Tax the Toys!

Clickme for full text of editorial at Washington Post.

This past summer, billionaire Warren Buffett dusted off an old line about how his secretary pays a higher tax rate than he does, and ever since there’s been a running debate over tax fairness.

….From one angle of view, this seems absurd, particularly in a country that boasts of a progressive tax code. … But from another angle, the “Buffett Pays Lower Tax Rate Than Secretary” story looks to be something of a statistical mirage. (see box).

The effective tax rate for most corporate profit in the United States is 27 percent. Once the tax is paid, the profits can go in either of two directions. The company can distribute them to shareholders as dividends. Or they can retain the profits in the company, which has the effect of increasing the value of the company’s stock and thereby generating higher capital gains when the shares are sold. Either way, the profits eventually make their way to the tax returns of the shareholders, where they are taxed again at the special 15 percent rate. The antitad crown  argues that 27 plus 35 =  42 percent, several times the tax rate paid by middle-class secretaries.

While I like the idea of a progressive sales tax, I suggest a better tax may be on unproductive wealth. For example, money spent on a grand wedding is at least paced into the economy. Should we tax weddings and bnai mitzvot? On the other hand, Paul Allen’s collection of yachts, manions, and airplanes generates little wealth. A federal property tax on thatsort of property might encourage Mr. Allen to INVBEST some of his wealth rather than waste it on toys.

….So where does all this leave us in terms of tax fairness? Well, if you take an effective tax rate on corporate profits of 14 percent for the shareholders (about half of the effective 27 percent corporate rate), and add to that a 15 percent tax on the shareholder’s dividends and capital gains, you wind up with a combined tax on investment income of 29 percent. By contrast, a household earning $150,000, for example, typically has an effective federal tax burden of about 17 percent of income.

Even liberal tax reformers concede double taxation of corporate profits is not fair or economically desirable…….however, the better way to reform the tax code, and make it a bit more progressive, is to go back to an old idea — a progressive consumption tax — first proposed by Sens. Sam Nunn and Pete Domenici two decades ago and recently revived by Cornell University economist Robert Frank in his new book, “The Darwin Economy.”

A progressive consumption tax would be a big step forward for a country where household savings has been woefully inadequate and borrowing for current consumption has risen to dangerous levels. And as Frank likes to point out, such a tax would also discourage the unproductive “arms races” in which the wealthy now use their money to bid up the price of scarce “positional” goods such as houses in the Hamptons, luxury cars and tuitions at elite private schools and colleges.

Of course, it’s perfectly possible under a progressive consumption tax that Warren Buffett could pay less in taxes than his secretary — but only if he were willing to live a lifestyle as modest as hers.

Your Comment