Buffett

Warren Buffett CEO of Berkshire Hathaway has been saying that the rich should pay more taxes and he believes the top tax rate should be raised from the current 35% to the 39.6% it was in the Clinton administration. Buffett is seen as a grandfatherly old guy who gives a lot of money to charity. In fact, his plan was to pass on his estate to his wife but she died so he set up his children with enough money to run charities and gave most of the rest to the Bill Gates Foundation. This was an admirable thing to do and the recipients of these charities will have better lives.
Having said all of this, there is another side to his demand that the rich pay a higher tax rate. Buffett pays only 17% in taxes and the reason is that most of his income is from capital gains and dividends which are taxed at 15% and there is no payroll tax on these items. Recall that the payroll tax is the 7.65% that we all pay for social security and Medicare. In addition many of the rich have large investments in municipal bonds and the interest on these bonds is tax free. If the tax rate is increased it will have little effect on the super-rich but it will hit small business since these people get their income from wages which is taxed at the 35% rate plus the 7.65% payroll tax and includes state income tax which averages 7.5% for a total tax of over 50%.
In addition Buffett urged the President to reinstate the estate tax which means that the super-rich will pay 55% of their estate to the government when they die. This will have very little effect on Buffett since he has disposed of most of his estate through gifts. He could have given that money to the government but chose instead to pass it on to his children and charities. What is interesting about this is that Buffett’s company owns several life insurance companies and these companies benefit since many rich people purchase large life insurance policies to pay off the estate tax when they die so their heirs can inherit their estate. In addition life insurance policies can accumulate cash value without being taxed and finally life companies sell deferred annuities and both of these products become more valuable when tax rates increase.
If you want to go after the super-rich by taxation you must go after capital gains, dividends and municipal bonds. When I see the politicians doing that then I will know they are serious about attacking the wealth gap between the super-rich and the rest of us.