Big Picture: Warren Buffett on Taxes

"Our leaders have asked for 'shared sacrifice.' But when they did the asking, they spared me."

That's how Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) CEO Warren Buffett began a New York Timesop-ed this week, repeating a call he's made in the past: His taxes, and those of other millionaires and billionaires, should be higher than they are now.

He elaborated:                                       

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we megarich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as 'carried interest,' thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they'd been long-term investors. ...

Last year about 80 percent of [federal] revenues came from personal income taxes and payroll taxes. The megarich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It's a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot. ...

Last year my federal tax bill ... 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.

This topic stirs up emotions so strong it's hardly worth discussing with peers. Most think taxes are either too high, or too low, and nothing will change their opinions -- end of story, with an almost religious level of conviction.

So rather than debate whether Buffett's right, I thought I'd share five pieces of data that put the topic into context. 

Before that, let's get two things out of the way. One, Buffett explicitly says deep spending cuts are necessary. He calls this "job one" for the Congressional super-committee tasked with completing the recent debt-ceiling deal. Two, whenever Buffett calls for higher taxes, many respond with what they think is a clever rebuttal: "If he wants to pay more, he's welcome to donate his money to the IRS!" they say. Folks, this totally misses the point.

Now some numbers. First up is taxes as a share of the economy:


Source: Tax Policy Center.

A big irony in the tax debate is that many waited until taxes were at historic lows before complaining about how high they are. Between last decade's tax cuts, the recession's hit to employment, and the more recent payroll tax cut, total taxes are now far below long-term averages, and have played a significant role in blowing open the current deficit. When one looks at what forecasters in 2001 predicted today's budget would look like, and compare that to what's actually happening today, lower tax revenue accounts for half of the increase in current deficits.

This chart underscores a similar point. Top marginal tax rates on both income and capital gains are at or near a post-World War II low:


Source: Tax Policy Center.

To be sure, no one, including Buffett, is suggesting we go back anywhere near the tax rates seen in the 1950s and 1960s. The current proposal to raise marginal rates on top earners from 35% to 39% would barely be visible on this chart. And that proposal is slated to hit a small sliver of Americans -- perhaps 3% of wage earners.

But what happens to the economy when you do that? Many say raising marginal rates will slow investment, stifle economic growth, and kill job creation. Buffett disagrees:

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. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what's happened since then: lower tax rates and far lower job creation.

This is probably his most controversial point. A few numbers put it into context:


Sources: Tax Policy Center, Federal Reserve, author's calculations.

If there is a correlation between marginal tax rates and economic growth, it's the opposite of what most think: The United States achieved the fastest economic growth when marginal tax rates were the highest.

Now, this isn't suggesting that higher taxes leads to higher growth; that's silly, and no one's making that argument. But it backs up the idea that tax rates are just one of thousands of variables contributing to economic growth, and one that, historically, haven't been the most consequential. Far more important are things such as population growth, demographics, labor productivity, creativity, consumer confidence, and -- immediately after World War II -- the lack of production capacity in bombed out countries. Do tax rates matter for growth? Yes, but not nearly as much as some think.

As Buffett notes, the same is true for gross private investment:


Sources: Tax Policy Center, Federal Reserve, author's calculations.

And jobs:


Sources: Tax Policy Center, Federal Reserve, author's calculations.

"My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice," Buffett wrote.

What do you think?

At the time this article was published Fool contributorMorgan Houselowns shares of Berkshire Hathaway. Follow him on Twitter @TMFHousel.The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.