(Bloomberg News) The U.S. is holding a debate that is critical to its future: whether to tax, redistribute and consume income that would otherwise be invested.
Warren Buffett has weighed in, supporting higher taxes on wealthy taxpayers. Unfortunately, the evidence he uses to make his case is superficial and flawed. One can’t help but wonder: If he had stronger evidence, why wouldn’t he use it?
Buffett, the chairman of Berkshire Hathaway Inc., is an iconic leader. The U.S. needs insightful analysis from him. His claim that taxing upper-income taxpayers doesn’t reduce investment runs counter to standard economic logic.
Federal Reserve surveys show the top 5 percent of households save and invest 40 percent of their income. Median- income households save very little, whereas the Buffett household probably invests 99 percent of its income.
If we tax, redistribute and consume income that otherwise would have been invested, the investable pool of savings declines. With a smaller pool of capital, less-attractive investment opportunities remain unfunded. Buffett tautologically claims investors will continue to invest in opportunities with expected returns above the cutoff point. Of course they will. Investment is lost at the margin.
Buffett points to the 1950s and 1960s, when marginal tax rates were higher, and claims that because the economy grew faster then, it can grow faster today with higher marginal tax rates.
Different Economies
What he fails to mention is that the advent of interstate highways and television knitted together the U.S economy in the 1950s. Large capital-intensive companies such as General Motors Co. and Procter & Gamble Co. raced to exploit previously unrealized economies of scale.
As a result, entrepreneurs and individual tax rates mattered much less to growth then than they do today. Growth accelerated independent of the tax rate.
The U.S. sent its workforce to college long before the rest of the world. That also opened new investment opportunities. Two decades of underinvestment in the private sector -- first during the Great Depression and then during World War II -- added further to the rebound. The cost of food dropped from more than 20 percent of gross domestic product to less than 10 percent, freeing resources to fuel the manufacturing boom.