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What Would Warren Buffett Pay Under 9-9-9, if He Went on a Consumer Binge?

2 min readBy: William McBride

In my last post, I calculated what Warren Buffett would pay under Herman Cain’s 9-9-9 Plan, and found that he would get a substantial taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cut. There I assumed Buffett consumes only 10 percent of his income. However, the 9-9-9 Plan is all about taxing consumption rather than income, so this is a critical assumption. Let’s instead assume that Buffett consumes all of his income, e.g. blows it all on a new house to keep up with Bill Gates, or just throws a bunch of wild, extravagant parties.

Interestingly, that turns the results upside down. Buffett now gets a big tax increase under 9-9-9. The reason is that Party Buffett pays 10 times more sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. than Tight-fisted Buffett under 9-9-9, $5.66 million versus $566 thousand. That brings Party Buffett’s total tax bill to $9.42 million under Scenario 1 (where his income is split evenly between dividends, interest, and capital gains) and $8.49 million under Scenario 2 (where his income is 50 percent capital gains, 25 percent dividends, and 25 percent interest). Since Buffett currently pays $6.93 million in federal income and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. , this would mean a tax increase of $2.49 million (36 percent) under Scenario 1, or $1.55 million (22 percent) under Scenario 2.

However, Buffett has a lot more money to spend than just his income. If he really wanted to get hedonistic, he could tap into his wealth, which is estimated at $39 billion. Let’s say be burns through all $39 billion, by buying a new fleet of yachts, private jets, and Airbus 380s. That would add $3.5 billion to his sales tax under 9-9-9. That’s a tax increase of more than 50,000 percent, relative to what he currently pays.

There are two things to point out here. First, income does not equal wealth. Our current tax code provides no significant way to tax Warren Buffett’s wealth, or that of any other living person (the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. is triggered by death). So 9-9-9 actually provides a very significant way to tax the “rich,” i.e. by taxing those who live off their wealth. And, to the second point, it does so with minimum harm to economic growth. The reason is that incentives matter. The sales tax component of 9-9-9 creates an incentive for Warren Buffett to cut back on his lavish lifestyle and instead keep that money invested in Berkshire Hathaway or other investments. It is not that there is zero economic benefit when Buffett buys yachts and planes and throws parties, but these are all depreciating assets, if you will. It is better for Buffett’s net worth, and that of the nation as a whole, if he buys appreciating assets, such as stock in Berkshire Hathaway or the next Apple.