David Axelrod Is Right: The Buffett Rule Is a Cheap Shot

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The Obama Administration proposes the "Buffett Rule," mandating that taxpayers making $1 million per year should pay at least 30% of their income in federal income taxes. This targets the "loophole" exploited by uber-investor Warren Buffett, who (in 2010) paid only about 11% of his income in taxes - a proportion less than his secretary.

When President Barack Obama released his 2011 income taxes, it became clear that he, like Buffett, exploited tax "loopholes." On income of nearly $800,000, he and the First Lady paid just $170,000 to the IRS, a reported tax rate of 20%. When asked about this potential embarrassment by Chris Wallace on Fox News, Obama campaign spokesman David Axelrod shot back: "Listen, Chris, first of all, the reason that his tax rate was so low was in part because 22% of his income was donated to charity."

Just so. Sending 20% to the IRS and 22% to charity adds up to 42% -- presumably more than Mr. Obama's secretary pays. The President, like Buffett (and Mitt Romney), reduces IRS payments by giving away big money to worthy causes. When releasing his 2010 return, Mr. Buffett disclosed that he had paid under $7 million on income of $63 million, while donating about $23 million to charity (with some local tax deductions mixed in). Republicans have been hectoring Mr. Buffett, who complains about paying such a low tax rate, to assuage his conscience by writing a check to the IRS. Somehow they miss the fact that it is so much easier. All Buffett need do is to stop claiming those massive checks he writes to charity as deductions.

Ask Romney. On reported 2011 income of $13.7 million, the Republican presidential nominee paid $1.9 million in U.S. taxes, about 14%. He also made charitable contributions of $4 million. The taxes and donations together equaled 43% of his income. But Romney only deducted about half of the $4 million in eligible contributions (helping him fulfill a campaign pledge that he always paid at least 13% of his income in taxes). The method could fulfill other political objectives, like deficit reduction, as well.

As a general matter, the U.S. rich actually pay taxes at a much higher rate than do the middle class. According to the Tax Foundation's analysis of IRS data, the top 1% in 2009 ($344,000 and up), paid an average rate of 24%. The top 5-10% paid 11% of their incomes, those in the top 10-25% paid 8%, and the bottom 50% just 2%. While the top 1% accounted for 17% of total reported income, they paid 37% of the taxes. On average, the largest earners pay a much higher rate than their secretaries.

But some, like Buffett, aggressively reduce tax burdens, in part by taking on other obligations. Their tax rates are relatively low if you leave out these charitable donations, which divert Mr. Buffett's income to others - exactly the sort of "giving back" that the President claims that the affluent should be doing. Adding Buffett's taxes and contributions, and dividing by income, produces a "Giving Back Rate" of about 48%.

It is noteworthy that Mr. Buffett elected to give far more to charities than to Barack Obama's federal government. Forced to choose between worthy causes, Mr. Buffett tilts his resources heavily to the private sector -- the IRS got less than a quarter. Mr. Obama cannot be terribly surprised. As David Axelrod is quick to note, the President also prefers to send his contributions to private charities and to claim the deduction.

Rich individuals like Buffett, Romney, and Obama can afford to pay more taxes. Being wealthy is all about discretionary income. Their millionaire lifestyles would not be dented - if they were, they could simply reduce outlays for charity. Famously, Warren Buffett lives frugally, drives a used Buick, and gives away almost all he makes. It is a pretty safe bet that, no matter the president and whatever the tax schedule, the 82-year-old Buffett will continue to spend as much as he likes on personal consumption, hop around the country in a private jet, and still have cash to burn.

But the issue is not whether the wealthy will suffer but whether our society will prosper. If we want to embrace the wisdom of a "Buffett Rule" we must first ask why - if the government is such a worthy source for his discretionary income - the Oracle of Omaha is so reluctant to let his personal wealth flow there.

Take it from David Axelrod: Paying a low IRS rate doesn't mean you're greedy. It just means you want your dollars doing the most good. The Buffett Rule would disrupt that prospect. Take that from Warren Buffett's tax return.



Hazlett is Professor of Law & Economics at George Mason University, and formerly served as Chief Economist of the Federal Communications Commission.

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