Buffett Pays Too Little Tax, Not Because He’s So Rich but Because the U.S. Tax System is So Poor

Here's a Canadian perspective from Jack Mintz on Warren Buffett's proposal that the "billionaire-friendly Congress" stop coddling him and his friends by raising tax rates on the "mega-rich":

"Although a brilliant investor, Warren Buffett’s recent prognosis to hike taxes on the rich is off the mark and, frankly, naive public policy. He is right that tax reforms of some sort will be needed to deal with the U.S. deficit since the fiscal hole is just too large now. With federal-state-local government spending over 40% of GDP and all-government revenues at 30% of GDP, Americans are paying only for 75% of their 2011 public bills. Spending reforms alone won’t do the trick.

However, the Obama plan to simply increase personal income tax rates on the rich and hike capital gains and dividend taxes will hurt rather than help growth. Higher personal tax rates will reduce the incentive to invest by entrepreneurs, who are most responsible for growth.  Capital gains and dividends (subject to federal-state personal tax rate of 20%) are currently highly taxed at more than 50% once taking into account the 39% corporate income tax rate that reduces the amount of profits distributed to shareholders or reinvested by the company. More double taxation of dividends and capital gains hurts the economy.

Already the highest-income taxpayers — about 5% of taxpayers — pay almost 60% of U.S. income taxes. The bottom half of the population pays only 3%. So any tax increase imposed on high-income earners should be in areas where some, like Warren Buffett, are paying far less than other wealthy individuals. Warren Buffett’s 17% tax rate results only because he gets a large number of breaks that other wealthier Americans, like doctors, cannot use.

Which gets to the main point. The United States needs major tax reform, rather than playing at the edges to make the system more progressive than it is already. U.S. income taxes are complex, inefficient and highly unfair. The statutory rates, once taking into account federal and state income and payroll taxes, are already high, even with the Bush tax cuts.  The problem is that too many targeted preferences reduce the amount of taxes paid, undermining economic growth. 

The list of special preferences in the United States is mindboggling and could fill a book on how not to run a tax system. A major tax reform that lowers rather than increases personal and corporate tax rates and eliminates a number of special preferences would make the tax system more efficient and fair, and it would grow revenue over time by growing the economy. Currently, favored activities earn a lower return, so base-broadening and rate reductions would shift resources to activities with better returns. The Americans could also build in some extra revenues to help deal with the deficit, since a more efficient tax system would generate growth.

The United States needs to get out of its box of low growth. Current proposals for tax increases are the wrong medicine. Instead, a rate-reducing cum base-broadening tax reform would be more powerful by reducing the economic cost of taxation. Buffett pays too little tax, not because he’s so rich but because the U.S. tax system is so poor."

HT: Brad Parkes