So how much does Warren Buffett consume? That’s hard to say. But he doesn’t seem to live a lavish lifestyle. It’s hard to believe he spent seven million dollars on consumer goods last years. As economist Arnold Kling speculated the other day, it’s highly likely that Buffet’s income taxes are more than 100 percent of what he consumed!
If you’re an envious sort, that result may be satisfying. But it doesn’t change the fact that the current tax system has everything backward. The taxes are imposed on Buffett’s investment income. They are affected not one whit by how much or how little Warren Buffett spends on himself.
What kind of tax system would get the incentives right? Any tax system that taxes consumption, but not investment.
A flat tax, a national sales tax and a value-added tax — at least in their pure forms — would all accomplish the right goal. And contrary to a lot of loose rhetoric, the changeover to a consumption tax is actually “progressive.” It would leave after-tax income more equal than it is today!