“We billionaires have been coddled long enough by Congress. It’s time for our government to get serious about shared sacrifice.”—Warren Buffett
“The rich aren’t paying enough. We should greatly raise their taxes.”—Ben Stein
Earlier this week in an op-ed for the New York Times, Warren Buffett, one of the richest billionaires on Earth and a social democrat, proposed a sharp increase in taxes on those making a million dollars or more a year.
He argued the case on the basis of fairness. He noted that his federal tax bill of $6,938,744 last year was only 17.4% of his taxable income, considerably less than his employees. Their tax burden ranged from 33% to 41%. He can pay less because most of his income is in the form of long-term capital gains, which is taxed currently at 10%.
Ben Stein, a conservative Republican, lawyer and part-time actor, agrees and has been making the case for soaking the rich since 2006. “They can afford to pay more,” he states. “We’ve got to do something about the deficit, and cutting spending won’t solve the problem entirely. We need to raise some tax revenues.”
Of course, Buffett and Stein are correct in one way: The rich can afford to pay more in taxes. The rich (I’m in this category) have surplus wealth that we can draw on to send to Washington .
The real question: Is that a good idea?
Suppose an American entrepreneur earns $1 million, and is able to save half of it after paying taxes and his living expenses. He can use that half a million dollars in a variety of ways:
1. Expand his business, or start a new business (creating new jobs).
2. Invest in other successful businesses, i.e., invest in stocks and bonds, or through private venture capital.
3. Place funds in bank savings or CDs, which in turn might be loaned out to businesses.
4. Give money to good causes—charities, churches, think tanks and alma maters (e.g., scholarships for needy students).
5. Make improvements on his home by hiring skilled workers, etc., or spend the money in other ways.
Or send the tax money into Washington in hopes that the money will be used appropriately.
The question that Warren Buffett, Ben Stein and other wealthy Americans need to answer is this: Will this surplus wealth be used in a productive way or wasted on some boondoggle?
I suspect that Warren Buffett and Ben Stein could use the money more productively than the federal government.
And that’s the crux of the matter (which has been lost in this debate):
An income tax on the rich is a tax on productive capital.
A capital gains tax is a tax on capital.
A federal estate (or inheritance) tax is a tax on capital.
A tax on interest and dividends is a tax on capital.
And it is private productive capital that grows an economy, not wasteful or inefficient government spending.
In sum, if you want more economic growth and a higher standard of living, the government should reduce taxes on the productive rich.
Hong Kong is the best example of a pro-growth tax policy (with no deficits): no tax on interest, dividends or capital gains, and a flat income tax of around 18%.
One more point: Even if Congress increases taxes on millionaires and billionaires, and sends the money to Washington, there is no guarantee the new revenues will reduce the deficit. In the budget markup committee, the House is notorious for looking at revenues first, and then deciding how much to spend on each program. If more revenue comes in, they are likely to spend more. That’s been the history—tax increases lead to more spending, and the deficit stays the same or gets bigger.
Sorry to say, Warren, but I suspect that your $6,938,744 in tax money went down a federal rat hole. You could have used that money better yourself.
Better to keep more of the surplus wealth in the hands of private entrepreneurs, who will grow the economy and make everyone better off.
It’s known as supply-side economics, or Say’s law.
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