4 Reasons Buffett and Obama are Wrong on Tax Hikes

November 28, 2012 07:27

Ever-growing entitlements have put spending on a trajectory toward a European-level implosion. If they are not reined in, taxes on everyone will have to rise perpetually just to keep pace.


Amy Payne and Alison Acosta Fraser at Heritage Foundation


Let’s talk taxes. In a New York Times op-ed yesterday, famed investor and Berkshire Hathaway CEO Warren Buffett once again argued that the wealthy should be taxed more.

This isn’t the first time Buffett has made the case for higher taxes, and it’s not the first time he’s been wrong. Here are four reasons he is wrong to push for tax hikes.

1. Buffett says tax hikes won’t hurt jobs.

Fact: Tax hikes, especially those he espouses, hurt jobs.

Buffett cites periods when tax rates were high and says that “Under those burdensome rates,” employment “increased at a rapid clip.”

This country has an employment problem right now, and tax rates aren’t even as high as Buffett wants. The tax increases President Obama champions would hit small businesses that create jobs. According to Treasury figures, 1.2 million Americans who employ people are paying their taxes through the individual income tax, and they would be hit head-on. The amount that their taxes would go up could be roughly equivalent to one employee’s salary, meaning that’s one person they can’t hire in the new year. A study by Ernst and Young estimates that these tax hikes would kill 710,000 jobs.

2. Buffett says tax hikes won’t stop investors from investing.

Fact: Any time you tax something, you get less of it.

Buffett says: “So let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if—gasp—capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.”

Let’s think about what taxes are intended to do. The cigarette tax is intended to curb smoking. Proponents of a carbon tax want to curb the amount of carbon emissions we are producing. In Washington, D.C., a plastic bag tax is intended to curb the number of plastic bags people use.

When you tax something more, people do less of it. This is how taxes work. It doesn’t change because the behavior being taxed is investing rather than smoking.

3. Buffett says the wealthy aren’t even paying a minimum tax.

Fact: We already have an Alternative Minimum Tax.

Buffett says, “We need Congress, right now, to enact a minimum tax on high incomes.”

We already have this. It’s called the Alternative Minimum Tax. As Heritage’s Curtis Dubay explains:

Congress passed the Alternative Minimum Tax (AMT) in the early 1970s to ensure that a few high-income taxpayers did not reduce their tax liability too much by taking advantage of all the deductions, exemptions, and credits Congress put in the tax code. But Congress did not index for inflation the income threshold over which families qualify for this extra tax. So now Congress must annually “patch” the AMT by raising the threshold to correct this mistake. Even with the patch, the AMT still ends up falling on almost 4 million taxpayers; Congress initially intended for it to hit only a few hundred.

But here’s where the rubber meets the road: “According to the Congressional Budget Office (CBO), the top 1 percent of earners (those with incomes over $1.2 million in 2009) pay an effective tax rate on all federal taxes of 29 percent. That’s almost three times as high as the 11 percent average rate paid by the middle class.”

The top 10 percent of earners in the United States already pay more than 70 percent of federal income taxes. To move forward in this debate, those who argue that we just need to “tax the rich” will have to get real. We can’t close the budget deficit by taxing the rich. Even though Buffett also claims…

4. Buffett says we need to raise taxes to bring in more revenue for the government.

Fact: The problem is government spending, not government revenue.

Buffett says, “Our government’s goal should be to bring in revenues of 18.5 percent of [gross domestic product] and spend about 21 percent of G.D.P.”

Revenues are lower now today than normal, not because of tax rates, but because of the slow-growing economy. As the economy recovers, so will revenues. And they will continue to grow as the economy thrives. Why? Because more people are investing, saving, working, and enjoying higher wages. The nifty little benefit for the government of a strong, growing economy is that people pay more in taxes.

But on to spending. The White House already estimates that federal spending will be 23.1 percent of GDP this year—well above Buffett’s target. But, unlike taxes—which will return to the historical levels Buffett aims for, spending will continue to spiral ever upwards. In 25 years, spending will be 35.7 percent of GDP. In 2025, the big three entitlements will gobble up a full 18.5 percent of GDP—the entire amount of revenue that Buffett would like to raise.



In Buffett’s world, then, after funding entitlements, that leaves only 2.5 percent of GDP for everything else (assuming that interest rates don’t go through the roof). The fact is that ever-growing entitlements have put spending on a trajectory toward a European-level implosion. If they are not reined in, taxes on everyone will have to rise perpetually just to keep pace.

While Warren Buffett is right about many things, he is wrong about tax hikes. Which leads us to the real questions: Why are we even talking about tax hikes? Where are the spending cuts?

>>> The tax debate in 5 minutes: Watch Heritage’s J.D. Foster discuss tax hikes on CNBC.


Amy Payne is Assistant Director of Strategic Communications at The Heritage Foundation. In that capacity, Amy serves as Managing Editor of The Foundry, Heritage’s public policy news blog, as well as the “Morning Bell,” one of Washington’s most widely read and influential e-newsletters.


As Director of the Roe Institute for Economic Policy Studies, Alison Acosta Fraser oversees Heritage Foundation research on a wide range of domestic economic issues including federal spending, taxes, energy and environment, retirement savings and regulation.


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