Buffett to Obama: Lower My Taxes!

 | Oct 14, 2011 | 7:45 AM EDT  | Comments
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For being one of the most astute investors of any generation, Warren Buffett is surprisingly off base in his "raise my taxes" campaign.

Buffett's goal of greater income equality is laudable, from both moral and economic perspectives. I will leave the moral side to your personal belief of what is "fair," but the economic fact is that if the vast majority of workers have no income growth, they will not create the demand that enables our industries to grow and produce more. (As Gene Balas pointed out yesterday, absent income workers can substitute debt-financed consumption for a short period of time, but this will inevitably end badly, as it did in 2008.) Rather than focusing on how he can reduce his own income via more taxes, Warren should be contemplating how he can raise the income of his secretary and all of the hundreds of thousands of employees of Berkshire Hathaway (BRK.A). Higher incomes for them (and the rest of the bottom 90%) would create the purchasing power that can drive the resumption of growth.

Importantly, as someone who presumably understands the inherent inefficiency of government operations, Buffett's idea that government would be the best redistributor of wealth is odd. Rather than pay higher taxes into an inefficient system that will inadequately redistribute them, why not simply do private-sector redistribution by paying employees more? Such a shift will come at the cost of lower corporate profit margins, but so what? Margins are not somehow sacrosanct, and Buffett paying a "tax" in the form of lower margins while redistributing cash privately to consumers, seems far preferable to starving workers to earn high margins, then paying higher taxes to an inefficient government.

Of course, while Saint Warren might voluntarily pay his employees more, other business owners may not. One policy solution is tax code incentives that encourage business to pay top people less and bottom people more. For instance, I am an advocate of a plan that places an accelerating surcharge on executive compensation above some high limit, while simultaneously reducing the employers' tax burden on lower-income workers when their pay is increased. By creating the incentive for businesses to voluntarily redistribute down, both our social goals and our economic goals could be reached with less intrusion by government bureaucracy.

Our model of big government is unsustainable. We need to put more cash in the hands of below-median families to drive demand, but doing it via government will cause more problems than it solves. Listen closely to policy prescriptions that put this task into private hands.

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