On September 18, the Obama administration signaled that it would be incorporating the so-called “Buffet Rule” for millionaires into the president’s new plan to increase tax revenues. Warren Buffett, the 81-year-old investor whose $50 billion personal fortune is the world’s third largest, has been calling for higher taxes on the “rich” for years. At a June 26, 2007, fundraiser for then Senator Hillary Clinton, Buffett reportedly remarked, “the 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter.” In October 2007, Buffett told NBC’s Tom Brokaw he would bet $1 million that the average tax rate of the 400 billionaires on the Forbes list was lower than the average tax rate of their receptionists. In November 2010, Buffett appeared on ABC’s This Week to say, “I think that people at the high end—people like myself—should be paying a lot more in taxes.”
But of all the platforms Buffett has used over the years for this message and of all the ways he has cast it, none has had quite the resounding effect as that created by his New York Times op-ed on August 15 of this year, which appeared under the headline “Stop Coddling the Super-Rich.” Only hours after the piece was published, President Obama himself was quoting it at a town hall meeting in Minnesota. That evening, Buffett’s article was mentioned on the ABC, NBC, and CBS nightly newscasts. The television interviewer Charlie Rose, conveniently pre-positioned in Omaha, devoted his program the same evening to an interview “with my friend Warren Buffett,” a show that in turn was reported on by CNBC and the Washington Post, in which Buffett’s Berkshire Hathaway has long been a key shareholder. The Times followed up the next day with a prominently displayed news article about the op-ed, a signal distinction usually reserved for situations such as Brent Scowcroft’s opining against going to war in Iraq.
Various members of the “super-rich”—the home builder and art collector Eli Broad; the hedge-fund manager and philanthropist George Soros; the vice chairman emeritus of J.P. Morgan Chase and former CEO of Bear Stearns, Alan “Ace” Greenberg; and even 16 wealthy Frenchmen—surfaced to express agreement with Buffett’s insistence that taxes on the uppermost be raised. Buffett’s call was also met with some bracing criticism from free-market-oriented journalists and think-tankers. An examination of the Buffett raise-my-taxes episode offers a preview, in miniature, of the arguments, both moral and practical, that are likely to play a large role in the 2012 presidential campaign unfolding ahead.
Buffett began his op-ed with a variation on the “receptionist” line he used back in 2007 at the Hillary Clinton fundraiser: “Last year my federal tax bill—the income tax I paid, as well as payroll taxes paid by me and on my behalf—was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income, and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.”
He proceeded to reject the idea that higher taxes destroy jobs or deter investment: “I have worked with investors for 60 years and I have yet to see anyone—not even when capital gains rates were 39.9 percent in 1976–77—shy away from a sensible investment because of the tax rate on the potential gain.”
Buffett concluded with a specific—well, quasi-specific—proposal for a tax increase that he said would raise revenues to help reduce the deficit: “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.”
Perhaps the most basic objection to Buffett’s plea is a practical one: the tax increases he suggests would barely begin to erase the deficit or the debt.
Partly this is a matter of loopholes; as Conrad Black wrote in a column that ran on the websites of National Review and the New York Sun, Buffett “might stand still while the tax-swatter approached, but most of his income peers, in so far as he has any, would not. They would fly away in tax-planning terms, and what we would get is an escalation of the cat-and-mouse game of legislators and tax experts on licit avoidance.”
Primarily, though, it is a matter of basic arithmetic. Jack LeMenager, in a letter to the Times, pointed out that “the Internal Revenue Service’s own statistics indicate that if the top 1 percent of all taxpayers (households with annual income of more than $380,000) were taxed at a rate of 100 percent, it would net $938 billion, which would barely make a dent in the nation’s multitrillion-dollar annual budget.”
This point, while important, doesn’t affect Buffett’s central argument because Buffett himself conceded it to Charlie Rose: “I don’t think that what I’m talking about on taxes solves the deficit gap at all. But I think fairness is important.”
Onward, then, to the question of “fairness.” Here Buffett’s critics first asserted that percentage of taxes paid by the respective categories he cited mischaracterized the actual tax burdens under the existing system. David Logan, of the Tax Foundation, and Daniel Mitchell, of the Cato Institute, both said Buffett conveniently neglected to include in his own burden the 35-percent corporate tax rate; a more accurate accounting of Buffett’s federal bill should logically include the tax paid by companies he owns.
Mitchell also pointed out that Buffett focused on payroll taxes and did not include in his calculations the Social Security benefits that those payroll taxes fund. Those benefits are disbursed according to a formula that, Mitchell says, “actually is tilted in favor of low-income workers.” Jeff Jacoby, of the Boston Globe, cited a Congressional Budget Office study focusing on total income rather than taxable income: “Households in the bottom fifth of the income distribution paid 4 percent of their income in federal taxes, the middle quintile paid 14.3 percent, and the highest quintile paid 25.1 percent. Average rates continued to rise within the top quintile: The top 1 percent faced an average rate of 29.5 percent.”
Even if Buffett were correct about the unfairness of the current system, his critics went on to say, he is wrong in his prescription for a remedy. As Jacoby put it: “Buffett doesn’t argue that his workers’ federal taxes should be cut. He demands that his own be raised.” And such tax increases, notwithstanding Buffett’s claims to the contrary, would have negative effects on economic growth, as they would transfer wealth from the private sector to the public without any promise that it would be more productively used there.
That was the argument of the libertarian industrialist Charles Koch, who said, “Much of what the government spends money on does more harm than good.” The same view was more colorfully expressed by Harvey Golub, who had been the successful CEO of American Express at a time when Berkshire Hathaway owned a large stake in that company.
“Governments have an obligation to spend our tax money on programs that work. They fail at this fundamental task,” Golub wrote in the Wall Street Journal in response to Buffett. “Do we really need subsidies for domestic sugar farmers and ethanol producers? . . . Why do we spend billions on trains that no one will ride? Why do we keep post offices open in places no one lives? . . . Why do we pay government workers above-market rates and outlandish benefits?”
Three final and somewhat entwined lines of argument are less about the substance of the call for higher taxes than the identity and record of the person making it. The first of these relates to self-interest. As the Washington Examiner’s Timothy Carney observed, Buffett’s Berkshire Hathaway holding company has a great many investments in companies such as General Electric and Bank of America that are sensitive to government regulation and subsidies. His $5 billion investment in Goldman Sachs was all but guaranteed to succeed by the structure of the Troubled Asset Relief Program (TARP). Buffett might stand to benefit from giving President Obama cover for tax increases in a way that advances his business interests and enriches him and the companies he owns far more than those higher taxes would cost him.
The second charge is that Buffett is a hypocrite. The Financial Times, in an editorial, noticed that the income tax increases Buffett suggests will barely apply to him, because most of his wealth is in the form of unrealized capital gains, which don’t count as taxable income or capital gains of the sort he proposes to raise taxes on. If anything, raising such taxes would actually improve Buffett’s position relative to the other wealthy people against whom he competes to acquire businesses. It would also help him to achieve his longtime goal, as his wife Susan described it in her own Charlie Rose interview three months before her death in 2004, of being “the richest man in the world.” The Financial Times suggested that in Buffett’s case, “shared sacrifice probably requires a wealth tax. Set at a modest 2 percent, he would owe about $1 billion a year, or 25 times his current taxable income.”
Dan Calabria mischievously suggested in a letter to the editor of the Wall Street Journal that such a wealth tax should also apply to tax-exempt foundations—like the Bill and Melinda Gates Foundation, to which Buffett has pledged the bulk of his fortune, having concluded that the foundation will do a better job of spending it than would the politicians who would otherwise eventually receive it via the estate tax.
The point here isn’t that such a wealth tax or a tax on foundations would be desirable, but that we might question the suspiciously self-serving lack of consistency or principle on Buffett’s part in exempting those approaches from his call for “fairness” and shared sacrifice.
One subcategory of the hypocrisy argument featured pundits asking puckishly why Buffett didn’t just write an extra check to the Treasury voluntarily. They pointed out the existence of a federal fund established in 1843 called “Gifts to the United States.” Bloomberg News devoted an entire editorial to responding to this argument, insisting that “it doesn’t disqualify someone’s call for collective action that he is not inclined to act fruitlessly alone.”
The third identity-related argument one could make is that Buffett is an old man. He (and Soros, 81; Broad, 78; and Greenberg, 84) made a vast fortune while America was amassing a $14 trillion debt and tax rates were low enough to encourage growth. Now he would assign the responsibility for repaying that debt not primarily to himself but to others on their way up.
So who got the better of this debate? The ultimate deciders will be the American electorate. In 2012 the voters will have the chance to reelect, in Barack Obama, a president who is making Buffett-style arguments about tax increases on the “rich” and seeking a mandate to impose them. The voters will also have the choice to install instead a Republican candidate who will probably choose counterarguments from the list above. The same choices will apply in Congressional elections.
But those candidates and their advisers, not to mention the voters, may wish to consider this, too: by framing the fiscal-policy discussion this way, as a debate over whether the “super-rich” should pay more, Buffett and his allies in politics and the press avoid certain other questions. And those questions are more important ones. Questions like:
• Who should allocate capital, the people who earned it and own it, or the politicians in Washington as influenced by their lobbyists and campaign contributor cronies?
• How did we accumulate $14 trillion in debt so rapidly, and what are the consequences of that?
• How and why has federal spending grown to $3.8 trillion in 2011 from $1.8 trillion in 2000?
As weak a case as Warren Buffett and Barack Obama have for raising taxes on the “super-rich,” it is nevertheless a debate they would almost certainly prefer to some of the alternatives.