I kid with the title; if only to distinguish myself somewhat from the other million people or so linking to Warren Buffett’s latest opinion in the New York Times. Sometimes I wonder if guys like Buffett and Soros are viewed by other billionaires in much the same way as a lot of gay people view Log Cabin Republicans.
Buffett points out that he pays a smaller percentage in taxes on income he makes from investment than people make on income they actually work for. He further contends that it’s a fallacy that people will walk away from investment if the taxes are any higher. And, he points out that the job creating power of lower taxes on investment does not comport with historical experience. Lower taxes on investment have coincided with a period of weak job creation in the U.S.
Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.
The taxes I refer to here include only federal income tax, but you can be sure that any payroll tax for the 400 was inconsequential compared to income. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)
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Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.
But 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.
We should keep in mind that the super-rich are, by and large, not extraordinarily good or bad people. They are not demons who should be reviled; but, by the same token, they are not Galtian heroes either. Some worked harder than usual. Some were smarter than usual. A lot were some combination of hard working, smart, and very lucky – in terms of opportunities life sent their way to seize and/or in terms of coming into life with a nest egg they could use to make money.
My sense is that profit should come from labor, innovation, and/or risk. Where the system breaks down, in my mind, is when the economy rewards individuals in excess of the labor, innovation, or risk generating the profit. “Who’s to say?” Good question. But, I would venture a guess that, of 238,663 households making more than $1 million per year, only a tiny percentage of them are generating value from their labor/innovation/risk that is twenty times more valuable than that generated by the average household making $50,000 per year.
I know plenty would say that the value is whatever the market will bear. But, I think the market is structured to overcompensate certain activities — financial services and investment come to mind. I think these services and investment could be had for less. Mr. Buffett, who can speak on these matters with considerably more authority than me, seems to agree; for whatever that’s worth.