Now that Mitt Romney has been revealed to pay around 14% of his income in federal taxes, talks of the “Buffett Rule” have surged once more in the media. The first time the Buffett Rule came to national attention was after an article penned by investment guru and billionaire Warren Buffett appeared in the New York Times.  The title of the piece, “Stop Coddling the Super-Rich,” demonstrated Buffett’s consternation with the US tax code, which enables him to pay a lower effective tax rate than his secretary because most of his income is taxed as capital gains, at a 15% rate. And thus was born the so-called “Buffett Rule” that President Obama has proposed, wherein millionaires would pay a new tax rate. Sounds fair, right?

Well, maybe not.  When one gets beyond Mr. Buffett’s appeal, as logical as it may seem, there is a preponderance of fallacies and misconceptions.  So let’s set the record straight.

First, I should point out that Mr. Buffett—famed investor though he is—is not an expert on tax policy or public policy; just because he makes a lot of money does not make his opinions infallible.  I had it pointed out to me several times that disagreeing with the Buffett Rule was lunacy because, you know, Mr. Buffett makes a lot of money.  Sarah Palin also makes a lot of money, but we don’t seem as eager to use her advice.

Second, it’s important to note a couple of important things regarding the amount that America’s rich pay in taxes.  In terms of amount and in terms of proportion, it’s a lot: the top income quintile paid an astounding 68.9% of income taxes in 2007, a proportion that has increased by more than a dozen percent while the proportion of taxes paid by the other quintiles has fallen.  The proportion of taxes paid by the top earners in the United States even outpaces their relative share of income—another common fallacy thrown around by proponents of the Buffett rule.

Besides the fact that the rich already pay more than their fair share, there are serious economic and philosophical implications that Buffett did not, perhaps, think through.

First, if we want to get serious about the deficit, raising the capital gains tax is not the place to start.  A recent analysis by the Tax Policy Center indicated that the Buffett Rule would not even raise $20 billion this year.  To put that into perspective, the national debt is approaching $15 trillion, and Obama’s unprecedented spending added $1.4 trillion to the debt in 2009 and $1.5 trillion to the debt this year.  Twenty billion is child’s play, a statistical anomaly.

If we want to get serious about deficit reduction, perhaps we should take a look at entitlements; means-testing Social Security and making Medicare into a premium-support system would be two good places to start. Obama has firmly refused to lead on these issues, the real drivers behind the debt.  In this sense, the Buffett Rule is just a diversionary tactic, one used within the larger context of liberal class warfare: by villainizing the rich, Obama can shore up his base as he gets nearer to 2012.  If he really cared about deficit reduction, he would float entitlement reform, not just higher tax rates.

This is, after all, the same administration that extended the Bush tax cuts while acknowledging that it was foolish to raise taxes in a recession. With unemployment currently at 8.5% (and the economy mired in the worst recovery since the Great Depression, largely thanks to Obama’s regulatory and health care schemes), it would be foolish to say that the United States is out of its recession.  Economists agree that higher tax rates tend to hurt the economy and slow growth, while punishing job creators and investment.  From that accepted standpoint, this is the worst possible time to embark on a plan to massively increase tax rates.

There is a philosophical argument against the Buffett Rule as well.  In general, citizens of the United States tend to be far more giving than their European counterparts.  The United States welfare system pales in comparison to that of Europe, where taxes are much higher and the government, in effect, acts as a “nanny” to its citizens, providing care at all stages of life.  The United States relies on churches and other non-profit organizations and charities to plug in many of the gaps that European governments fill.  To that end, which seems more pernicious: First United Methodist Church offering a free meal, or a creeping, looming government—with all of the associated loss of liberty—fulfilling the same duties? Do we want to put into the hands of government that which could be done more efficiently—and at lower cost, in most cases—in the non-profit world?

The rich of this country give disproportionately to charity compared to their counterparts around the world, in large part because they do have low tax rates. And of course, should we institute another tax bracket, the precedent for more tax brackets (on ever higher incomes) and for higher tax rates on those incomes is in place.  From there, it will prove very difficult to stop.  Just look at how the national income tax has been transformed from its beginnings to see my point.

In sum, Mr. Buffett is just plain wrong on his tax rates. The wealthy in this country pay, on aggregate, much higher tax rates than the middle classes.  Mr. Buffett is an anomaly, nothing more.

Mr. Buffett has proven himself in the arena of business, swinging dozens of large deals over the decades and clearly making many important insights into business.  To be blunt, the “Buffett Rule” is not one of them.

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