The Real Reason Warren Buffett Should Pay More Taxes

For most of the past six decades, the U.S. government has taken a lenient approach toward taxing financial wealth. Dividends from stocks and gains on long-term investments are currently taxed at 15 percent, compared with rates on ordinary income as high as 35 percent. The differential treatment has resulted in such attention-grabbing distortions as Warren Buffett paying a smaller share of his income in taxes than his secretary, and Mitt Romney an effective federal rate of only 14.1 percent on $13.7 million in income last year.

In a certain kind of world, such a system makes sense. In the 1970s and 1980s, researchers built models of the economy showing that, if everyone started out with nothing, made money by working and didn’t pass anything on to their children, the optimal rate on investment income would be zero. The logic was that if you tax people once on their labor income, it’s not right to tax them again on the part that they set aside for the future. Doing so would inhibit saving, starving the economy of the investment it needs to grow. Fewer jobs would be created. Everyone would be worse off.