Warren Buffet and the “Buffet Tax”

Warren Buffett, the “Oracle of Omaha” and one of the world’s three richest men, sparked a furor of debate with his editorial published recently in The New York Times. In his piece, he called for a more equitable distribution of the tax burdens that constitute our “shared sacrifice,” targeting the mega-rich.  Specifically, his prescription was: “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.”

Powerful and heavy words. But taxes seem like such an esoteric and distant topic for most of the hedonistic college-aged population (similar to our perception of voting rights and rare exercise of it, until the Obama campaign mobilized us). Taxes are either an inconsequential matter, or at best on the fringes of our thoughts.

In fact, personal fiscal responsibility is similarly critical to most students. The refinement of personal finance skills isn’t as important for our pleasure-seeking generation as it was for that of our parents, especially considering the greater amount of discretionary wealth we enjoy. We can spend freely, make poor purchases and still have enough for sushi. Additionally, America’s media machine has helped to construct an intrinsically perceived need to spend more in order to reach the pinnacle regions of our local social hierarchies. Nonetheless, taxes are a looming concern that will become abruptly relevant upon graduation from a full-time student to a full-time, exempt employee.

At the risk of assuming a reductionist view, the purpose of taxes is simple: to provide public goods and public services. Taxes serve as a means by which governing entities gather resources to provide for basic infrastructure, national defense and funding for projects that would otherwise be unprofitable for the private sector and would consequently never come to fruition or inception. Taxes are the lifeblood of governments. The revenue from taxes ensure the necessary power needed by such entities to manage externalities like crime, fires, pollution, corruption and inequality, problems that the limited resources of a single household would never be able to address meaningfully.

The concentration of a preponderance of wealth in the hands of the upper echelons of American society has a positive feedback effect. Put simply, having more money makes it easier to make money. The wealthy possess greater access to better financial opportunities that afford greater returns (consider Goldman Sach’s private IPO of Facebook for wealthy foreign investors). As a consequence, there is a self-perpetuating cycle where the rich have the financial endowment to increase their wealth faster than those who lack proportionately equivalent means. A positive feedback effect is observed. What kinds of people strive to challenge such a system? Apparently, it’s the incredibly wealthy.

First, let’s ponder some pieces of common sense. It is never shocking to hear a person advocate changes that can be perceived as self-interested. But it is always inspiring to hear someone of privilege demand reform for the benefit of others, especially at his or her own cost. A rich person’s influence stems from his or her wealth. Demanding to have more of that source of power taken away is paradoxical and irrational, which is precisely what makes such propositions even more enigmatic and respectable. Consequently, Mr. Buffett’s call for increasing the maximum federal tax brackets and suggesting higher tax rates on capital gains and dividends has attracted a lot of controversy. Currently, the highest marginal tax rate for the married filing jointly is 35 percent on income over $379,150, and has been 35 percent since the popular Bush tax cuts were implemented in 2003. Buffett has argued that the 35 percent rate can go higher, while “Republicans have fiercely resisted any attempts by President Barack Obama and Democrats in Congress to make higher taxes for the wealthy part of any budget plan, insisting instead on all the deficit-curbing measures be made through spending cuts,” according to Reuters. I wanted to have an informed opinion on this issue, so I decided to look at historical numbers from the Tax Foundation to get a sense of what the “average” rate was. My scrutiny of past federal marginal income tax rates produced surprises to both myself as well as my well-aged parents. It was as high as 70 percent from 1965-1981, higher in 1964 at 77 percent, and even higher from 1955-1963 at a staggering 91 percent. The 70 percent tax bracket was set for income over $200,000 (in 1965-1981 dollars), equivalent to $1.37 million to as little as $473,000 today, depending on the year of the dollars you are converting. The 91 percent bracket took effect for earnings above $400,000, which is equivalent to $2.7 million to $3.2 million dollars today, affecting a proportionally smaller segment of the population, discounting for a smaller population size. Perhaps even more surprising is that a Republican president presided during the period rates were at 91 percent, President Dwight Eisenhower. The bottom line is, a return to higher tax rates for the stratospheric and “endangered” parts of society is nothing new to America, and judging by our current status as the world’s leading superpower, high rates for the rich did not destroy our future.

However, in the midst of the Standard and Poor’s downgrading of U.S. debt on Aug. 5 for the first time in 70 years from a triple-A rating to AA+ and heated partisan debates over whether or not to raise the debt ceiling at the risk of a government shutdown, a sharp focus has turned toward improving America’s fiscal health. There is a prevailing sense of alarmism and urgency that has gripped our nation, and concerns that have manifested in disruptive ripples through stock markets across the world. The only options for improving our fiscal position lie within the domains of reducing government expenditures or improving revenue collection. Such options include any mix of the following: spending cuts, raising taxes, paying off debt to reduce interest payments or increasing the size of the economy to increase the tax base.

Warren Buffett’s manifesto represents a juggernaut of influence now entering the ring on the side for increasing taxes on the top 2 percent of America, and has triggered a cacophony of new voices to enter the fray. While his suggestions will not solve our problem as Mr. Alan Reynolds pointed out in an earlier Wall Street Journal article, our history of tax rates as high as 91 percent between 1955-1981 yet eventual rise to world superpower suggests that America’s future won’t be jeopardized. In the end, it should be interesting to see what conclusion our country comes to regarding a re-distribution of burden for our “shared sacrifice” especially with President Obama proposing the “Buffet Tax” on people making more than $1 million a year as part of his deficit recommendations to Congress.

Andrew Wong is a UCI alumnus. He can be reached at acwong77@gmail.com.