Via Real Clear Politics, Warren Buffett breaks Obamanomics down to its most critical component — populism. Buffett yesterday dismissed concerns that tax hikes will curb investor enthusiasm, but in the end, that issue seems to be less important than making the middle class happier by sticking it to the rich:
MATT LAUER, TODAY: So bottom line, would raising taxes on the wealthiest Americans have a chilling effect on hiring in this country?
WARREN BUFFETT: No, and I think would have a great effect in terms of the morale of the middle class, who have seen themselves paying high payroll taxes, income taxes. And then they watch guys like me end up paying a rate that’s below that, you know, paid by the people in my office.
On one level, Buffett’s right. If he called me tonight and said, “Ed, I’m telling you that this investment is golden and you need to put some serious money in it,” I wouldn’t be asking about the capital-gains rate down the road. (By the way, Warren, drop me a line sometime and, er, let’s do lunch.) When you have a sure thing, there isn’t any risk. But that’s the problem in his argument, too. Most capital investors don’t put money on risk-free investments, in large part because they rarely if ever appear. When they want low-risk options, they turn to bond markets and established firms, not ventures that create innovation and job expansion. The kind of job-creating innovation comes from investment in activities that fail and lose money more than they succeed and make money. Because venture capitalists put their money at risk rather than derive it from salary, investors want better return on profit — and the US has always calculated tax rates differently on the two in order to encourage investment. That’s nothing new.
Buffett also mentions “payroll taxes” as part of the mix, which is correct as far as it goes. Anyone who works for themselves, in whole or in part, know how costly those taxes can be. But what are “payroll taxes”? They are the funds deducted for Social Security, Medicare, unemployment insurance, and disability, not the general fund (in principle, anyway), and they relate specifically to benefits that cap out past a certain income level. They pay for benefits due to the worker. If payroll taxes are too high, perhaps we need to recalculate benefits — which we need to do anyway, and which would resolve most of the issues Buffett claims to address with his new take on the Alternative Minimum Tax.
The kind of issues that Buffett wants to fix would be better addressed in systemic tax reform that takes a look at the relationships between investors, managers, workers, and the distortions created by the American tax codes. There may be plenty to fix in that kind of effort, including the tax rates at all levels, as well as the spending this system is supposed to fund. Instead, though, we’re getting arguments that we need to boost morale by engaging in petty populism through the kind of short-term, short-sighted thinking that created the system that so badly needs reform.