Forum Post: The Realities Of a Buffet Tax

The Realities Of a Buffet Tax

By Robert Samuelson Whatever else they are, the super-rich have now become political props. We can thank President Obama and Mitt Romney for this. Obama thinks he can ride resentment against the rich into the White House for a second term; and Republican Romney's fortune, estimated at $190 million or more, qualifies him as super-rich.

By all means, Congress should pass the "Buffett Tax," named after billionaire Warren Buffett, who noted that his 2010 tax rate (17.4 percent) was about half his secretary's. The explanation is that Buffett's income comes mostly from dividends and capital gains - profits on sales of stocks and other assets - that enjoy a preferential rate of 15 percent. This is neither socially just nor economically necessary.

Obama's still-vague Buffett Tax would apparently impose a minimum 30 percent tax rate on incomes exceeding $1 million. Republicans should support it. Economic incentives for risk-taking wouldn't collapse. Under President Reagan, the top capital gains rate was 28 percent. The economy did fine. And passing a Buffett Tax might improve political truth-telling.

For starters, don't pretend, as Obama does, that taxing the ultra-rich would solve the deficit problem. Here's what he said in the State of the Union address:

"Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else, like education and medical research, a strong military and care for our veterans? Because if we're serious about paying down our debt, we can't do both."

We sure can't. In September, the Congressional Budget Office estimated the 10-year deficit at $8.5 trillion. The nonpartisan Tax Foundation estimates that a Buffett Tax might now raise $40 billion annually. Citizens for Tax Justice, a liberal group, estimates $50 billion. With economic growth, the 10-year total might optimistically be $600 billion to $700 billion. It would be a tiny help; that's all. "The purpose of the Buffett Rule is not to close the deficit gap," Buffett has said. Hard choices remain, in part because existing deficit estimates already assume steep defense cuts.

It's also a myth that all the ultra-rich enjoy low tax rates. In 2007, the richest 1 percent of taxpayers paid an average tax rate of 29.5 percent and provided 28.1 percent of federal revenues, reports the CBO. On their wages and salaries, many of the ultra-rich pay the top income tax rate of 35 percent plus a Medicare tax of 1.45 percent.

Who are these people? How did they get so rich?

In a study, economists Jon Bakija, Bradley Heim and Adam Cole break down the top 1 percent as follows: executives in nonfinancial companies, 30 percent; doctors, 14 percent; professionals in finance (banks, hedge funds, pension funds), 13 percent; lawyers, 8 percent; computer experts and engineers, 4 percent; sales workers, 4 percent; sports, entertainment and media stars, 2 percent. The rest include farmers, management consultants, real estate developers and scientists.

Most of these people probably got rich the old-fashioned way. They worked hard, started businesses (about one in eight is an entrepreneur or manager in a closely held company) or showed great talent. But traditional virtues can't explain the growing concentration of income. From 1950 to 1980, the top 1 percent represented about 10 percent of Americans' income; by 2000, this had increased to about 20 percent, where it's remained, estimate economists Emmanuel Saez and Thomas Piketty.

Explanations abound: "superstar" rewards for those at the top; globalization (by expanding markets for the talented); warped corporate compensation practices. But the biggest contributor was the long financial market boom that inflated executive stock options and Wall Street compensation. "So many people in this group (corporate managers, bankers, traders) have pay that's tied to the stock and financial markets," says economist Bakija.

Consider: From 1980 to 2000, stocks rose almost tenfold; from 2000 to 2007, the gain was about 40 percent. And the boom's largest cause was declining inflation, which reduced interest rates. As rates fell, stocks and other assets rose. The ultra-rich benefited partly from good luck. Ironically, because the boom is spent, the rise of inequality may cease or reverse (Wall Street bonuses are shrinking) just as political attacks on the rich intensify. From 2007 to 2009, the number of tax returns with incomes exceeding $1 million dropped 40 percent, says Scott Hodge of the Tax Foundation.

So, raise tax rates on Warren Buffett and others to upper-middle-class levels. But recognize that the anti-wealthy populist rhetoric is mostly political expediency. It distracts from the serious issues the country faces - creating jobs and closing long-term budget deficits. The anti-rich backlash is growing; a Pew poll finds 66 percent of Americans see "strong" conflicts between rich and poor, up from 47 percent in 2009. Pandering to this is easier than dealing with the future.