Why Warren Buffett's View on Taxes Is Irrelevant

When billionaire investor Warren Buffett proclaimed that he paid too little money in taxes in an op-ed last month, progressives everywhere nodded in agreement. At last, a poster boy for the ridiculously wealthy -- the second richest man in the U.S. -- had urged the government to raise his taxes. He asserted that doing so wouldn't change his behavior one bit. While Buffett's opinion might make for an attractive political talking point, considering the actual economics of the situation shows that his assertion changes nothing.

Plenty of arguments have already been made to dispute Buffett's claim that wealthy Americans don't pay enough in taxes. First, he fails to recognize that the capital gains tax is already double taxation, so its relatively low rate is justified. Second, Buffett's very low marginal tax rate is an exception and not the rule: the rich as a group actually do pay taxes at a higher rate than the poor. But Philip I. Levy, a resident scholar the American Enterprise Institute, provides another important reason we should ignore Buffett. Economics suggests that the billionaire's opinion here shouldn't affect policy.

Using a very clear analogy, Levy explains that Buffett is an inframarginal taxpayer -- that is, he happens not to be sensitive to tax increases. But some other taxpayers certainly would be sensitive to a tax hike, and may drop out of investment or entrepreneurship if taxes rise too much. He explains that it's those on the margin -- not Buffett -- that we should worry about:

But why should we worry about them? Imagine for a moment that Buffett's sentiments are fairly common and that even 19 out of 20 employers would just pay the higher taxes and only one would throw in the towel. What does it matter if there were only one tax-sensitive outlier in the bunch? That would be a mere 5 percent; should it really drive the whole conversation?

To put this in perspective, a small percentage can make a big difference. Civilian employment in the United States peaked in November 2007 at 146.6 million jobs. In August 2011, there were 139.6 million jobs, a drop of 4.75 percent--seemingly small percentage changes can cause significant pain.

And of course, the other side of the coin is that if taxes are lowered further, more on the other side of the margin could invest more or start up a business. A 5% increase in jobs sure could help right about now.

Read the full story at The American.