Attention Warren Buffetts ‘Round the World
Published in Politico
The discussion on tax policy sparked by Warren Buffett has started a global domino effect leading to “The Buffett Rule,” an attempt to extract more tax revenue from millionaires and billionaires. Unfortunately this will not resolve the fiscal mess of the U.S. or our European colleagues.
It started several weeks ago when the wealthy investor set lawmakers, the media, Wall Street and Main Street abuzz when he strongly argued that he and his wealthy brethren should be paying more in taxes. His proclamation was echoed overseas shortly thereafter as sixteen of France’s wealthiest individuals, including L’Oréal heiress Liliane Bettencourt, the chief executives of Airbus and energy company Total, signed a petition to the French government urging that they be taxed more. In Germany, a group of 50 have all signed an Initiative of the Wealthy for a Wealth Tax. Great Britain has yet to jump on the bandwagon much to frustration of the media who ask, “Where is Britain’s Warren Buffett or Liliane Bettencourt?”
Perhaps it’s noble for these wealthy elite to offer to pay more than the fair share that they already contribute. The crushing debt and fiscal imbalance that our nations face is going to require everyone to sacrifice more, but Buffett and his European counterparts are wrong on a fundamental point. We should not be looking at paying more into the broken systems that have left us deeply mired in unemployment, wiped out nest eggs and have led many to lose confidence in our democratic institutions and their own individual future. A sobering Gallup Poll released earlier this year found that only 44% of Americans believe it is “likely” that today’s young people will “have a better life than their parents, with better living standards, better homes, and better educations.”
The U.S. has a golden opportunity to set the tone on the world stage in crafting a tax policy that will promote economic growth and restore confidence to its electorate, businesses and Wall Street.
The handpicked members of the debt reduction “super committee” have been charged with designing an acceptable bipartisan blueprint to trim our crushing debt and restore our fiscal health. Tax reform will most certainly be on the table but they should reject “The Buffett Rule,” which is a bad rerun from 40 years ago under a similar proposal by President LBJ’s Treasury Secretary Joe Barr. The “Barr Rule” ultimately led to the now dreaded Alternative Minimum Tax (AMT) that is soaking many middle income Americans today. It failed as bad tax policy then, and will fail as bad policy now. It will exacerbate a weak economy, will generate very little revenue to offset the large American debt crisis and will undermine the American dream.
If Congress and the super committee want to truly return the U.S. to prosperity again, they must look beyond redistributing wealth that sets winners and losers under our current broken tax code. They must examine what we tax in the first place. In the U.S. we have a system that punishes Mr. Thrift who works hard, maybe has more than one job, and saves every penny, but faces a punitive tax code that increases his burden the harder he works.
It rewards Mr. Spendthrift who borrows like crazy and is happy that Uncle Sam encourages him to do so. He buys everything from vacation homes to new cars for his teenage child but is taxed less than Mr. Thrift who saves and is penalized.
A shift from progressive rates on an income tax base to flatter rates on a consumption tax base would allow for much greater savings and investment on behalf of Mr. Thrift. He will be taxed only on what he spends, simplifying his tax liability and giving him more control over his hard-earned income, retirement and college savings. Similarly, businesses would become more confident about putting profits and savings back into their companies and other incentives that spur growth and jobs.
Spendthrift Sam would be taxed at a federal level on his consumption – the latest model car, his extravagant vacation and his iPad.
A key component of this more pro-growth tax scheme would be to lower rates on capital gains. Contrary to what critics say, if lowering capital gains tax rates was truly about benefiting wealthy fat cats, then I’d switch sides. Businesses large and small need capital. It doesn’t matter whether they get it from Warren Buffett, their family and friends or their own hard earned savings they plough into their own business to take a chance on the return, only if they succeed, of a capital gain.
Buffett is wrong in his sentiments that tax rates on capital gains have no bearing on savings and investment decisions. An econometric study by the highly respected economist Dr. Allen Sinai notes that the economic activity sparked by eliminating the capital gains tax increases GDP increases by a little over 0.23 percentage points per year. Jobs increase by an average of 1.3 million per annum while the unemployment rate drops 0.7 percent at its lowest point. Conversely, Sinai found that raising the U.S. top individual capital gains rate from the current 15 percent rate to 20 percent, as suggested in several deficit reduction plans, would cut annual economic growth by an average of .05 percent per year and job growth would decline throughout the economy by an average of 231,000 from 2011-2016.
A return to pro-growth tax policy would reward Mr. Thrift, who saves for his family, his retirement, education for his kids and his health care. It would also reward the frugal business that invests profits in new machinery and equipment, and ideas, or provides seed money for startup companies that create new jobs.
It would also restore economic confidence among those who still aspire to succeed and become the next Warren Buffett, aka the American Dream. There’s an old parable of a French farmer who has one cow; his neighbor has five. The farmer is jealous and believes that justice requires that he should receive two of his neighbor’s cows so that they each have three, consistent with European egalitarianism. Conversely, the American farmer sees his neighbor’s five cows and applauds his success, saying, “If my neighbor can do it, so can I and I will also have five cows.”
The key to regaining our “five cows” is economic growth and we can arrive there through pro-growth policy. If U.S. leaders are bold enough to pursue it, that’s a shot worth sending ‘round the world.