My father used to have an expression that “The hard case makes bad law,” and that phrase comes to mind from time to time; most recently in what I call “The Curious Case of Mr. Buffett’s Secretary.” You see, it is alleged that Mr. Warren Buffett, the great stock speculator of this age, actually paid less in taxes than his secretary, who is, one supposes, paid a modest sum for doing things such as answering the telephone, taking dictation, and periodically wiping the drool from the old man’s face after he falls asleep in the afternoon in his overstuffed easy chair. Of course, I have a hard time believing that the actual dollar amount paid by Mr. Buffett was anything less than a fantastical sum of money, so what I assume the credulous and ill-informed retellers of this story are actually saying is that the rate paid by Mr. Buffett’s secretary is higher than the rate paid by Mr. Buffett. This is certainly possible, and it takes only a modicum of imagination and/or a pinch of knowledge of our Byzantine tax code to understand why this might be so. Mr. Buffett probably does not take a salary, but instead relies on income from Capital Gains, taxed at 15%. Mr. Buffett’s secretary, not having spent her entire life parroting the wisdom of Benjamin Graham while putting the screws to the old boys in Washington, D.C. to put the thumb on the scale in the favor of a certain Omaha octogenarian, is presumably taxed at an Income Tax rate of 28% — minus, of course, her permitted deductions. This leads one to ask the question, “Why are Capital Gains taxed at a different rate than ordinary income?”
The answer is twofold. First, because it has generally been found beneficial to society as a whole and to the government coffers in particular not to punish the formation of capital. And second, because it is generally considered that any income received from a capital gain has already been taxed once as either ordinary or corporate income. In other words, Mr. Buffett is not taxed on his Capital Gains received as an elderly millionaire because he already paid his taxes on this money when he was a lowly Nebraska stock hustler with a fresh shoeshine and larceny in his heart back in his salad days, and rather than have the old coot hoard the money in his vault like the legendary Scrooge McDuck, society has decided it benefits when he is permitted to put that money at risk in the market. The real question is, “Why is he taxed on it at all?” After all, are we not simply punishing the formation of capital? The answer, is of course, that the government does not recognize this simple economic truth, but prefers to take a second bite at the apple, because of the insatiable, ravenous greed of the Federal Government. A child can see the solution to “The Curious Case of Mr. Buffett’s Secretary” quite readily. On her dollar, the secretary is taxed at 28%. On his dollar, Mr. Buffett is taxed first at 28%, when he originally earned it, back in 1952 or whenever (or at whatever the confiscatory income tax rate was back then for Confidence Men and Pool Sharks), and then a second time at 15% when he receives a dividend on it from whatever corporation he invested it in.
But let us assume, for sake of argument, that Mr. Buffett was indeed able to skate by at a lower rate than his secretary. Should we base our tax code solely on the nefarious activities of Mr. Buffett, or should we consider how a change to the tax code would benefit or harm everyone? In other words, should we not consider that however reasonable our desire is to harm the sleazy and wily Mr. Buffett, might there not be significant harm rendered to others if we adopt the so-called Buffett Rule? The answer, of course, is “Yes.”
So, at long last, we come to the chart above. This is the income tax paid at various income thresholds, as of 2009, the last year, my reliable manservant Mr. Chang informs me, for which data is available (courtesy of the Tax Foundation). As you can see, the top .1%, 1%, and 5% are, on balance, taxed at a much higher rate than those at the bottom, which is as might be expected in a progressive tax code. I would point out, however, that taxing the rich at such high rates may actually be counterproductive to generating revenue, if you consider the principle known as Hauser’s Law, which suggests that no matter how much the government raises rates, it is rarely successful at capturing more than 19.5% of income. The reason for this is simple human behavior — above 19.5%, people no longer consider it practical to earn the marginal dollar, but are instead inclined to engage in all manner of absurd activity to avoid taxation. I would argue that if you actually wished to raise revenue, and not merely engage in the feel-good scapegoating of rich coots like Mr. Buffett, you might consider cutting the top marginal tax rates until those on the top few income thresholds above are paying closer to 19.5%. They would engage in more productive activity, and less unproductive activity such as manipulating credulous and simpleminded Democrat politicians, or worse yet, dictating words to their overworked Chinese henchmen to post on blogs.