Extra - Why Warren Buffett Is Wrong

There’s been a lot of buzz the last few days about an another article from Warren Buffett in favor of higher taxes on the wealthy.  I was going to send out a WSJ editorial on the topic, but I liked this article from CATO better, as it is the best rebuttal I’ve come across.  I recommend reading the whole article, but, as always, a few portions are excerpted below.

Why Warren Buffett Is Wrong

The first problem with Buffett's view is that the number of super-rich is too small for higher rates to make much difference to our budget problems.

In 2009, the income earned by the 236,833 taxpayers with more than $1 million in adjusted gross income was about $727 billion. Imposing a 10% surcharge on this income would generate at most $73 billion in new revenue — only about 2% of federal spending.  [And note, the current one-year budget deficit is about 1.4 trillion, with a “T”.  So a 100% tax rate on these folks still wouldn’t close the deficit.]

Focusing on the super-rich also fosters a counterproductive attitude toward material success… Most importantly, singling out the super-rich distracts from the real problem: the myriad policies that make no sense in the first place because they inhibit economic growth and that simultaneously redistribute from low-income households to the middle and upper classes.

Numerous loopholes for favored industries in the corporate tax code distort the market's investment decisions and reward the well-funded and politically connected.

Excessive licensing requirements, permitting fees, restrictive examinations and other barriers to entry into medicine, law, plumbing, hair styling and many other professions are bad for economic productivity because they artificially restrict the supply of these services. And these barriers redistribute income perve rsely by raising incomes for those protected and raising prices for everyone.

Crony capitalism — the special treatment of favored industries like autos — runs counter to economic efficiency because it protects businesses that would otherwise fail, and it maintains high incomes for executives and shareholders.

In contrast to these and other policies, the one Buffett criticizes — low tax rates on capital income — is beneficial for the economy, including lower-income households.

Economists agree broadly that an efficient tax system should avoid taxi ng income, dividends and capital gains to promote savings, investment and growth. Tax rates on capital income should therefore be low or even zero. The U.S. is far from this ideal, especially given the high tax rate on corporate income and the additional taxation at the personal level.  [double taxation rate of about 45%]

Buffett errs, most fundamentally, by focusing on outcomes rather than policies. The right question is which policies promote differences in incomes that reflect hard work, energy, innovation and creativity, rather than reward the unethical, the politically connected and the tax-savvy.

In economics, as in sports, we should adopt good rules and insist that everyone play by them. Then we should s tand back and applaud the winners.

 

If you’d also like to read the aforementioned WSJ article, here’s the link:

WSJ.com - Opinion: Warren Buffett's Tax Dodge