A Closer Look at Taxes on the Rich

With the budget deficit growing and tax rates at a 60-year low, one question will remain near the center of the political debate in the coming months: Should the federal government raise taxes on the rich?

Warren E. Buffett, the billionaire investor known as the Oracle of Omaha, pushed the issue to the forefront this week by urging members of the new Congressional supercommittee on deficit reduction to stop “coddling” him and other affluent Americans and raise their taxes.

In an opinion article in The New York Times on Monday, Mr. Buffett said he paid just under $7 million in federal payroll and income taxes last year, about 17 percent of his income, a lower percentage than anyone else in his office.

Echoing comments he has made in the past, he called on Congress to make the tax system more fair by rolling back the so-called Bush tax cuts on people who earn more than $1 million a year and on income from capital gains and dividends. He would also close the loophole allowing hedge fund managers to be taxed at a lower rate.

Whatever the political viability, his proposal would put a significant dent in the nation’s budget shortfall. Based on projections by the Joint Committee on Taxation, the Congressional Budget Office and the Treasury, the tax increase on all three fronts would generate as much as $500 billion in new revenue over the next decade — about a third of what the Congressional committee is supposed to cut from the deficit.

“It’s not going to solve the long-term budget shortfall all by itself,” said Eric Toder, an economist at the nonpartisan Tax Policy Center. “The only way to do that is to have broader tax increases or reduce entitlements. But it could be an important piece of the puzzle.”

Because of Mr. Buffett’s high visibility and wealth — Forbes estimates his net worth at $50 billion, making him the world’s third-richest person — his comments brought a torrent of reaction. President Obama, who has fought unsuccessfully to increase taxes on the nation’s highest earners, cheered Mr. Buffett’s remarks during his Midwestern bus tour on Monday, saying that it was only fair that the spending cuts be balanced by tax increases on the wealthy.

Conservative bloggers and commentators brushed aside the proposals as grandstanding or as a gimmick to usher in a middle-class tax increase, and Pat Buchanan, a commentator on CNN, suggested that Mr. Buffett visit the section of the Internal Revenue Service Web site that accepts donations.

Republicans have been united in their opposition to tax increases, and gave Mr. Buffett’s proposals a chilly reception. All six Republican members on the committee have taken a no-tax pledge. Representative Kevin Brady, a member of the Ways and Means Committee and a Texas Republican, flatly rejected Mr. Buffett’s ideas.

“This is not a serious solution for deficit control or getting this dismal economy on its feet,” Mr. Brady said. “Economic growth does not follow a tax increase. So as much as I respect Mr. Buffett, his proposal fails on virtually every level.”

Despite the intense antitax sentiment that has helped the rise of the Tea Party movement since Mr. Obama took office, tax rates in the United States are at their lowest level since Harry Truman was president.

In 1950, the top income bracket had a 91 percent rate; today it is 35 percent. Mr. Buffett called for two new tax brackets for high earners — for income above $1 million a year and another above $10 million. While Mr. Buffett’s proposal did not suggest a rate, the Tax Policy Center has estimated that a 50 percent tax rate on income over $1 million would raise $48 billion over the next decade.

But one of the biggest factors reducing the comparatively low tax rates on investment income is the 15 percent for dividends, capital gains and “carried interest,” the money paid to hedge fund managers and private equity investors. Eliminating the carried interest provision alone would raise $21 billion over 10 years, according to the Congressional Budget Office.

And restoring capital gains and dividend rates to the levels before the Bush tax cuts — when capital gains were taxed at a top rate of 20 percent and dividends were treated as ordinary income — would bring the Treasury an additional $340 billion over the next decade.

Any of those measures would face intense lobbying and a battle in Congress. Indeed, Democrats were unable to roll back the carried interest tax break or the Bush tax cuts on the wealthy even when they controlled both houses of Congress. But with the prospect of severe spending cuts and another round of bitter deficit negotiations in Washington, proposals like Mr. Buffett’s call to raise taxes on the affluent are likely to become an increasingly urgent part of the discussion.

Article source: http://feeds.nytimes.com/click.phdo?i=ebef26c039e98d45ad317c73e7eff8d7