Warren Buffett has drawn considerable attention with his op-ed in Monday's NYT suggesting that tax rates be increased for people at the top of the income distribution:
"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....
"But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.
"My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice."
Some on the right gibe that, if Buffett wants to pay more to the federal government, that's fine; he can do so any time he likes by making a voluntary donation. But Buffett wants people in his income tier generally to pay more tax, not just himself personally, so the critique is wide of the mark. He can't unilaterally achieve the social effects of a higher tax rate on rich people generally all by himself, and it's not especially selfish to ask "Why should I be the only one to pay more?" Perhaps it's equally wide of the mark on the same ground, however, when people on the left complain that those on the right shouldn't take advantage of government subsidies that they argue should be repealed.
As I discussed in my recent Tax Notes article, the policy Buffett advocates of imposing significantly graduated rates at high income levels is in tension with what long was the predominant view suggested by the optimal income tax or OIT literature (which takes distributional concerns into account, not just efficiency). But that consensus is increasingly vanishing, even within the OIT framework. I noted this (and some reasons for the change in views) in my article, and since then the Peter Diamond and Emmanuel Saez's have further spelled out some of the main arguments in The Case for a Progressive Tax: From Basic Research to Policy Recommendations.
Before one swoon too much over Buffett's nobility (though I do indeed find his stance praiseworthy), a caustic comment from David Miller may be in order. David notes that Buffett's "Berkshire Hathaway stock appreciated by $3 billion last year and, unless he is extraordinarily patriotic, there will never be any income tax paid on his unrealized appreciation. So his tax rate on the economic income he earned last year is more like 0.22% ($6.9/$3.039.9). Even if his tax rate on recognized income was increased to 100%, the tax on his economic income would be a little more than 1% ($39.9/$3.039.9). A mark-to-market tax on appreciation at a 15% rate would have raised $450 million in 2010 from Warren Buffett alone!"
David is the author of A Progressive System of Mark-to-Market Taxation, under which current year mark-to-market taxation of publicly traded securities such as Berkshire Hathaway stock would indeed be required, so this is no idle or random suggestion. Buffett presumably will never pay tax on the appreciation due to Code section 1014, which gives assets a tax-free basis step-up at death.
On the other side of the ledger, it is certainly fair to note that Berkshire Hathaway appears to pay tax at something like a 30 percent rate on its financial accounting income, if I am correctly interpreting this. I myself would count this as paid by Buffett, to the extent of his stock ownership. While there are disputes about the economic incidence of the corporate tax, similar questions could be raised about non-corporate business taxes that the owners pay directly.
I myself, if generally empowered to specify tax code changes, would opt both for corporate integration (so that Buffett wouldn't be taxed at two levels on BH's income - though, as it happens, I would prefer to concentrate the tax liability at the shareholder level, without regard to the payment of dividends) and for greater high-end rate progressivity.
Another point well known to those who have been following the budget debate, but perhaps worth mentioning here, is that solving the long-term U.S. fiscal gap realistically requires not just revenue increases from the top end of the income distribution, but extending significantly down the income scale to at least the middle-middle. With an aging population and retirement programs that serve important social purposes (and also are baked in to people's behavior and expectations), raising taxes just at the top will not be sufficient. But raising them at the top as part of the short-term budgetary response (if anything happens from the Gang of Twelve deliberations) would certainly be a start.