Buffett is Right, We Need to Heavily Tax the Super-Rich


America is the greatest country on earth for many reasons. We are free; we are protected by a great constitutional document; we can earn very good compensation through hard work; we have the best health care system in the world; and we benefit by the wisdom and generosity of great men like Warren E. Buffett, chairman of Berkshire Hathaway, who has a net worth of $47 billion according to Forbes.

Buffett recently wrote an op-ed in the New York Times titled, “Stop Coddling the Super-Rich.” In it, he confirms that he and other very wealthy individuals pay very low taxes on their total income principally because most of it is derived from long-term capital gains on investments and not from salary. This effectively decreases their taxes, as long-term capital gains are taxed at 15%, while the top bracket salaries are taxed at 35%.

Buffett points out that “investment managers who earn billions . . . are allowed to classify [their] income as ‘carried interest,’ thereby getting a bargain 15% tax rate.” He queries why the federal government has been so generous to him and his super-rich colleagues. He, for one, has never lobbied for such favorable treatment. The benefits that accrue to large investors enable them to keep a much larger share of profits after taxes. This situation discriminates against wage earners who are taxed at the ordinary income tax rate. There is no reason to give super-rich investors such an advantage.

Another huge benefit for the rich relates to payroll taxes. Employees pay 4.2% for Social Security on the first $106,800 of salary earned plus 1.45% on total salary for Medicare (Note: the Social Security payment is scheduled to increase to 6.2% in 2012). For the wealthy, the Social Security tax schedule is very advantageous as they pay taxes only on a small portion of their compensation, whereas every American who earns less than $106,800 pays a tax on all of their earnings. Exacerbating this situation is the fact that the income of the super wealthy is predominantly investment income, which is not subject to the tax at all.

Buffett debunks two myths regarding higher taxes. First, investors like Buffett do not decrease investing when income and capital gains taxes are high, as some conservatives contend. The second is that job growth is stymied by higher taxes. He notes that 40 million jobs were created in the country between 1980 and 2000, a period when tax rates were much higher, while jobs decreased significantly thereafter when rates were lowered during the Bush administration.

The article presents a startling fact about the earnings and taxes of the super-rich. In 1992, the 400 Americans with largest incomes had “taxable income of $16.9 billion and paid federal taxes of 29.2% on that sum.” In 2008, the corresponding numbers were $90.9 billion and 21.5%. Super-rich taxes went down 26% while their income increased by over five times during the period. 

Buffett believes that Americans are losing faith in Congress’ ability to deal with the fiscal crisis. To gain credibility, he suggests that the congressional “super committee” immediately consider and recommend tax increases on the wealthy. Buffett proposes that they “leave rates for 99.7% of taxpayers unchanged” and keep in place the “current 2% reduction in the employee contributions to the payroll tax.” But, for the 236,883 households earning more than $1 million, he would raise income and capital gains rates. For those 8,274 households earning more than $10 million, he proposes even higher rates.

Buffett's suggestions make sense to me, especially those relating to the super-rich. If implemented, they would result in a large inflow of taxes and decrease the advantages that super-rich investors have over other taxpayers. I think an increase in the income tax rate for other members of the top 2% of earners is also warranted, but only after Congress negotiates and implements spending cuts.

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