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Why Warren Buffett Is Right About Raising Taxes on the Rich

Henry Blodget

Ask any non-partisan economist how this country can begin to address its debt and deficit problem, and the answer is "raise taxes and cut spending."

Not raise taxes OR cut spending.

Raise taxes AND cut spending.

With the federal government currently spending about 22% of GDP per year and taxes pulling in only 17% of GDP, there's simply no way we can get the deficit under control just by cutting spending or raising taxes unless we crush the economy in the process.

On the spending side, the big long-term problems are the social and healthcare programs, so the attention should be focused there. Defense spending is also massive and can likely be trimmed without compromising the country's security.

On the tax side, meanwhile, the obvious place to look for potential increases is the place where taxes are relatively low. And one of those places is the tax rates that mostly benefit the highest-earning Americans--top-bracket income taxes, capital gains taxes, and dividend taxes.

The only argument against modestly raising these taxes, aside from the fact that no one wants to see their own personal taxes raised, is that increasing taxes on investing and earning will discourage the country's entrepreneurs and investors from building companies.

Related: Fixing the Fiscal Cliff: Is Hiking Taxes on the Rich the Answer?

In an op-ed in the New York Times, billionaire Warren Buffett gives this argument the only response it deserves: Ridicule.

Buffett says, as he has before, that modestly higher taxes would not cause him to work any less hard. He points out that, even in the 1960s and 1970s, eras with truly high taxes, these taxes did not stop him and his clients from pursuing investment opportunities. Lastly, he notes that, given the vast sums of money that the richest Americans have banked in the past decade, they will have plenty of money to invest even if taxes rise modestly.

And then Buffett lays out a series of proposals that are eminently reasonable.

  • First, he only calls for raising taxes on Americans earning more than $500,000 a year, not the $250,000 that President Obama is focused on. Families who earn $250,000 and live in major cities justifiably point out that this salary does not leave them feeling "rich." So, raising the definition of rich would go a long way toward making these tax hikes more palatable.

  • Next, he calls for a minimum 30% tax on Americans making $1 million to $10 million or more, regardless of how this income is generated. One of the most egregious elements of the tax code is that some of America's highest earners pay much lower tax rates than average earners, because they generate their income from capital gains or dividends or have figured out how to shelter it by taking advantage of various loopholes. This tax would ensure that most income is treated the same way.

No, these new taxes won't completely fix our debt and deficit problems. But they will help. And they will also encourage entrepreneurs, investors, and senior managers to keep their money in their investments and companies, rather than taking it out and spending it. This should have a positive impact on future economic growth, and with it, jobs.

Let's be clear: No one wants to pay higher taxes.

But to address our debt and deficit problems, we have to raise taxes.

And Warren Buffett is right: Raising taxes on the highest earning Americans back to levels that will still be historically low is a smart place to start.

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