Warren Buffett: Here’s How to Solve the Fiscal Cliff
Investing legend Warren Buffett raised some eyebrows on Monday when he proposed an even higher minimum tax rate for America’s most wealthy citizens.
The man behind the massively successful Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) is something of an oddity among the super-rich. Currently number two on the Forbes list of the 400 richest people in America, he routinely makes headlines for being both one of the world’s most respected investors and one of the most philanthropic billionaires.
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In 2006, he committed to give away 99 percent of his wealth to philanthropy. More recently, and perhaps more controversially, he has made headlines for the tax plan that bears his name, the Buffett Rule, which would apply a minimum tax rate of 30 percent to individuals who made more than $1 million per year.
Buffett expanded on the proposed tax policy in a New York Times op-ed published on Monday. The tax rate on wealthy Americans was put front and center during the presidential election between candidate Mitt Romney and President Barack Obama. Each came down on decidedly different sides of the issue.
Romney and many others in the Republican camp want to keep tax rate increases off the table in any policy discussion, even those regarding the fiscal cliff. Obama and many in the Democratic camp stand behind the idea that revenue increases are a necessary part of any deficit reduction plan, and tax rate hikes on America’s wealthiest citizens must be part of that revenue.
Ostensibly, the super-rich have a vested interest in keeping their tax rates as low as possible. In his article, Buffett notes that in 1992, the 400 top income earners in the United States paid an average tax rate of 26.4 percent. In 2009, that rate dropped to 19.9 percent on an average income of $202 million per year — or $97,000 per hour for a 40-hour work week, as Buffett points out.
Contrary to many of his Forbes 400 peers, Buffett favors Obama’s proposal to eliminate the Bush tax cuts for high-income taxpayers, although he would like to see the cutoff moved from $250,000 to $500,000. As stated, Buffett also favors increasing the tax rate of those who earn more than $1 million per year to 30 percent. However, in his most recent op-ed, Buffett proposes that those earning more than $10 million per year pay a minimum of 35 percent on income earned after that.
Buffett’s proposal is particularly poignant given the pending fiscal cliff, which could trigger as much as $500 billion in tax hikes and revenue cuts at the end of the year if lawmakers don’t find a solution beforehand. Many business owners, analysts, and consumers predict that America will enter a recession without a solution.
“Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P.” wrote Buffett in his op-ed. “As the math makes clear, this won’t stem our budget deficits; in fact, it will continue them. But assuming even conservative projections about inflation and economic growth, this ration of revenue to spending will keep America’s debt stable in relation to the country’s economic output.”
The government brought in 15.5 percent of GDP as revenue in the last fiscal year while spending 22.4 percent. “Correcting our course will require major concessions by both Republicans and Democrats,” wrote Buffett.
Buffett points out that only in Grover Norquist’s imagination do investors pass up a good opportunity because the tax rate is too high. While Buffett does not speak for all investors, his level-headed insight speaks volumes about what direction lawmakers should take in their search for a solution to the fiscal cliff.