Paul Jacob has written twice in the last 2 weeks about Warren Buffett's taxes. This is in response to Mr. Buffett's revelation that he pays half the effective tax rate as his employees. Mr. Jacob attributed this to the Social Security earnings cap. This is part of the problem, but not whole story. The rest of the story is that Mr. Buffett receives most of his income from dividends. Dividends are taxed at a much lower rate than wages and are not subject to Social Security taxes in any case. This lower tax rate was a compromise in an earlier effort to eliminate the double taxation of dividends, which was a questionable goal. The problem arose that many corporations had already gamed the system so well that they paid no taxes on their income. The rational thing to do in that case would be to relieve workers and investors from paying taxes and only tax business income in what would be a less obvious version of the Fair Tax - a Value Added Tax. Such a tax could even be made visible if it would make the anti-taxers happy.

Raising the Social Security earnings cap is favored by some because it would capture the same portion of income as it had previously. This would be especially useful if the employer contribution were credited equally to each taxpayer rather than recorded as a match to individual contributions. Why on earth would I be suggesting such a thing? Because such a step would allow the collection of revenue to roughly match how it is distributed. Do that, and you can eliminate "bend points" from the calculation of benefits and more easily create Personal Accounts for Social Security.

Now, as to the latest contention that Mr. Clinton and Mr. Buffett should simply contribute to the government quietly. The point these gentlemen were making was that there are equity problems in how the tax system is currently structured. Higher income taxpayers are currently paying at a lower rate than the average American. These higher income Americans are not spending their money creating jobs, since last I checked wages paid to workers were deductible anyway. These moneys are spent on the acquisition of assets in the secondary market (inflating stock prices and providing an incentive for "securitization") and the purchasing of luxuries. If taxes were at least proportional, Messrs Buffett and Clinton would have less of a problem, but they are currently regressive. To object to such a sate of affairs is patriotic.

Let me also point out that the cutting of taxes is a major driver in the increase of the federal debt, which is sinking the dollar as we borrow from China and others outside our borders - although some portion is certainly being financed by the wealthy. If there were no foreign investment in the debt (and the year is young) then investment would be mostly be the wealthy who would be putting their excess funds into the government as an investment. Such an activity has the same economic effect in macro funds as higher taxes, except that higher taxes do not require repayment. Given the option of taxing the wealthy or borrowing from them, I would say the former is better public policy than the latter.

-Michael Bindner