Wednesday, August 17, 2011

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

10 Comments:

At 8/17/2011 10:21 PM, Blogger Benjamin said...

I have been dealing with the IRS lately. I owe them money, and they can't even get around to setting up a monthly payment system. They appear woefully undermanned.

KISS-Keep It Simple Stupid.

Greg Mankiw, GOP economist, suggests PIGOU taxes. I like that.

A national sales tax, national gasoline tax, and 10 percent flat tax on all income above $100k, no deductions.

Fill out a postcard, or online form, and send it in.

 
At 8/18/2011 3:59 AM, Blogger GlibFighter said...

But so few corporations pay anywhere close to 39% on their profit.

 
At 8/18/2011 4:46 AM, Blogger bobby said...

The authors say "Warren Buffett’s 17% tax rate results only because he gets a large number of breaks that other wealthier Americans, like doctors, cannot use."

... but really they should point out that Buffett's effective tax rate is far above 17% after taking into account the amount that he is taxed via the corporate income tax. The CBO estimates of taxes by income bracket clearly show the progressivity of the tax structure, even for the top 1% of the top 1%.

Mankiw also points this out in his paper: Spreading the Wealth Around: Reflections Inspired by
Joe the Plumber.

 
At 8/18/2011 7:04 AM, Blogger Frozen in the North said...

A Jack Mintz, our Canada "FoxNews", using statistics selectively to make his point. How about that America's richest 5% control 80% of all financial assets!

How about that the richest 5% of America saw a 30% increase in their share of the overall wealth pie over the past decade.

These are statistics too!

 
At 8/18/2011 9:03 AM, Blogger morganovich said...

glib-

that's actually not true.

don't forget they pay half your FICA.

the S+P 500 pay an average tax rate of 32.8%.

that's already much higher than the tax rate of the top 1% of individuals. (23.3%)

add in FICA and you are looking at a tax rate around 40%.

7.65% of payroll really adds up.

most companies have far more in payroll costs than profits, but let's be very conservative and call them equal.

32.8 + 7.65 = 40.45

the real figure is probably more like 45% in federal taxes.

compared tot he all in tax rate of 29.5% for the top 1%, that's VERY high.

and god help you if you are in California and get another 11% tacked on.


56% of profits in taxes is a crushing level.

 
At 8/18/2011 11:40 AM, Blogger Ron H. said...

"How about that America's richest 5% control 80% of all financial assets!

How about that the richest 5% of America saw a 30% increase in their share of the overall wealth pie over the past decade.

These are statistics too!
"

They certainly are, what's your point?

 
At 8/18/2011 12:44 PM, Blogger arbitrage789 said...

Perhaps we should impose a tax on ASSETS of wealthy people who call for higher taxes.


We'll find out what they really think then.

 
At 8/18/2011 1:04 PM, Blogger juandos said...

Gee! I wonder how many of the little bastards that get 'free' meals in the public school system in Omaha have been invited over to Buffet's place for a meal?

 
At 8/18/2011 2:09 PM, Blogger Hydra said...

Perhaps we should impose a tax on ASSETS of wealthy people who call for higher taxes.

=============================

A flat tax on assets would be a lot more progressive than a flat tax on income.

 
At 8/18/2011 2:50 PM, Blogger morganovich said...

hydra-

a flat tax on assets would cause a national collapse.

everyone would leave and take their money with them.

the dutch tax savings. as a result, they have nearly none and a total dependence on a welfare state for retirement.

why is a progressive tax fair?

you've never answered any of those questions.

why should i pay 50 times what you do for the same services (at best) and more likely fewer services?

you are just looking for a subsidy so you can get free stuff.

 

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