What would Warren Buffett pay under 9-9-9?

 
 
October 14, 2011

Many are concerned that Herman Cain's 9-9-9 Plan would shift the tax burden from high income earners to low income earners.  One interesting data point is how much Warren Buffett would pay under 9-9-9.

First, Herman Cain has not fully specified the Plan's details, but I assume, unlike others, that personal income is not double or triple taxed (see addendum).  Also, I assume dividends and interest are taxed as personal income, while capital gains are exempt.  Next, I assume that Buffett, unlike the average millionaire, has almost no wage income.  Apparently, he pays himself $100,000 per year, which is negligible in comparison to his total income of $62 million.   Let's assume two scenarios:

1)      His income is evenly split three ways, between capital gains, dividends, and interest.

2)      His income is 50 percent capital gains, 25 percent dividends, and 25 percent interest.

Lastly, I assume that Buffett consumes a small share of his income, since this is statistically the case for higher income earners and by all accounts he is quite thrifty.  Let's say he consumes 10 percent of his income.

Under Scenario 1 with 9-9-9, Buffett would pay $3.77 million from the 9 percent personal income tax on dividends and interest, plus $566 thousand from the 9 percent sales tax.  His total tax would be $4.33 million, compared to $6.93 million in federal tax currently.  That's a tax cut of $2.6 million, or 38 percent.

Under Scenario 2 with 9-9-9, Buffett would pay $2.83 million from the 9 percent personal income tax on dividends and interest, plus $566 thousand from the 9 percent sales tax.  His total tax would be $3.39 million, compared to $6.93 million in federal tax currently.  That's a tax cut of $3.5 million, or 51 percent. 

Either way, that's a big tax cut, but then $3 or $4 million is still a big chunk of change to send to the IRS.

Cain's plan is about reducing taxes on saving and investment, so it is inevitable that a famously tight-fisted saver and investor like Warren Buffett would receive a big tax cut.   I'm pretty sure Cain is not doing this because he likes Buffett in particular or millionaires in general.  Rather, Cain is pursuing straight forward economic logic that says low taxes on saving and investing are particularly conducive for long term growth.   Essentially, it is the same reason that personal investment advisors recommend saving and investing, rather than blowing one's income on SUVs and fancy clothes.  So, a sound tax code would not penalize the savers of the world nearly as much as ours currently does.  These savers likely include Warren Buffett. 

Lastly, outside of charitable deductions, 9-9-9 eliminates all loopholes, so it is much more likely under 9-9-9 that Warren Buffett would pay the same rate on wage income as a teacher, fireman, etc.

Addendum: Under these alternative assumptions, the corporate tax resembles a VAT, and as such would add $566 thousand to the total tax bill.  However, comparing this total to Warren Buffet's current personal income and payroll tax burden is questionable, as it does not include his share of the current corporate income tax burden.

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