Tom's Life Bits

Billionaire is playing games with the math; the wealthy pay plenty in taxes

By Brian H. Murphy

4:33 PM EDT, August 24, 2011 Advertisement

The United States tax code is so backward that billionaire investor Warren Buffett pays only 17 percent in income taxes, a rate even lower than that of his secretary. Or so he claims. While I have great respect for Mr. Buffett, and while I agree that our tax code could benefit from major adjustments, Mr. Buffett's statement is misleading. And he knows it.

Even worse, when Mr. Buffett implies that wealthier Americans are under-taxed, it gives public officials cover to pursue disastrous policies such as Maryland's failed millionaire's tax, and the pending sales tax on interstate Internet purchases known as the “Amazon tax.” Taxing the rich and protectionism may poll well, but these policies demonstrably hurt the same middle class and lower-income citizens they purport to protect.

Throughout his career, Mr. Buffett has been influential in creating hundreds of thousands of jobs and billions of dollars in wealth, and he has directly and indirectly paid billions of dollars in taxes. But Mr. Buffett is an equity owner in the companies he has created. As such, Mr. Buffett takes all of the risks and gets paid last: after his employees, after his creditors, after every form of government. While he is partially correct that his “income” is only taxed at 17 percent, Mr. Buffett is also guilty of some sleight of hand. A simple example will illustrate the point.

Let's pretend one of Mr. Buffett's companies is in Baltimore. Assuming his secretary makes $36,000 per year, excluding payroll taxes (which are ostensibly reserved for the employee's direct benefit), and after certain standard deductions and personal exemptions, the secretary's combined state, local and federal tax rate would be about 19 percent.

Unlike Mr. Buffett's secretary, the capital representing Mr. Buffett's “income” would have already been taxed at the average combined corporate local and state rate of 7 percent, and the federal rate of 35 percent, before it ever reaches Mr. Buffett, and at 22 percent thereafter. (For simplicity's sake, I am rounding several tax rates and making assumptions about deductions.) A more accurate comparison of tax rates would find that Mr. Buffett's capital has an effective tax rate of about 50 percent, while his secretary pays a rate of about 19 percent.

Perhaps an argument can be made that the corporate rate should be lowered in order to raise the personal rate for Mr. Buffett, but no credible argument can be made that the effective tax rate for Mr. Buffett's capital is too low. And in addition to the misleading math, Mr. Buffett's argument lays the groundwork for tax policies that punish high earners and companies, and opens the door for protectionism, which shrinks our economy and hurts lower-income earners.

Arguments such as Mr. Buffett's were part of the rationale that gave Maryland the millionaire's tax in 2008, which not only failed to realize the projected $106 million increase in tax receipts, but saw a 33 percent decline in millionaires and netted a $100 million decrease from the prior year. (I can't claim with certainty that the tax caused the decline, and I admit that the plural of anecdote is not data, but I do know more than a dozen people who changed residences just to minimize their tax bill. Ironically, several are committed Democrats who supported the tax increase.)

More embarrassing than the disappearing revenues was the fact that politicians already spent the money they were expecting, so lower income Marylanders were left to foot the bill through increased debt, cuts to services, and higher taxes elsewhere.

One would think our Maryland politicians have learned their lesson, but as we speak they are lining up to support a tax on online merchants that would no doubt be a similarly spectacular failure. Storefronts across Maryland are suffering from high rents, high taxes and diminished consumer confidence. At the same time, online merchants from across the country are able to sell goods to Maryland consumers without paying our 6 percent sales tax. Instead of looking for ways to help Maryland companies compete for Maryland consumers, our politicians are suggesting we raise the sales tax to include online purchases.

But how will Maryland consumers benefit if they have to pay more for online purchases? And how are Maryland shopkeepers better off if we punish online consumers and retailers? Prices in Maryland will still be high, and consumers will still be motivated to find ways to shop less or to get cheaper goods elsewhere. Public policy should focus on consumers and businesses. And this policy does neither.

History has proved that tax increased are speed bumps to economic growth. At a time when our nation and state are in desperate need of private-sector growth and job creation, our politicians insist on the folly of building better mousetraps in which to catch millionaires and businesses, all in the name of claiming higher shares of phantom revenues. Their time is better spent in locating and minimizing impediments to private sector growth. And on that point, I am confident Mr. Buffett and I are in complete agreement.

Brian H. Murphy is a former Republican candidate for governor of Maryland. His email is bhmurphy@plimhimmon.com.

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