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Tuesday, August 16, 2011

Warren Buffett and Income Tax Progressivity

Warren Buffett is in the news this week for calling for increased income taxes on very high income individuals, such as himself (New York Times op ed of 8/14/11 - "Stop Coddling the Super-Rich"). He notes the very high income of a very small percentage of the US population. Specifically he states that about 237,000 households reported income exceeding $1 million in 2009. Buffett says they should have a higher tax rate than other individuals and the roughly 8,300 filers with income in excess of $10 million should have an even higher rate. He says the rate should be higher not only for earned income, but also capital gains and dividends.

He raises an important discussion point. How wide of a range of tax rates should a progressive income tax have? In California, the highest tax rate kicks in at about $95,000 of income for a married couple. That is fairly low. For the federal income tax, a married couple in 2010 hit the highest rate of 35% at about $374,000. Less than 2% of filers see that rate. But within that top 2%, there is really quite a range of income levels. I agree with Buffett that consideration should be given to make the system more progressive given the reality that there is quite a different between $400,000 of income and over $10 million of income. Perhaps the reinstatement of the higher tax rates in 2013 should apply to these very high income levels.

Arguments against greater progressivity include that high income individuals do pay more taxes (because they have more income) and very high tax rates can be confiscatory. High tax rates provide a greater tax benefit for deductions, but this could be addressed by converting some itemized deductions to credits.

What do you think?


Anonymous said...

Buffet writes:
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.

My reponse
His prescription is to raise taxes on capital income, otherwise known as savings. He is totally wrong about this. Editorial pages should stop coddling him by running his op-eds.

The statistic I would like to see is the amount of tax paid relative to consumption. By that measure, it is possible that Buffett's tax rate was more than 100 percent.

I do not care if he pays very little tax on saving. I would rather he pay zero tax on saving. His taxes are too high, not too low.

income tax prep said...

The income tax system is a matter of continued controversy and debate. For example, while many, if not all, people seem to have accepted the idea that the income tax rate should rise with taxable income, at least up to some point, there is a question as to the exact pattern of progressivity. Thanks a lot.