Warren Buffett Faces a 90% Plus Tax Rate

I actually don’t know the exact tax rate, but from what I can tell it’s probably well in excess of 90%.  Unfortunately, Warren Buffett seems to know little or nothing about tax theory, and hence has been arguing that his tax rate is equal to the amount of tax paid, divided by his income.  As I argued here, income is a nearly meaningless concept in economics.  All tax incidence questions need to be addressed in terms of consumption.  I don’t know how much Buffett consumes each year, but this article suggests the amount is rather low:

Warren Buffett, perennially ranked among the world’s richest men, lives a lifestyle that hasn’t changed much since before he before he made his billions. He is often referred to as the world’s greatest investor, and his long-term track record suggests the title is well deserved. He is also legendarily frugal, residing in the same house in Omaha, Nebraska, that he bought in 1958 for $31,500. He is well known for his simple tastes, including McDonald’s hamburgers and cherry Coke, and his disdain for technology, including computers and luxury cars. Underlying his legend is one simple fact: Buffett is a value investor. It’s the hallmark trait of both his professional and personal success.

Let’s assume his consumption is less than $600,000.  In this op ed he says he paid nearly $7,000,000 in taxes:

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — 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.

There are so many things wrong with that statement that I hardly know where to begin.  The tax rate he cites is probably a rate on investment income.  But the tax rate on investment income should be zero–only consumption should be taxed.  His taxes paid are probably over 90% of taxes plus consumption.  Even worse, taxes on capital income represent double taxation, as the money was first taxed as labor income, and then taxed again as capital income.  He ignores that problem; perhaps he’s not even aware of it.  He also confuses nominal and real tax rates.  In the US the tax on investment income applies to nominal earnings; the tax rate on real earnings is far higher–over 100% for many Treasury securities.  And as Greg Mankiw points out he ignores that fact that much of his earnings were taxed at the corporate level.

Warren Buffett should be paying far less in taxes, perhaps less than me.  The people who should be paying lots more in taxes are the billionaires with their 400 foot yachts, mansions, and fancy parties.  I’m sure if they tried to do that the bill would be filibustered by liberal democratic congressmen from NYC.  Much of Manhattan’s economy is providing luxurious goods and services to the rich.  Don’t believe me?  Then read this link.  Dems say they want “fairness,” but oppose the only way to make the tax system fairer–higher taxes on wealthy lifestyles.

Many people find tax theory counter-intuitive, so think of it this way:

1.  Buffett’s consumption is the resources he takes out of the economy for his own personal enjoyment.

2.  Taxes paid are what he contributes to the common good.

It’s very possible that the wealthy should be paying far more taxes.  But Buffett should be paying far less than he currently pays.

About Scott Sumner 490 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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