The Buffett Rule and Tax Reform Essay

The Buffett Rule and Tax Reform As the tax cuts enacted by George W Bush during his presidency come to a close, the importance of reconciling spending and taxation has produced a spirited debate as to the best manner in which to solve the debt crisis. One voice in the debate is that of Warren Buffett, Chairman and CEO of the holding company Berkshire Hathaway and one of the richest men in the world. He has come out against the status quo tax policies, stating “My friends and I have been coddled long enough by a billionaire-friendly Congress.

It’s time for our government to get serious about shared sacrifice. ” However Mr. Buffet’s analysis of the situation fundamentally assumes two things about raising the taxes on the rich: first, that the current situation is not fair, and second, that raising these taxes will produce a net beneficial social effect. However the so-called “Buffet Rule”, while a rallying cry for political means, would fail to solve the debt crisis and would additionally compound the current problems due to the lack of incentives and its impact on the wealthy.

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An important facet of the debate is based on the various areas of taxation that are in focus. Buffett admits that when he compared his taxes to those in his office, he was specifically referring to federal income tax. His argument is that the least affluent in society should be given more by distributing from those making more than 1 million dollars. This draws from the Rawlsian tradition of maximin criterion, or the claim that the government should aim to maximize the well-being of the worst-off person in society.

However, this suggestion ignores the incentives made by those in response to taxation. Higher tax rates would cause people to spend less, as well as invest less if the increased tax rate on capital gains proposed by Buffett were enacted. With less investment comes less wealth generation, and in the future, less tax revenue for the government. A parallel to this proposal comes from Britain, where, following a tax raise on the highest earners, there was an almost 2/3 reduction in declared “millionaires”, as well as a net loss of ? 7 billion in tax revenue.

This decrease in revenue would also be met with less workforce expansion, because, according to Princeton Economist Harvey Rosen, Business owners who received larger tax cuts expanded their hiring more. Therefore, it is clear that this tax policy would reduce the overall wealth of the populace, reduce future revenue, and constrain hiring processes. The Buffett rule may make sense even in the face of this counterevidence if it was shown to solve the debt crisis America faces. However, according to the American Enterprise Institute, the tax hike would only raise 0. 7 trillion dollars over the next decade, or about . 4% of annual GDP. From this it becomes clear that taxation is not the only problem. The historic relationship between spending and tax revenue as a percent of GDP has been 20. 3 to 18. 0 percent, respectively. However, even if the proposed tax comes into effect, by 2021 the spending to revenue relationship will be at 26. 4% to 18% (Appendix A). Therefore, though it is clear that there must be something done to reconcile the debt crisis, the Buffett rule would, on balance, reduce economic efficiency and fail to account for the ballooning levels of spending, solving very little and costing very much.

Appendices Appendix A: Source: Bluey, Rob. “Runaway Spending, Not Low Tax Revenue, Fueling Deficits,” Heritage Foundation, 12-4-11. Accessed 12-1-12. Available at http://blog. heritage. org/2011/12/04/chart-of-the-week-runaway-spending-not-low-tax-revenue-fueling-deficits/ Works Consulted: Bluey, Rob. “Runaway Spending, Not Low Tax Revenue, Fueling Deficits,” Heritage Foundation, 12-4-11. Accessed 12-1-12. Available at http://blog. heritage. org/2011/12/04/chart-of-the-week-runaway-spending-not-low-tax-revenue-fueling-deficits/ Buffett, Warren. “Stop Coddling the Super-Rich,” The New York Times, 08-14-2011.

Accessed 04-20- 2012. Available at: https://www. nytimes. com/2011/08/15/opinion/stop-coddling-the-super-rich. html Carroll, Robert, Douglas Holtz-Eakin, Mark Rider, and Harvey Rosen (2000) “Income Taxes and Entrepreneurs Use of Labor,” Journal of Labor Economics, 18 (2), April pp. 324-55, Cited in: http://www. american. com/archive/2011/august/obamasfollytaxingtherich Gardiner, Nile. “Britain’s millionaire exodus is a wake-up call to Barack Obama’s high tax America,” The Telegraph, 11-28-2012. Accessed 12-3-2012. Available at: http://blogs. telegraph. co. k/news/nilegardiner/100191962/britains-millionaire-exodus-is-a-wake-up-call-to-barack-obamas-high-tax-america/ Mankiw, N. Gregory. “Chapter 20: Income Inequality and Poverty,” Principles of Economics. (6th Edition) South-Western Cengage Learning: Mason, OH. 2010. Sanandaji, Tino and Arvid Malm. “Obama’s Folly: Why Taxing the Rich is No Solution,” The American, 08- 16-11. Accessed 12-3-2012. Available at: http://www. american. com/archive/2011/august/obamasfollytaxingtherich ——————————————– [ 1 ]. Warren Buffett, “Stop Coddling the Super-Rich,” The New York Times, 08-14-2011. [ 2 ]. N.

Gregory Mankiw. “Chapter 20: Income Inequality and Poverty,” Principles of Economics. 426 [ 3 ]. Nile Gardiner, “Britain’s millionaire exodus is a wake-up call to Barack Obama’s high tax America,” The Telegraph, 11-28-2012. [ 4 ]. Robert Carrol, Douglas Holtz-Eakin, Mark Rider, and Harvey Rosen (2000) “Income Taxes and Entrepreneurs Use of Labor,” Journal of Labor Economics, 18 (2), April pp. 324-55 [ 5 ]. Tino Sanandaji and Arvid Malm. “Obama’s Folly: Why Taxing the Rich is No Solution,” The American, 08-16-11. [ 6 ]. Rob Bluey, “Runaway Spending, Not Low Tax Revenue, Fueling Deficits,” Heritage Foundation, 12-4-11