Warren Buffett's Modest Proposal -- Good For the Economy

Last Updated Aug 15, 2011 3:38 PM EDT

Warren Buffett -- noted socialist, re-distributionist and class warmongerer -- wants to raise federal income taxes on the wealthiest Americans. We should listen. Some relevant stats:
  • In 2010, the top 1 percent of income-earners -- who had average annual cash income of $1.2 million -- paid a total effective tax rate (counting federal, state and local taxes) of 30 percent. The middle 20 percent of Americans, with average income of $40,700 -- paid taxes at exactly the same rate.
  • Between 1960 and 2004, the top 0.1 percent of U.S. taxpayers -- who earn an average of $7.1 million per year -- have seen their share of income paid in total federal taxes drop from 60 percent to 33.6 percent.
  • As of 2008, the 400 richest U.S. households -- with an average income at the time of $345 million -- paid an average federal income tax rate of 17 percent. That was down from 26 percent in 1992.
  • Between 1955 and 2007, the top 400 income-earners saw the share of their income they pay in federal income tax fall from 51.2 percent to 16.6 percent.
  • Between 1961 and 2007, average Americans' share of the federal tax load has risen from 13.1 percent to 22.5 percent.
  • In 1960, the middle 20 percent of U.S. taxpayers paid 15.9 percent of their incomes in total income, payroll and other federal taxes. Today, this segment pays 16.1 percent of their incomes in federal income taxes alone.
Sharing sacrifice
Is it fair that over the last 60 years tax rates for people making at least $500,000 a year have fallen much faster than who learn much less? Not in my book, but you may feel differently. So let's set the ethical considerations aside for a moment. As Buffett suggests, another reason to raise taxes on the rich is that it would benefit the U.S. economy.

Would it take a big bite out of the federal deficit? No. But it would generate significant government revenue. Boosting the average tax rate on the top percentile of income-earners from 22.4 to 29.4 percent would lift revenue by a full 1 percent of GDP, according to economists Peter Diamond and Emmanuel Saez. Raising that rate to 43.5 percent would boost revenue by 3 percent of GDP, while still leaving the after-tax income of the super-rich more than twice what they earned in 1970.

Increasing taxes on the wealthiest Americans would also help tame the deficit. A so-called millionaire surcharge that set the top tax rate at 45 percent, lower than where it was in 1986, would raise more than $540 billion over a decade. That would reduce the need to cut social services that people depend on to survive and other government programs, like transportation and research spending, that are vital to economic growth.

The end of reason
Buffett's proposal is less bold than it sounds. He only wants to increase taxes on taxpayers making over $1 million. By contrast, President Obama wants to end the Bush-era tax cuts for anyone making at least $200,000 ($250,00 for joint-filers). As Henry Blodget notes, Buffett's plan would leave 99.9 percent of Americans alone:
Buffett is suggesting the implementation of two new brackets -- one for taxpayers making over $1 million, of whom there are 237,000 in the country, and one for taxpayers making over $10 million, of whom there are only 8,000. In other words, Buffett's tax-increase-on-the-super-rich would affect 1 in 1,253 Americans, less than 1/10th of 1 percent of the population.
Of course, when it comes to fiscal policy, all the data points in the world are meaningless unless our political leaders are willing to act on them. And as they have made clear, Republican lawmakers oppose tax hikes on even the wealthiest Americans; bizarrely, they also oppose tax cuts.

As long as ideology defeats reason, in other words, Buffett's eminently reasonable proposal will go nowhere.

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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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