Advancing a Free Society

Which Buffett Rule Should America Embrace?

Wednesday, January 25, 2012

Last night’s State of the Union address had something for every fan or critic of the President. In energy policy, my own primary area of research, the President offered a mix of the promising (some sops for greater domestic conventional energy production and a continued commitment to sustained support of basic energy R&D) along with the regrettable (no mention of his ill-advised opposition to the Keystone pipeline—and no recognition that the government role of picking winners Solyndra-style was not likely to lead to good policy outcomes). But the focus of the speech for most commentators was, not surprisingly, the President’s populist economic message of redistribution in the name of “fairness.”

It was therefore highly symbolic that Warren Buffett’s secretary Debbie Bosanek was in attendance as an invited guest of the First Lady. Bosanek was the inspiration of the so-called “Buffett Rule”, named for Warren Buffett, America’s second-richest man, who regularly claims that Bosanek, his secretary, pays taxes at a higher rate than he does. Whether this is in fact the case, nobody knows, since Bosanek has not released her tax returns—but if it is the case, it’s a highly unusual circumstance. In a recent OECD study cited by the non-partisan Tax Foundation , the U.S. was found to have the most progressive tax system in the entire OECD, a number that includes not only all income taxes but payroll taxes as well. Even when taking into account income distribution, the well-off in America pay a higher share of America’s taxes then do the well-off in any other comparable country. Meanwhile, 46% of tax filers pay absolutely no federal income taxes at all and the fastest-growing group of those, up from almost zero during the Clinton years, to nearly ½ million individuals and families today, are those earning between $75-100,000 a year, hardly the huddled masses.

What is breathtaking about Obama’s state of the Union rhetoric is the fundamental dishonesty of his central conceit, that of rich not paying their “fair share” of taxes. Indeed a large part of America’s tax problem today is that it is overwhelmingly only the well off that are paying much in the way of taxes. Large swathes of the middle class and most of the working class are increasingly exempt from any significant shared tax burden at all outside of Social Security, which arguably is more akin to a forced retirement savings scheme than actual redistributive taxation.

Now it would be fundamentally honest if Obama said that in order to fund our growing entitlements and general government expenses, everyone, poor, middle-class and wealthy would have to pay substantially more taxes. Raising taxes rather than cutting spending would be in my view, very ill-advised, but at least it would represent a serious approach to the problem. And it would embody the sort of “shared sacrifice” that the President constantly calls for—everyone has to give up something to make sure an expansive social safety net is there for everyone. But continuing with a long-running theme, last night Obama ruled out any tax increases for those making under $250,000. It’s clear his definition of “shared sacrifice” is nothing more than a massive redistribution of wealth from those who have earned it through voluntary exchange in the private market to his political cronies and voting blocs, who are asked to sacrifice absolutely nothing. This is the exact opposite of real Presidential leadership, and it is a direct repudiation of the national unifier image Obama sold to the American people in 2008. As economics, this approach will do little if anything to solve the deficit. As politics, this is pure demagoguery.

Indiana Governor Mitch Daniels’ response on behalf of the Republicans was pitch perfect in getting to the heart of the issue: “No feature of the Obama Presidency has been sadder than its constant efforts to divide us, to curry favor with some Americans by castigating others. As in previous moments of national danger, we Americans are all in the same boat. If we drift, quarreling and paralyzed, over a Niagara of debt, we will all suffer, regardless of income, race, gender, or other category.”

But perhaps the best response to Obama, Warren Buffett ,and his Buffett rule was given by Buffett himself—Not Warren, but his late father Howard .

The elder Buffett is not much remembered today, but in his time he was a paragon of the so-called Old Right, a four term Republican Congressman from Nebraska, a leading figure in Robert Taft’s 1952 Presidential campaign, a stalwart critic of the New Deal, a defender of the Constitution, and a relentless critic of the growth of government power. He was a strictly ethical representative, turning down his Congressional pay raise and refusing to participate in any junkets in contrast to almost all of his colleagues.

According to Buffett’s wife, he had only one rule of his own when deciding whether or not to vote for a bill: And it wasn’t “Does this meet my own arbitrary definition of fairness?” Or “Does this sufficiently spread the wealth around?”

He asked himself: “Will this add to, or subtract from, human liberty?”

The Warren Buffett Rule, with its false patina of social justice, fails the Howard Buffett test rather dramatically.

By all accounts Warren Buffett greatly admired his father. How tragic then that by giving a name and a symbol to the heart of the President’s intellectually dishonest class-warfare strategy, he has repudiated the original Buffett rule, and undermined his father’s fundamental legacy.

(photo credit: Aaron Friedman)