Warren Buffett's Tax Shell Game

So, by now, everyone and their mother has heard about Warren Buffett's request to increase income taxes on those making $1 million or more per year.  Liberals have latched on to it as a form of proof that their desire to raise taxes on higher incomes is a good idea.  Conservatives have dug into economic theory to argue that the effective tax rate Buffet claims is distorted.  What's most curious about this, is that both sides appear to have missed the magic shell game Buffett himself plays on everyone right from the start.

Buffett very clearly explains that his low effective tax rate is largely due to the fact that much of his income is taxed in a different category from wages and payroll taxes.  In particular, he says:

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.


To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

The point here is that most of the wealthiest people make their money through investment, and not through a salary or any other payroll device.  In short, many of them don't have "jobs" in the common sense of the word, but instead make money by owning parts of companies that make money and thereby increase the worth of their investment.  Buffett goes even further in making his case when he says the following:

I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.

So, he's arguing for higher Capital Gains taxes, because they won't prevent investment, and they'll make the super-rich pay more of the tax burden, right?  That's the shell game, folks.  His proposal:

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

 That's right.  After telling everyone that he (and those like him, the super-rich) pay a lower effective tax percentage of total income because the money is made through investment, and not as a salary or a wage, he turns around and proposes that they increase the income tax - which he's just told you won't apply to the vast majority of his income, at all.  Isn't that nice of him?

I'm not sure which is more ridiculous, Buffett's magically disappearing tax rate, or the inability of anyone else to spot his verbal sleight of hand.