Warren Buffett’s 28 Percent Solution

Billionaire investor  Warren Buffett appeared on CNBC’s Squawk Box Monday, and along with his usual comments about the stock market, there was substantial discussion about tax policy.

Buffett has become controversial for his complaint that he pays a lower marginal tax rate than his assistant. Like former Massachusetts Governor Mitt Romney, Buffett’s earnings are almost entirely in capital gains and dividends, So, both of them are taxed at around the 15% rate, not including payroll taxes for Social Security and Medicare.

President Obama has been campaigning on the Buffett Rule, in which millionaires would pay a minimum tax of 30%, all part of the president’s focus on “fairness,” a hot button issue in 2012.

Warren Buffett on CNBC's Squawk Box. Photo: David Grogan/CNBC

But Buffett himself had another idea, in response to questioning by CNBC’s Joe Kernen and Becky Quick:

Quick: Should capital gains and dividends be the same rate as ordinary income?

Buffett: That depends on what the ordinary income rates are…Under Reagan, we went to 28% on everything…I would not have a problem with a 28% rate. There would be a lower rate on people with lower incomes, but so it would still be a graduated rate…Taxing capital gains and dividends at the same rate, we’ve done that in 1986 and people thought it was a wonderful improvement on the tax code at that time.

Buffett’s idea has the virtue of fairness and simplicity. If you throw in the 28% corporate tax rate the president is proposing (while eliminating many corporate tax breaks), then all four high-profile taxes would have the same top tax rate.

There are some problems with this proposal, however. First, you’d be doubling capital gains rates, which conservatives argue would be a disincentive for investing and capital formation. And by doubling top rates on dividends you’d penalize many retirees who rely on dividend income.

The big question, though, is revenue. Buffett’s idea would actually cut the low 35% top rate the Bush tax cuts ushered in by some 20%, and there’s far less revenue from doubling dividend and capital gains taxes than from slashing top rates on income.

So, depending on how it’s written, this idea could actually raise debt dramatically. According to the nonpartisan U.S. Budget Watch, Mitt Romney’s tax plan, which calls for a top rate of 28%, could increase the federal debt by as much as $2.6 trillion by 2021.

So, there are issues with Warren Buffett’s 28% “solution.” But the Sage of Omaha has certainly helped advance the discussion with his clear, simple suggestion.

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