Tuesday, November 06, 2007

Warren Buffett on Tax Reform

NBC recently aired an interview with Warren Buffett about his feelings on tax reform. (this clip is from U-Tube) He makes the point that because of payroll taxes that his receptionist pays a higher percentage of her income in taxes than he does. That is true. Buffett then goes on to suggest that taxes should be raised on him.

The Oracle of Omaha has made a good part of his fortune by adroitly using current tax law, relating to estates in the case of family owned business, to build his economic empire. When the effort was being made to eliminate estate taxes he argued against it. One could make the case that at least some of his motivation was to protect the source of his ability to acquire family owned businesses. Excuse me if I am a bit skeptical about his tax perspectives.

But in this case, some of what he says makes sense. For example, he argues that the carried interest exclusion which allows a lower capital gains treatment in some parts of hedge fund transactions makes no sense. That may well be true.

In other cases there are some considerations that should be reviewed before we jump at Mr. Buffett's suggestions. For example, I would argue, and Mr. Buffett would disagree, that the capital gains rate has a positive effect on revenues (lower means more, at least in current and proposed). But one could also make the point that looking at the largest part of taxes that many taxpayers bear (FICA "contributions") should be part of any intelligent discussion. Prior to the 1983 Tax Equity and Fiscal Responsibility Act (TEFRA) the contributions by most Americans to Social Security were a small part of their base - but the 1983 reform, allegedly to make the system more secure, raised both the total rates and the total amount covered from wage income. There were and are certainly alternative ways to finance social security. When TEFRA was adopted we gave those alternatives scant attention. Most of the democrat proposals for changing the tax system start with some significant adjustment of the FICA base. Most of Buffett's income is not from wages and thus not covered by FICA taxes. I would be surprised to see him advocate that the FICA base be extended to all wage and non-wage income. If we are to have sound policy we should have a broader discussion that does not simply extend the existing logic that we once adopted.

Our history is replete with examples of changes in thinking about taxes brought about by changes in the economy. Beginning in the late 19th Century there was a recognition that the existing tax bases that funded both federal and state budgets did not allocate burdens fairly. I would argue that the current mix of income and wage based taxes does not do that now. But it would be a long stretch to then suggest, as Buffett seems to do that increasing capital gains rates would necessarily be a good thing for either tax revenues or for economic growth.

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