Warren Buffett Rule: Class Warfare or Tax Fairness?

Sept. 19, 2011 — -- In proposing the "Buffett Rule," President Obama is invoking a name synonymous with success to raise taxes for the wealthy in what political analysts are saying will be a tough sell to Congress.

The chairman and chief executive of investment company Berkshire Hathaway is widely known to have friends on both sides of the aisle, including former Treasury Secretary Henry Paulsen and Federal Reserve chairman Ben Bernanke - both Republicans. Of course, he is known for being a billionaire businessman who lives rather modestly in Omaha, Neb.

In opposition to the Buffett Rule, Republicans have attacked the president's proposed tax hikes, crying "class warfare."

"Class warfare will simply divide this country more. It will attack job creators, divide people and it doesn't grow the economy," Rep. Paul Ryan said on FOX News Sunday. "Class warfare may make for really good politics, but it makes for rotten economics."

Joseph Stiglitz, Nobel prize winner in economics and professor at Columbia University, said he disagrees.

"It's not class warfare to ask everyone in the country to pay their fair share. To say the wealthy have taken advantage of their political position and have not paid their share of taxes is not class warfare. It's a statement of fact," Stiglitz told ABC News. "The fact is they are paying lower taxes and most Americans think this is unjust and unfair. Tax loopholes don't just appear out of thin air. They are the result of big political investments that rich people have particularly made to get tax preferences."

In an ABC/Washington Post poll in July, 72 percent of those surveyed supported raising taxes on people with incomes of more than $250,000 a year to help reduce the national debt while 55 percent supported it strongly. That was the most popular of nine different debt-reduction approaches tested and the only one to win majority "strong" support. The next closest was raising the amount of income taxable for Social Security purposes.

Stiglitz said there is "no justification" why hedge funds should be taxed at a lower rate than workers. He said it is possible that raising taxes by 0.5 percent, particularly with millionaires, could raise GDP by 1 to 1.5 percentage points.

"This could make a significant contribution to the country, especially if we spend it well," he said. "So from economic point of view, the current tax system is a distortion and this is partial fix for that distortion."

Buffett and billionaire George Soros have also has said if the wealthy make certain sacrifices, it could be a sign of national solidarity.

"It's a good sign that responsible successful investors say it will strengthen our economy and won't undermine investment," Stiglitz said. "They think the system is unfair. And I think it's a great tribute to them that they say this."

Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life, said many former presidents and legislators have asked Buffett for his advisory services. She said Obama's working relationship with Buffett most likely began when the president asked him to join his Transition Economic Advisory Board in 2008.

She said naming the new tax rule after Buffett is a sales tactic to reach a broad base.

"Just by using one word, Buffett, you sum up three ideas," Schroeder said. "First, he is egalitarian."

Buffett has long noted that the poor inordinately carry the country's tax burden. He has said the super-wealthy often pay little because their investment gains are not taxed as income. In August, Buffett wrote an op-ed for the New York Times in which he said last year his federal tax bill was $6,938,744, only 17.4 percent of his taxable income. That is lower than what the other 20 people in his office paid, which ranged from 33 percent to 41 percent and averaged 36 percent.

President Obama quickly mentioned the op-ed the next day. The president has also asked for Buffett's guidance, among that of other business leaders, for his jobs plan.

Roger Lowenstein, author of Buffett: The Making of an American Capitalist, said Buffett has always been "slightly left of center" in advocating for a progressive tax system, because the Depression shaped most of his political views.

"His father was a conservative congressman, but Warren saw that an active government in the New Deal stopped some bleeding when the country was in trouble," Lowenstein said. "I think he grew up with that mindset: the government can help and people who can contribute should."

Second, Schroeder said Buffett is the symbol of financial success, which symbolizes that the tax will work because Buffett has been enormously successful in business. Buffett reportedly said he approves that Obama chose to name the rule after him.

The third idea the Buffett rule can invoke is that the American people can actually relate to him, despite being a multi-billionaire.

"He's down to earth, the one billionaire that everyone can relate to, as opposed to the yacht crowd or mansion crowd," Schroeder said. "If you take him to a nice French restaurant, he won't know what to order. He's a steak and hamburger person."

Schroeder said Buffett does not have a lavish lifestyle. He does not have a home in the Hamptons, nor a yacht, and his home in Omaha has not been renovated in 30 years. She said his second home in Laguna Beach, Calif., is mostly used by his children, as Buffett does not often go on vacation.

"He's lived in Omaha all his life," she said. "He loves Wendy's hamburgers. He doesn't collect art. He just doesn't have the trappings of the rich and famous in any respect."