Warren Buffett's Call for Higher Taxes on the Rich Doesn't Fit the Facts

August 15, 2011

The United States currently boasts the most progressive income tax in the industrialized world. Meaning, our wealthy pay a greater share of the tax burden than do the wealthy in any other capitalist nation. Yet in an August 14th New York Times op-ed, Warren Buffett called for even higher taxes on the rich in order to lower the federal deficit.  He believes that he and his wealthy friends are under-taxed.  However, Mr. Buffett's actions and the facts tell the real story.

  • Mr. Buffett chose to leave most of his fortune to the Bill & Melinda Gates Foundation and, thus, avoided an estate tax that could potentially give 55 percent of his wealth to Uncle Sam.  Moreover, keeping that wealth actively working in the private sector would generate deficit reducing tax revenues indefinitely.   
  • Mr. Buffett seems to forget that capital gains and dividends taxes are a double tax on corporate income.  Before it gives out a dollar in dividends, Berkshire Hathaway - like all U.S. corporations - must first pay a 35 percent federal corporate income tax, one of the highest in the world.  Then, shareholders pay the individual tax rate of 15 percent on their dividend income or the gains from appreciated stock. As a result, the combined tax rate of 50 percent is the 4th highest combined dividend rate in the industrialized world. Ironically, we had the 8th highest combined rate under Bill Clinton.
  • In his op-ed, Mr. Buffett suggests that increasing taxes on the rich ensures that they pay their fair share.  Perhaps, but while the top 1 percent of taxpayers earn 20 percent of the nation's income, they currently pay nearly 40 percent of the income taxes. That's a greater share of the burden than the bottom 90 percent combined (that's everyone earning under $100,000 by the way). 
  • Let's not forget that when the top marginal income tax rate was 70 percent in 1980, the rich paid 20 percent of all income taxes.  Yet now, when the top marginal rate is 35 percent they pay twice that. 
  • Finally, while the tax burden on the rich has been growing, the burden on low and middle-income Americans has been shrinking. By most accounts, roughly 50 percent of American households pay no income tax at all.  Indeed, the IRS will give out roughly $110 billion in "refundable" tax credits this year to households that pay no income taxes.

Contrary to Mr. Buffett's and President Obama's perceptions, America's wealthiest taxpayers are paying a disproportionate share of the income tax burden. Before we ask the rich to pay more, perhaps we should ask those who are paying nothing to contribute at least something to the basic cost of government.

Of course, like any American, Mr. Buffett can voluntarily write a check or make an electronic payment to the Treasury to help reduce the deficit by simply clicking here.  To be consistent with his message, however, he should resist taking the corresponding charitable donation deduction.  This would at least ensure that he still pay those low income taxes of which he so passionately speaks.

Follow David Logan on Twitter @Loganomix

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