The Buffett rule: tax fairness or farce?

Melanie Sturm Investor and Conservative Commentator
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“The higher up in the tree the monkey goes, the more of his backside that shows,” goes the maxim. It would be hard to climb higher than Warren Buffett, the world’s most celebrated investor. However, as the namesake of the Buffett Rule — a proposal to raise taxes on the wealthy — Buffett and his backside are dangling precariously “out on a limb.”

Residing atop Buffett’s tree is New Jersey Governor Chris Christie. Last month, Christie buffeted Buffett, forcing a response that contained an important admission.

Christie’s 10 percent tax cut for all New Jerseyans is central to his fiscal revival plan. It’s designed to stimulate economic growth, job creation and entrepreneurialism. Christie expects New Jersey’s economic pie to grow so more “haves and soon-to-haves” generate more tax revenue. After eschewing Buffett’s tax, Christie challenged Buffett to put up or shut up by writing the government a check, to which Buffett conceded, “It’s sort of a touching response to a $1.2 trillion deficit, isn’t it? That somehow the American people will just all send in checks and take care of it?”

Perhaps unwittingly, the “Oracle of Omaha” revealed the hard truth: no reasonable amount of taxation can address the catastrophic levels of spending, deficit, debt and doubt that plague Americans.

Even the 49.5 percent of Americans who aren’t currently paying federal income taxes — a status for which they’re wrongly disparaged since other taxes they pay support government (state, payroll, property, sales, gas) — know that increasing tax rates on high-earners won’t “take care of it.” Incredibly, confiscating all of the taxable income of America’s millionaires and billionaires would only yield $938 billion, enough to run the government for three months.

The nonpartisan Tax Foundation estimates the Buffett Rule would raise just $40 billion annually, chickenfeed compared to our deficit, and bullish considering that Britain’s recent tax hike on the wealthy seems to have actually decreased government revenues.

Most insidious, a large majority of America’s small businesses, which since 1996 have been responsible for creating two-thirds of all new jobs, file individual (not corporate) returns. Thus, they’d be ensnared by the Buffett Rule. Imagine the surprise of the technology entrepreneur who wants to expand her business but finds herself in Buffett’s tax class!

The dirty little secret is that to reduce the deficit or avoid spending cuts, we’d need a “soak-the-middle-class” strategy. That’s because 98 percent of America’s taxable income is in households that earn less than $250,000. As Buffett admitted, “the purpose of the Buffett Rule is not to close the deficit gap.”

So, why promote the Buffett Rule if it’s economically injurious and fiscally imprudent? Because in an election year, budget gimmicks and fairness illusions trump growth, job creation, tax revenue and economic logic. This isn’t tax fairness; it’s tax farce.

The million-dollar question is, what’s fair? Is it fairer to equitably divide a stagnant or shrinking economic pie, or to grow the pie so everybody gets more, albeit unevenly?

Since first implementing the income tax a century ago, we’ve agreed on the later while operating the industrialized world’s most progressive tax system. According to 2009 IRS data, Americans with incomes under $100,000 paid an average rate of eight percent while those making over $500,000 paid an average of 25 percent. Furthermore, the top 1 percent currently pay 38 percent of America’s income taxes while the top 10 percent pay 75 percent.

But as Buffett notes, “You can do pretty dumb things when you’ve got a big checkbook.” The real problem isn’t that Americans (rich or not) aren’t paying enough in taxes; it’s that government is so over-extended that it’s transferring hundreds of billions of dollars to the affluent. Why should a farmer making $2.5 million be eligible for farm subsidies? Should Buffett be entitled to the same Medicare and Social Security benefits as those without corporate jets? Should wealthy backers of green energy be entitled to billions in below-market loans, whether or not they’re political donors?

As the president’s Bipartisan Debt Commission recommended, wealthy Americans shouldn’t get benefits they don’t need or tax preferences that distort and undermine our economy. But withdrawing voters’ goodies isn’t smart politics when you’re trying to secure electoral majorities. Conversely, it’s politically wise to distract voters from the reality that one in six Americans live in poverty (the most since tracking began in 1959), government dependency is at an all-time high and the percentage of Americans with a job is the lowest in decades.

Imagine the possibilities if Buffett turned his attention to the challenges of income stagnation. He already knows that American prosperity derives from entrepreneurial activity and the incentives that inspire it, having once said, “You can change behavior by incentives, but you can’t usually change behavior by sermons, although people try every Sunday.”

Mr. Buffett, that’s awfully good advice.

Melanie Sturm has 15 years of private equity investment experience, previous to which she specialized in project finance at International Finance Corporation and mergers & acquisitions at Morgan Stanley and Drexel Burnham Lambert. She has an MBA from INSEAD and undergraduate degrees in international relations and economics from Tufts University.