Buffett's Wealth of Dollars, Lack of Insight

Economy: Billionaire investor Warren Buffett says the rich should have a higher tax bill. He's free to hold this opinion. But he's not free to turn his ideas into law. For this, the nation should be grateful.

While Buffett said income taxes should be cut for the "lower and middle class and maybe even the upper middle class," he noted Sunday on ABC's "This Week With Christiane Amanpour" that the top earners should be treated differently. He wants them punished.

"I think that people at the high end - people like myself - should be paying a lot more in taxes," he said. "We have it better than we've ever had it."

He's not alone. His good friend and fellow billionaire Bill Gates, the Microsoft co-founder, likewise supports higher taxes on the rich.

But tax policy shouldn't be about how good anyone has it. Tax policy shouldn't be about class envy. It should be about funding the government, nothing else.

If the tax code is based on emotion and subjectivity, the law becomes a tool of government authority. Equal treatment under the law, a hallmark of our American tradition guaranteed by the Constitution, is invalidated by laws intended to redistribute wealth.

Typically, the call for a tax hike on the top earners - and it would be a tax hike because the rates would increase beyond the current rates established by the law if the law is allowed to lapse - is based on the need to balance the federal budget and deal with rising debt.

President Obama represented well the Democrats' objections when he moaned that keeping the current income tax rates would be a mistake because the country would have to "borrow $700 billion to make tax cuts permanent for millionaires and billionaires."

He has also said that keeping the current rates in place would "cost" $700 billion.

Of course there is no cost to the government letting people - even rich ones - keep more of what they've earned. Government is not paying anyone when Americans keep more of what's theirs.

There is a cost, however, to increasing rates on the top earners.

Whether Buffett recognizes it or not, rich Americans' investments are needed to push the economy ahead. Taking more from them deprives the private sector of the fuel it needs to expand. Government cannot boost growth by increasing taxes.

Nor does giving more money to the government create jobs. All it does is cause the government to spend more. Economists Richard Vedder and Lowell Gallaway found in a well-known study that for each dollar in new taxes raked into the Treasury, Washington increases spending by $1.58.

An updated study by Vedder and Stephen Moore, an economist who writes for the Wall Street Journal's editorial pages, found that for every dollar in new taxes, the government spends $1.17.

Either way, increases in tax revenues won't close the deficit. They will only widen it.

Economist Arnold Kling, in a working paper for George Mason University's Mercatus Center, confirms that higher tax rates won't eliminate the deficit because taxpayers, especially those at the top end, will alter their behavior by shifting income into forms that are taxed at lower rates.

"A 50% increase in the effective tax rate on the highest earners, assuming that it could be obtained while holding their earnings constant, would yield an increase in revenue of less than 1.1% of GDP," he writes in "The Truth About Entitlements."

"Even doubling the effective tax rate on high earners would not make the budget problem disappear," Kling says. For the record, the gap between spending and revenues is nearly 10% of GDP.

When income tax rates have been cut, the economy has responded with growth. This well-documented phenomenon happened in the 1920s under Calvin Coolidge, the 1960s when Congress passed tax cuts that John Kennedy had asked for, the 1980s when Ronald Reagan promoted supply-side economics and, most recently, during the George W. Bush administration.

The data also show that tax cuts, by creating greater prosperity, increase tax revenues over time. While that may help close the budget deficit, we don't see it as a compelling argument for lower rates. Feeding the federal beast more is not our goal. If you want the deficit cut, spending should be reduced dramatically.

No, our wish is that Washington's tax policy maximizes freedom and kick-starts the economy. To use it for any other reason is to abuse it.