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Can Warren Buffett Do Simple Arithmetic?

John on August 22, 2011 at 10:31 am

As you probably heard, Warren Buffett wrote an op-ed last week begging to be taxed at a higher rate. Rather than give you an excerpt of the article, here’s a little video clip in which he makes most of the same points:

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Two points to make about this. First, can Warren Buffett do math? The Tax Foundation looked at his proposal [ht: Matt Cover at CNSNews] and found that his plan is a bust:

Suppose Mr. Buffett got his wish and loopholes and deductions were eliminated, making it possible to tax the “super-rich” (those earning $1M – $10M per year) at an effective rate of 50%.

The result is it would theoretically (in reality people would find ways to protect their money) bring in enough to drop next year’s deficit by 8%. This amounts to 1% of our current debt. But Buffett also envisioned a super-tax on those making over $10 million a year. It’s an easy sell since few of us are so fortunate but what would it accomplish? Again, the Tax Foundation crunched the numbers and found that a 100% tax rate on these individuals would reduce the deficit by 12%.

Obviously it wouldn’t take long for a 100% tax rate to lead lots of very rich people to relocate overseas. You could probably only do this for a couple years, but apparently Buffett hasn’t thought this through very carefully.

So taking half of the yearly income from every person making between one and ten million dollars would only decrease the nation’s debt by 1%.  Even taking every last penny from every individual making more than $10 million per year would only reduce the nation’s deficit by 12 percent and the debt by 2 percent.

Even if we go to ridiculous extremes, i.e. 100% tax rates, Buffett’s plan could at most reduce the deficit by 20%. The other 80% has to come from cuts in benefit programs like Social Security, Medicare, Medicaid and Obamacare. This is a classic 80-20 problem.

Question: Why would an economically sophisticated man spend so much time focusing on a “solution” which only gets us 20% of the way (again, that’s only under the most extreme circumstances). I think the answer is pretty obvious:

Buffett is a social progressive who supports the President. Like Obama, he knows that increasing taxes is more significant as a political point than as a solution to our debt problem. His recommendation has little practical value but much rhetorical value to the left. Either Buffett is acting as a partisan or he can’t do simple math. Your call.

For the record, I don’t agree with the GOP contenders who would leave a 10:1 cuts-to-increases deal on the table. In fact, I’d jump at that deal. And I’d happily sign on to some more realistic version of Buffett’s plan, say one that taxed millionaires to close 10-12% of the annual deficit in exchange for entitlement cuts that closed the other 88-90%.

Let’s see the plan Mr. President.

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