Billionaire Warren Buffett's call last week for higher capital gains and income tax rates on those with incomes above $1 million a year may appear to be an act of noblesse oblige. In reality, Buffett has betrayed his duty to those less fortunate by lending his name and prestige to an ignoble myth – that taxes targeted at the rich do not affect the middle-class and poor. Nothing could be further from the truth.
What makes the tax-the-rich myth so insidious is that Buffett most likely would not suffer any change in his standard of living if his taxes were doubled to $14 million a year. With an annual income of approximately $40 million, he can pay more for just about anything he chooses.
So, let's stipulate that Buffett can “afford” to pay more taxes. But this statement ignores the more important question: How would the middle class and poor be affected by the higher tax rates that Buffett advocates. Let's consider what happens when the rich pay more in taxes. With less disposable income:
No matter how you look at it, when Buffett – or anyone else pays more taxes to the government – there is an offsetting reduction in the amount of money and employment in the private sector. Although the rich may not notice the difference, the middle-class and poor pay the price.
How high the potential price may be is illustrated by the 1990 budget deal. To raise revenue, the Democratic Congress targeted the rich with a luxury tax on such expensive goods as boats that sold for more than $100,000, jewelry and expensive cars. But, the actual consequences were born by several hundred thousand middle-class people who lost their jobs and businesses when the demand for these now-higher-tax goods fell sharply – by 70% in the case of luxury boats.
Three years later, Senate Majority Leader and liberal democrat George Mitchell led the successful effort to repeal this tax because thousands of his middle-class constituents in Maine had suffered disproportionately from the collapse in the boating industry. Moreover, the lost revenue from the incomes that were no longer earned, and the increased government transfer payments to the now unemployed meant the luxury tax was a money loser for the government as well. Everyone lost except the rich, who simply bought their yachts outside the U.S.
The consequences of higher capital gains tax rates that Mr. Buffett advocates would be even worse. A capital gains tax is not levied on wealth, but on the activity of creating wealth by investing now in exchange for anticipated gains in the future. To claim, as Mr. Buffett does, that “People invest to make money, and potential taxes have never scared them off,” is disingenuous, if not silly. People invest to make money after tax: the higher the tax rate, the fewer investment opportunities that can produce an acceptable after-tax return. The result is fewer investments, less wealth creation, less opportunity, fewer jobs, and more poverty.
In addition, wealthy individuals avoid this tax by either matching gains with losses, or simply not selling an asset whose value has gone up. When the capital gains tax rate was raised in the late 1980s, capital gains tax revenues went down as asset prices languished and fewer assets were sold. Conversely, when the capital gains tax rate was reduced under President Clinton, investments in new businesses increased, economic growth accelerated, unemployment fell, the stock market surged, and capital gains and income tax revenues rose to record levels, contributing to the significant budget surpluses of the late 1990s.
Buffett's own actions suggest that he knows all this. He could lead by doing – and simply write a check to the federal government in an amount over and above what he has to pay in taxes. But, in fact, he has done just the opposite. Mr. Buffett has sheltered the bulk of his fortune from the federal death tax by putting it into several foundations that, over time, will give the money away.
In a 2007 CNBC interview he provided the following explanation: “I think that on balance the Gates Foundation, my daughter's foundation, my two sons' foundations will do a better job with lower administrative costs and better selection of beneficiaries than the government.” (Emphasis added.)
Here's a suggestion. If Buffett truly wants to do more for the country, he could make the following offer to the Obama administration and Congress. He and his wealthy friends will use their combined resources and talents to create a jobs training program that over time would replace 47 federal programs now provided by 9 federal agencies, many of which overlap and only a handful of which have assessed their outcomes. In exchange, the federal government would have to end these programs in proportion to the number of individuals served by the Buffet initiative.
The potential savings would be $18 billion a year – or in budget speak, more than $200 billion over the next 10 years. Those savings would be far greater than any actual tax revenues realized by taxes targeted at the rich. More important, they would actually help those seeking work to acquire the necessary skills and become employed. By so doing, Buffet would fulfill his noble calling to contribute beyond the running of a successful business to our society but do so by affirming his faith in the private sector and increasing the liberty of the American people.