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.
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...
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