Warren Buffett is right that the poor shouldn’t pay more tax than the rich

 

Last week Warren Buffet, the phenomenally successful American investor, called on the US government to stop ‘coddling’ the mega-rich and to raise taxes on those earning more than $1,000,000 a year. In an article for the New York Times, the chairman of Berkshire Hathaway Inc told us that his personal income tax rate was much less than other employees in his office and, to help close the federal government’s vast deficit, that taxes ought to be higher on the richest to make real the pledge of shared sacrifice.

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

I admire and respect Mr Buffett. And, unlike him, I don’t know any of the mega-rich. But I take him at his word that they are very decent people. However, the argument goes beyond the effects on behaviour Mr Buffett says higher taxes would have.

I have yet to see anyone — not even when capital gains rates were 39.9 per cent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.

This is true, of course, but only because taxes can change whether or not an investment is sensible. Mr Buffett is not saying that investors have not shied away from value-destroying investments which would have been sensible were it not for taxes. Nor is he claiming that the mega-rich will not work less and devote more of their time to leisure pursuits.

There are plenty of flaws in Mr Buffett’s analysis that others have explored in detail. The American Enterprise Institute have pointed out that disproportionately large rewards are needed to encourage enterprise. Successful entrepreneurs are usually highly effective, capable people with access to well-paid jobs. Most entrepreneurs do not hit the jackpot and become mega-rich and plenty fail outright. To encourage them to abandon the security of the well-paid jobs they could have had requires, to put it bluntly, big fat rewards. Higher tax means lower rewards, and that means fewer entrepreneurs and start-up firms. When companies are in their formative stages, the entrepreneurs’ own capital is usually the first places entrepreneurs go to finance their expansion. Higher taxes mean less capital, and that means a less vigorously entrepreneurial, less prosperous economy and fewer new jobs.

On the Forbes site, Tim Worstall raised the interesting point that either corporate income tax is paid for by the shareholders, such as Mr Buffett, in which case his tax rate would be something like 46 per cent. Or it’s paid for by employees, in which case it’s a regressive, anti-jobs tax which falls on the working poor.

But for all that, Mr Buffett’s argument doesn’t lack appeal. He paid $6.9 million in tax last year. That’s a lot of money but only it’s just 17.4 per cent of his income. By comparison, the tax rates paid by those in his office ranged from 33 to 41 per cent. However, Ronald Reagan’s tax cuts in the 1980s showed that the best way to get the rich to pay more tax is to encourage them to earn more, not to confiscate more of what they already earn. After all, as this article for the Tax Foundation shows, the US collects a larger proportion of income and payroll taxes from the richest tenth of its population than any other OECD nation, 45 per cent. What’s more, it still collects more from the richest tenth even after you adjust for income inequality. In other words, it has the most effectively ‘progressive’ tax system in the developed world.

Ordinary taxpayers with heavy tax bills and financial worries about paying for the ordinary things in life will struggle to see the fairness in people like Warren Buffett paying a lower rate of tax than they do. There are two ways to solve that unfairness. Taking away more money from the rich and squeezing the economy isn’t the right way. Cutting taxes for the poor and middle classes and letting the economy thrive is.

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