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Buffett Math comments

December 5, 2012

I have a new comment up on a Warren Buffett thread at the Grumpy Economist site. I’m a fan of Prof. Cochrane’s and appreciate both the intelligence and the moderate tone of the comments there. Here are my comments:

Warren Buffett’s op-ed supports the Obama administration’s proposal to raise tax rates on capital gains, dividends and the top two income tax brackets. The stated purposes are “fairness” and deficit reduction. I suspect that taxpayers with high incomes or substantial capital gains and dividends are more able (and more likely) to invest than others. Who would argue that higher tax rates would make them more likely to invest or increase the pool of investable funds? I also suspect that high income taxpayers have more control over the amount, character and timing of their income. Doesn’t the historical record show that a lot of the income these rates are designed to tax will simply disappear before it can be taxed?

So, if the President’s proposals (which Buffett supports) are unlikely to raise much revenue and likely to reduce investment, is there an unstated purpose? Every deduction or credit in the tax code is meant to shape behavior. Higher rates increase the value of tax credits and deductions. The principal effect of these higher rates will be to steer private investment into tax favored projects.

Given the trillions in losses from unwise investment in housing (encouraged by the mortgage interest deduction) and given the immense human cost of the “Great Recession” we’re now struggling to overcome, will we really benefit from more direction of private investment by the tax code?

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