Op-Ed: Earn and be burned

Warren Buffett is one of America’s most celebrated investors, and arguably the most successful. In recent years, he has delighted progressives by frequently and forcefully calling for increasing the tax burden on high earners. Last month, in a recent New York Times op-ed, Buffett noted that he paid the IRS only 17.4 percent of his taxable income last year, a smaller share than any of the employees working in his office.

Sensing a political opportunity, President Obama has dubbed a new proposal to tax high earners “the Buffett Rule.” The not-so-implicit message is that if one of America’s richest men welcomes higher taxes, why shouldn’t the president’s critics do the same? There is, however, a small wrinkle in this line of thinking. Unlike most high earners, Warren Buffett owns billions of dollars worth of corporate capital. Even if Uncle Sam doubled or tripled Buffett’s personal taxes, it would barely make a dent in his wealth.

Now, if you cut the corporate tax rate, well, that’s a different story entirely. The companies Buffett owns are largely profitable, and it is reasonable to assume that many of them pay taxes at the full corporate rate. A cut in the corporate tax rate could thus be a huge boon to Buffett, increasing the size of his already vast fortune. It’s worth noting that while the president has promised to fight for higher taxes on high earners, he has also called for cutting the corporate tax rate.

If President Obama follows through on his promise to “fix” the corporate income tax, Warren Buffett and his philanthropies stand to benefit. It doesn’t hurt that Buffett has earned himself a lot of goodwill from the Obama administration, which might help him when the Treasury Department decides on which loopholes will stay and which will go.

So have we suddenly discovered that Warren Buffett is actually a crooked character who means to hoodwink the American public? No, we haven’t. There is nothing intrinsically wrong with super-sizing the value of Buffett’s accumulated corporate assets. Even if Buffett hadn’t pledged to give away most of his fortune to charity, which he has, the Sage of Omaha has helped make hundreds of thousands if not millions of people around the world much richer than they’d otherwise be thanks to his shrewd investments.

All we’ve discovered is that Buffett’s homespun morality tale doesn’t really give us the full picture of what’s wrong with our tax code. It doesn’t really matter if Buffett wants to pay higher taxes, or that he wants other rich people to pay higher taxes. What really matters is what is best for the country as a whole.

During yesterday’s Rose Garden speech, President Obama presented a plan for cutting the deficit that relies heavily on increasing taxes for high earners. Among other things, the president made the case for the Buffett Rule, designed to guarantee that households earning $1 million or more in any given year don’t pay less in personal income taxes than a middle income household. One potential problem is that not every millionaire household is the same. While some millionaires fritter away most of the money they earn on fine wines and diamond-encrusted SUVs, others save and invest the bulk of their income, thus contributing to overall economic growth. It should be obvious that we want to encourage savings and investment and discourage excessive consumption, particularly if we want the U.S. economy to flourish in a more competitive world. But the current tax code does the opposite, and the president’s proposals could make matters worse.

There is, however, another way forward. Economists from the left, like Robert Frank of Cornell University’s Johnson School of Management, and from the right, like Mitt Romney adviser and Columbia Business School professor Glenn Hubbard and Alan Viard of the American Enterprise Institute, have called for a progressive consumption tax that would eliminate taxes on savings and investment. Rich spendthrifts, who spend every dollar they have in the present, will wind up paying taxes on their total income, as per usual. Rich penny-pinchers, who use their hard-earned money to help grow new businesses, will only pay taxes on what they actually spend.

This could mean that a penny-pinching millionaire household will pay a smaller share of its income in taxes than a middle-income household in some years, thus violating the Buffett Rule. But when those rich penny-pinchers decide to spend down their savings and live the high life, say in retirement, they will wind up paying a much bigger share.

The Buffett Rule presents a huge roadblock to this kind of pro-growth tax reform, and that will leave us all worse off.