“Obama Tax Plan Would Ask More of Millionaires,” reads the headline of the lead story in today’s New York Times. Nice touch that “ask” part, as if paying taxes were voluntary.
President Obama wants to invoke the “Buffett Rule,” named for multibillionaire Warren Buffett, who complains that his tax bill is too low because his effective rate is less than his secretary’s. Buffett wrote in the Times last month,
. . . for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.
According to today’s news story, Obama wants to require that everyone with an income of over $1 million pay the same effective tax rate (the percentage of taxable income paid in taxes) as “middle-income taxpayers.” He calls it a matter of “fairness.”
Well, let’s take the fairness lipstick off this pig. It has nothing to do with fairness, it has everything to do with class warfare, for this would be nothing more nor less than a whacking great tax increase on capital gains and dividends on those who earn more than $1 million a year. In other words, they would be penalized for their success at creating wealth.
People with seven- and eight-figure incomes from wages already pay 35 percent on most of that income, the highest marginal rate. It is dividends and capital gains (taxed at 15 percent) that bring down their effective tax rate. But dividends are paid out of corporate profits that have already been taxed at 35 percent (ignoring various tax fiddles that bring down corporate income tax rates to an average of 25.4 percent). So dividend income is actually taxed at 50 percent already. A large portion of capital gains, likewise, derives from retained corporate income that has already been taxed.
So President Obama’s latest tax proposal is just a disguised attempt to raise the dividend and capital gains taxes on those with incomes of more than $1 million to about 70 percent from the current 50 percent. The result, of course, will be a rush to avoid these taxes, using exactly the same method that Warren Buffett uses to avoid paying them: they’ll shelter their wealth under a corporate umbrella.
Warren Buffett’s Berkshire Hathaway Corporation paid $5.6 billion in corporate taxes last year on income of $19 billion, a 29 percent rate. (By the way, its tax form ran to 14,097 pages; just imagine what its tax compliance costs must have been.) Warren Buffett owns about 30 percent of Berkshire Hathaway, so he, in a very real sense, paid not just the $6 million in federal taxes he claimed in his Times article, but $1.68 billion more in the form of corporate taxes. But Berkshire Hathaway pays no dividend and I doubt that Buffett has sold any of his stock in the company. Thus he has no capital gains to report from his Berkshire Hathaway holdings.
So while he paid, roughly, the same effective tax rate as his secretary if you count his share of the corporate taxes paid (and you should), he would not owe much more under President Obama’s stick-it-to-the rich plan. Most of his billionaire friends wouldn’t either. Those most affected would be the upper middle class, as usual, who don’t control the corporations they invest in.