"The Buffett Rule, The Deficit - How to Pay for It"

Sydney M. Williams

Thought of the Day

“The Buffett Rule, The Deficit - How to Pay for It”

September 20, 2011

Mr. Obama chose to hit the campaign trail yesterday. In a populist speech, billed as an attempt to further bi-partisan talks with Congress in the hope of finding common ground for reducing the deficit, the President evoked the name of America’s number one elite – Warren Buffett, the sage of Omaha who sits on a net worth of approximately $50 billion, and who is perhaps America’s foremost expert when it comes to finding ways to legally avoid the taxman. After a career spent investing after tax dollars for long term capital gains and at the age of eighty-one, Mr. Buffett concluded that his tax bill is too low. Instead of simply writing a check for five or ten billion dollars to assuage his conscience, the sanctimonious, Mr. Buffett decided that what is right for him, at his age and with his wealth, should also be fair for anyone making more than a million dollars, regardless of their net worth, their age, or even if they are a business entity. Today, those filers represent 0.3% of all tax payers and pay 38% of all federal income taxes. So, what is fair? The President concurred with Warren Buffett. In Mr. Obama, Mr. Buffett found a kindred spirit. In Mr. Buffett, Mr. Obama has found the means to help pay for what will prove to be the most expensive political campaign ever waged.

Of course, in order to come up with the $1.5 trillion in tax increases Mr. Obama proposes, he needs to dig down to those with lower incomes. More than half of the tax increases will come from raising taxes in 2013 on those making more than $250,000. The number of households with incomes above a million dollars is about 34,500. The number of households with incomes above $250,000 is over 2.2 million. It is math, as the President realizes.

The “Buffett Rule”, as the Wall Street Journal makes abundantly clear, is simply a resuscitation of the Alternative Minimum Tax (AMT,) proposed by the Johnson Administration and signed into law by that master of finance, Richard Nixon. That tax was originally aimed at 155 tax returns that reported income above $200,000 and which paid no taxes. Today, twenty-one million returns are subject to the AMT. When the government wants more money it knows where to go.

One thing we know for certain is that Mr. Buffett has very little in common with the average American. As we are all well aware, wealth in our country is skewed toward the very rich. As deplorable as that may be to many, it is the way things are now and the way they have been for thousands of years; it will remain true as long as people are allowed the means to generate wealth. In this inverted pyramid, the base is very wide and the peak extremely narrow. Household net worth, according to data from the Federal Reserve’s flow of funds, is valued at $58.5 trillion, ten percent below where it was four years ago. The bottom 80% of households (about 92 million) own 15% of the assets, or roughly $92,000 per household. The top 20% have a household net worth of roughly $2.2 million; however, the wealthiest four hundred households own an estimated $1.5 trillion, or about $3.75 billion per household. Obviously there is a big difference between the “Über” wealthy and the merely rich – an oversight that seems to have escaped Mr. Obama.

I was pleased to hear the President call for tax reform, making it simpler and fairer. That is an idea with which we all can agree. The difficulty arises in defining “simpler” and, more importantly, “fairer.” Despite the President’s persistent repetition to the contrary, there is not one American – including the most conservative Republican – who does not want to see tax receipts rise. The difference lies in how such increases in revenues are achieved. In August of 2009, before the National Bureau of Economic Research (NBER) had called an end to the recession, Mr. Obama, famously said, “The last thing you want to do is raise taxes in a recession.” We might not now be in recession, according to the NBER; however, with GDP in the first half of the year growing less than one percent and with over twenty percent of the workforce either unemployed or underemployed, people sure don’t feel like we are in recovery. Mr. Obama’s decision to raise taxes now would appear to violate the spirit of his earlier words.

It was disappointing that no mention of entitlement reform was made other than some mention of future savings from Medicare due to the passage of the Affordable Healthcare Act. Good luck with that. The opportunity Mr. Obama missed was in not endorsing the findings of his deficit commission a year ago. If Republicans had fought the recommendations of that panel they could now truly be called the “Party of No.” While Mr. Obama continues to toss that label in their direction, the truth is that Mr. Obama has become the leader of the “Constant Campaigners.”

The only concern all parties should have is how to get the economy growing again, recognizing the restraint that deleveraging will have on a consumer-centric economy. The answer has nothing to do with class warfare or protecting “millionaires and billionaires.” It should be, as the President suggested in his speech yesterday, a question of math. Exports, as the President has often repeated, should be a focus, yet the three trade bills famously sit on his desk, held up by unions, relics of another age. Economic growth would benefit from both tax reform and entitlement reform. Addressing such matters forthrightly would instill confidence in the people, our companies, our trading partners and our creditors.

The Policy Center of the Brookings Institute, a left of center think tank, recently prepared estimates for federal revenues and outlays through 2016, based on numbers from the Office of Management & Budget (OMB.) For the five years beginning in 2012 they project receipts to rise from $2.173.7 trillion in 2011 to $3.819.1 trillion in 2016, a 75% increase over that five year period. Over the same time, they project expenditures to rise from $3.728.7 trillion to $4.467.8 trillion, a modest 19.8% increase. Looking back over the postwar period, I was unable to find any five-year period that experienced that level of growth in receipts, and I was only able to find one period (1995-2000) when expenditures grew at a lesser rate. Optimists rule the roost at OMB.

The answer to our deficit problem must be a combination of spending reductions and revenue increases, but the revenue increases must come from renewed economic growth. So the focus of the President and Congress should be solely on restoring economic growth. Over the past few years positive suggestions for restoring growth have been made by the Simpson-Bowles Commission and others, including Representative Paul Ryan. The President risks being a one term President if he continues to listen to those on his extreme left, like unions who are mired in nationalism and the past, and in those of a Keynesian bent who say “damn the deficits, let’s spend like it’s Saturday night.” He needs the Independents. The first stimulus failed. The second will as well. The government needs revenue, and revenues will come only with growth.