A Stitch in Haste

"The Republicans are the party of millionaires, but the Democrats are the party of billionaires."
--Source unknown.

No student of Ayn Rand should ever say "I just feel that it's wrong." But when I read that Warren Buffett was complaining that his secretary pays a higher marginal tax rate than he does, I just "felt" that it was wrong.

I'm not a tax lawyer or accountant, but I know that federal taxes are obscenely progressive. And I know that the uppermost marginal tax rates under both the federal income tax and the alternative minimum tax are far higher than the 17.7% that Buffett claims he pays.

But I didn't have the resources to dig deeper and find whatever misrepresentation Buffett was making — the one that I just "felt" had to be there — so I let it pass.

Fortunately Greg Mankiw did not:

You might wonder how Mr Buffett managed such a low tax rate. Most likely, it arose because corporate dividends and capital gains are taxed at only 15 percent. But the corporate income that funded those returns was already taxed at the corporate level, where the tax rate is 35 percent. Mr Buffett seems to be ignoring the first round of taxation. Is it possible that the world's most successful [corporate investor] has failed to pierce the corporate veil?

I should have thought have of that. Shame on me.

More:

I can think of at least four possible ways investors like Mr. Buffet can keep their taxable income, as opposed to their true income, low:

1. They hold stocks that pay minimal dividends.
2. They avoid realizing capital gains.
3. They hold some of their portfolios in tax-free municipal bonds.
4. They give appreciated assets to charity, getting a deduction for the current market value without ever having to realize and pay tax on the capital gain.

I figured #1 and #2 had to play some role. And I personally am a major practitioner of #3, though Buffett probably is not. Finally, Mankiw may not be aware that the Internal Revenue Code limits charitable deductibility to 50% of income, so that's almost certainly not the reason in Mr. Buffett's example.

In any case, if Mr. Buffett want to pay more taxes, then he's certainly welcome to do so. I seem also to recall Bill Clinton once complaining that his taxes were too low. Fine — so cut a check, out of the goodness of your heart and the deepness of your wallet, to the Treasury — and leave the rest of us out of it.

Note also that Buffett did not insist that his secretary's taxes were too high, only that his taxes were too low. Again, it is far easier for a billionaire not to worry about taxes than it is for a millionaire — or a secretary. (Compare and contrast: Bill Gates' father's campaign against repealing the death tax — which hits millionaires far worse than billionaires — or their fathers.)

Finally, I wonder whether Buffett's secretary, like most Americans, actually pays more FICA tax than income tax. The first, most urgent priority of anyone who claims to champion the middle class, and especially the working poor, should be Social Security reform. Not just twisting the dials, but bona fide reform — including voluntary partial privatization. Don't expect Buffett to concur.

More thoughts from Cato@Liberty.