Buffett Is Right About What Being Rich Is, Wrong About Tax Increases

The fiscal cliff negotiations may be the main event in Washington right now, but the sideshows are where all the action is — specifically, the debate over proposed tax increases, which looks like it's set to be the most bruising. On one hand, there's the President who is proposing that the current tax rates stay put (except for the rich), with the so-called "Bush tax cuts" being extended for households earning up to $250,000 a year. On the other hand, the White House's stance on the need for upper-income tax increases is unchanged; their notion of "rich" is now being challenged by none other than Warren Buffett.

In an op-ed in The New York Times today entitled "A Minimum Tax For the Wealthy," the Omaha billionaire writes that while he supports President Obama's proposal to eliminate the Bush tax cuts for high-income taxpayers, he prefers a higher cut-off point, "maybe $500,000 or so." At the same time, as my co-host Jeff Macke and I discuss in the attached video, Buffett argues that prior periods of high tax rates — whether on income, capital gains or dividends — had no negative effect on his accumulation of wealth or that of the nation, which he says saw GDP and jobs rise sharply during the post-war boom.

In addition to raising the threshold on the rich for the Bush tax cuts, Buffett also calls for minimum tax rates of 30% and 35% to be set on what I call the "Really Rich" and the "Super Rich" — which the 82-year old chairman of Berkshire Hathaway (BRK) pegs at $1 to $10 million and $10 million plus, respectively.

"The fact is, that debate needs to be elevated," Macke says of the current "What is rich?" discussion, adding that "a million dollars is where you start getting rich."

Implicit in all of this income targeting and wealth labeling are two keys facts: fairness and recession. In the case of the former, it is a known fact that over the past generation the rich have gotten richer and today control a larger slice of the nation's income and total wealth. However, on the latter point, the reluctance to raise tax rates on the masses is also couched in the reality that the economy is still too fragile and it would likely trigger a recession next year. The same thinking also applies to Federal Reserve Chairman Ben Bernanke's commitment to keep interest rates low, since the economy just can't handle any headwinds.

Finally, in spite of recent reports inferring that a growing number of Republicans are warming up to the idea of higher taxes, The Wall Street Journal counters that idea in a sweeping discussion with Grover Norquist, who heads up the influential Americans for Tax Reform committee that wields signed anti-tax increase pledges over the heads of almost all elected Republicans. Contrary to the conventional wisdom that Republicans have no choice but to fold and raise taxes, Norquist argues otherwise.

Even here it seems that Buffett and Norquist are in agreement that tax increases alone will do little to close the gap between revenues and spending in Washington nor will it help to tackle the nation's long-term debt of $16 trillion and counting. In fact, Buffett concedes that even if his aggressive GDP-linked targets on taxes and spending (18.5% and 21% respectively) were hit, it would not "stem our budget deficits; in fact, it will continue them."

Of course, no one knows how the fiscal cliff talks will ultimately play out in the coming weeks, but it is clear that the pressure will mount and the drama will build as the clock ticks down. The debate is set to continue even if the cliff is avoided, given that regardless of which course of tax increases and spending cuts lawmakers agree on, the country may be headed toward recession again.