Economix Blog: Buffett vs. Mankiw on Taxes

DAVID LEONHARDT

Thoughts on the economic scene.

By inviting Debbie Bosanek, Warren Buffett’s secretary, to sit in the first lady’s box at the State of the Union address, President Obama has signaled that he intends to talk about the tax rate on some investments. Mr. Obama and Mr. Buffett both argue that many investment managers pay too little tax, because the tax code treats their pay as an investment return — and thus taxes it at a much lower rate than ordinary income. Mr. Buffett has famously said that, as a result, his secretary pays a higher tax rate than he does.

The tax rate on many investment gains is 15 percent, while the top tax rate on ordinary income is 35 percent.

This gap goes a long way toward explaining why Mitt Romney, the Republican presidential candidate, pays a lower tax rate than many affluent Americans.

N. Gregory Mankiw, a Harvard economist and former adviser to President George W. Bush who is now advising Mr. Romney, has questioned the notion that Mr. Buffett actually pays a higher tax rate than his secretary. Writing in The New York Times in 2007, Mr. Mankiw, who is a contributor to the “Economic View” column in The Times’s Sunday Business section, argued:

Another piece of the puzzle is that Mr. Buffett’s tax burden is larger than it first appears, because he is a major shareholder in Berkshire Hathaway.

When the [Congressional Budget Office] studies the tax burden, it includes all federal taxes, including individual income taxes, payroll taxes and corporate income taxes. In its analysis, payroll taxes are borne by workers, and corporate taxes by the owners of capital. For the richest 1 percent of the population, 9.3 percentage points of their 31.1 percent tax rate comes from the taxes that corporations have paid on their behalf. The corporate tax would undoubtedly loom large if the C.B.O. were to calculate Mr. Buffett’s effective tax rate.

Mr. Mankiw’s main point is that Mr. Buffett’s true tax rate is higher than he says, because he is effectively paying corporate taxes, through his ownership stake in companies.

We invited the Center on Budget and Policy Priorities, a liberal-leaning research group in Washington, to respond to Mr. Mankiw’s argument. Chuck Marr, the center’s director of federal tax policy, wrote in an e-mail message:

Professor Mankiw identifies the best source of information on this subject: the Congressional Budget Office. Let’s take a closer look, though, at the story that the latest numbers tell. They show a country in the midst of a stunning increase in inequality, with incomes at the top rising more than ten times as fast as the incomes of middle-class Americans. At the same time, taxes have been cut dramatically for the richest people in the country – one reason why deficits have gone up in recent years. The 29.5 percent average tax rate faced by the top 1 percent used to be 37 percent in 1979.

The result is that the share of after-tax income flowing to the top 1 percent has surged from 7.5 percent in 1979 to 17 percent. This represents a shift upward of hundreds of billions of dollars each year. With huge budget deficits on the horizon and working and middle-class families struggling, it is time to reverse course and return the tax burden at the top to more reasonable levels.

Look for more discussion of this issue on both Mr. Mankiw’s blog and the center’s blog. And The Times’s Caucus blog will be following the State of the Union address all night.

Article source: http://feeds.nytimes.com/click.phdo?i=b4b27135fd5d38c24260418233346e19