I’m sure this will be a steeply uphill battle with this audience, but I’d like to make the case that Warren Buffett’s now-famous call for higher taxes on the super-rich is – as he actually proposed it – a lot more defensible than most conservatives have given it credit for being. And while President Obama’s co-option of the plan has now contaminated it with the intellectual and political equivalent of “cooties,” I think the Buffett proposal was a missed opportunity for Republicans to demonstrate an ability to be more pragmatic than dogmatic on the subject of taxes, as well as to blunt one of the few political arrows Obama has left in his quiver that actually has a chance of being somewhat effective.
Virtually all the critics of Buffett’s proposal have made one or more of three main points. First, there simply aren’t enough “millionaires and billionaires,” and raising their taxes, even significantly, wouldn’t make a perceptible dent in the federal budget deficit. This is true, but irrelevant. Getting the federal government out of the business of funding cowboy poetry festivals or studying the physics of interpretive dance also wouldn’t make a scratch in the deficit – but that doesn’t mean it’s not the right thing to do.
The second criticism is that raising taxes on the super-rich would be at best ineffective, at worst economically harmful. The argument here is that raising taxes on any group will alter and/or diminish that group’s economic activity. Various case studies have been trotted out showing that in jurisdiction X or Y, attempts to raise tax rates resulted in lower-than-expected, or even reduced, revenue. Nevertheless, there are weaknesses to this argument. One is related to the point raised above – if taxing only “millionaires and billionaires” a bit more wouldn’t raise enough revenue to make much of an impact on the deficit, it’s hard to see how it could have much of an impact on the overall economy. The other is that most of the studies demonstrating the reality of tax-avoidance behaviors in the face of rate hikes – at least the ones I’ve seen – focus on the short-term. That is, in the year following a rate hike, revenue turned out to be less than expected. This makes sense, because it is relatively easy to shift capital gains, or even income, from one period to another – once. But sooner or later the income or the capital gain has to be taken, or foregone altogether. From a common sense standpoint, I find it hard to argue with Buffett’s conclusion that the very rich (and he knows a lot more of them than I do or any academic does) may well take advantage of all legal means to reduce their taxes in the short term, but that over time they are in the business of making money, and they’re not going to pass up on good investments just because their tax bill may be a bit higher.
The third criticism is some variant of “the rich already pay their fair share or more” – usually accompanied by a graph showing that the top 1% of taxpayers pay 35-40% of income taxes, or that “millionaires” on average really do pay more than “secretaries.” This irresistibly calls to mind Mark Twain’s famous line about “lies, damn lies, and statistics.” One can cut tax data in such a way as to support virtually any point one cares to make. But the clearest and least-biased way, I think, is simply to look at what tax rates people actually pay across all income levels. This can be done fairly easily by pulling data from the IRS web site, and results in the following graph, which shows the actual taxes paid, as a percent of income, by filers at all different levels of income for 2000 (Clinton’s last year) and 2008 (Bush’s last year).
Owing to my background in consulting, I’m probably more of a “graph junkie” than most people, but I find this chart fascinating. Three things jump out. First, an awful lot of people – on average, all those making less than $100,000 a year – pay very little in federal income taxes. Second, the net impact of all the Bush tax cuts (or “tax cuts for the wealthy,” as the Democrats invariably put it) was remarkably even-handed – virtually every income group saw its income tax burden decline by a similar proportion during the Bush years. Third, although Warren Buffett’s example of himself and his secretary may be anecdotal and atypical, his uber-point is in fact correct – at income levels above $1,000,000 per year, the progressivity of federal income taxes simply stops and, in fact, reverses into mild regressivity at around $5 million/year.
Leave aside for the moment the question of whether “progressive” taxation is in itself a good or a bad thing. It’s what we have. There has been a settled public consensus for generations, across the majority of moderates, liberals, and even conservatives, that the principle of progressivity – the greater one’s income, the higher a percentage one should pay – is probably the least unfair way to structure the income tax. And even Adam Smith thought it was perfectly reasonable (Wealth of Nations, Book Five). People can and do debate whether the progressivity should be flatter or steeper, whether there should be more brackets or fewer, and whether overall levels should be higher or lower. But as far as I can recall, only Steve Forbes among even remotely serious presidential candidates in my lifetime has ever tried to make an issue of eliminating progressivity entirely. And his candidacy, of course, went nowhere.
So if progressive taxation is the reality of what we have, and most people agree at least on the principle, what on earth excuse is there for the progressive principle to stop precisely at the level where people can most afford it? If it is right and proper for a family earning $100,000 per year to pay a higher percentage than a family earning $50,000 per year, and if it is right and proper for a family earning $500,000 per year to pay a higher percentage than a family earning $200,000 per year, then why is it not right and proper for a family earning $2,000,000 per year to pay a higher percentage than a family earning $500,000 per year? Or for a family earning $10,000,000 per year to pay an even higher percentage than that? This, I think, is fundamentally Buffett’s point.
The legitimacy and effectiveness of any system of public finance in a free society depends on a widespread acceptance of the fundamental fairness of the basic structure of taxation. People may have a hundred grievances over this rate or that loophole, but they have to believe that the basic approach is roughly “fair,” or at least less unfair than any viable alternative. The super-rich may be few in number, but they are highly visible, and highly symbolic. For these people to be seen as exceptions to the rule of progressivity, which everyone else has to live under, contributes greatly to an increase in public resentment of a group of people who are, by and large, both decent human beings and enormously productive and valuable assets to the economy as a whole. And for conservatives to be seen, by intent or default, as defenders of this anomalous and favored treatment is to reinforce perceptions that they are willing to accept “unfairness” in order to favor “the rich.”
For reasons not entirely clear to me, I think conservatives have for some time now conceded the concept of “fairness” to liberals without so much as a fight. The contrast between what Warren Buffett actually proposed in his article – a sort of super-AMT only on incomes above $1,000,000/year – and what President Obama is currently proposing – an across-the-board sock-it-to-everybody-making-$250,000 – is illustrative of why I think this was a missed opportunity for Republicans. There is absolutely no empirical evidence to support the notion that raising taxes on households making $250,000 or $500,000 or $800,000 per year makes anything any more “fair.” These households already fall in the “steeply progressive” part of the tax rate curve. The only justification for such a proposal is political – there are a lot fewer people making over $250,000 than people making less, so the people making less may be inclined to support it. This is almost the very definition of “class warfare.” But there is empirical evidence (see above) that those making $1,000,000 or more are, on average, anomalous exceptions to the general rule of tax rate progressivity that holds across the rest of the population, and that correcting this anomaly would in fact increase the overall “fairness” of the tax system.
Reasonable people can disagree, but I think it is at least a defensible argument that the aggregate benefit of improving the public’s perception of the fairness of the tax system, and reducing the public’s resentment, even by a small degree, of successful, productive, and wealthy people, would outweigh any possible negative short-term economic consequences to the sort of tax hikes proposed by Buffett. And I think the political benefits to Republicans, had they embraced this proposal before the President, could have been significant. At the margin, it would have helped blunt perceptions, especially among moderates, that the party is too subservient to the wealthy or too rigidly inflexible on the subject of taxes. And I think Republicans could, with devastating effectiveness, have drawn a contrast between their own “fair” approach – limiting tax increases only to those who, on one dimension at least, are unfairly advantaged today, and thus minimizing any possible economic harm – and the President’s “unfair” approach – heaping yet more taxes on a lot of people who are by no means “rich” and who already pay more than those earning less, and, by hitting small business owners and entrepreneurs especially hard, putting economic recovery and job creation at risk.
Those who hold Buffett’s views – and he was explicit in his article in stating that while he supported increasing taxes on the $1,000,000-plus club, he believed taxes on everyone else should be left where they are – may be few in number compared with hardcore liberals or hardcore conservatives, but they are likely all to be found among the critical “swing,” or moderate, voters. I think the GOP has missed an opportunity to “lock in” the support of that group, and now risks losing some or much of it to the Class Warrior in the White House. And I think that’s a very big risk to take, just for the sake of maintaining rigid dogmatic purity, as opposed to strong directional consistency, on the subject of taxes.