Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett. There is no justification for it … It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million. … Middle-class families shouldn't pay higher taxes than millionaires and billionaires … That's pretty straightforward. It's hard to argue against that.
So much unfairness! So little time!
Buffett’s August 14 New York Times editorial, “Stop Coddling the Super-Rich,” provided Obama the talking points that we will hear repeated ad nauseum until next November. The fact that they are patently false seems not to disturb either man. Obama wants to be reelected; so deceptive half-truths and untruths are his stock in trade. But Buffett’s agenda in making false statements is harder to discern. He is in his 82nd year and has been the equivalent of a rock star in the financial world – the Sage of Omaha. Let’s hope his flirtations with Obama are not conclusive that there’s no fool like an old fool.
Buffett’s editorial claimed:
Last year my federal tax bill – the income tax I paid, as well as payroll taxes paid by me and on my behalf – was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4% of my taxable income – and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33% to 41% and averaged 36%.
There are reasons why this may be true for those 20 people – like having high incomes without enough deductions – but we don’t know because Buffett won’t share his tax return and neither will the people he refers to.
But here are the facts.
The IRS reports that those who made over $1 million in adjusted gross income in 2009, the latest year for which data are available, paid an average income tax rate of 28.9% in federal income taxes, compared with 24.6% for those earning from $200,000 to $500,000 and 11.6% for those earning from $50,000 to $75,000.
It sure seems that millionaires are paying more than secretaries. However, the tax progressivity is more extreme than these percentages reveal.
When all taxpayers are listed in rank order by income, the top 20% of earners pay almost 90% of the taxes that run the government. The top 1/10th of 1% – the very rich who must make about $2 million just to get into that category – paid over 16% of the tax dollars collected. When 1/10th of one percent pay 16%, that’s pretty progressive – to the point of being arguably unfair. It’s almost like a penalty, isn’t it?
The millionaires and billionaires that preoccupy Obama’s class warfare rhetoric make a lot of money per person but there’re not enough of them to pay the government’s bills – more significantly, to pay for Obama’s socialistic schemes. There are, in fact, six times more dollars earned by the bottom 80% of income earners than there are in the top 1/10th of 1%, but notwithstanding, the bottom 80% pays less than 11% of the tax dollars needed to run the government. But hey, Obama and Buffett say, the top tier is where the rich people are. True, but they aren’t six hundred times richer than the bottom 80%. The government could expropriate all of the income of the millionaires and billionaires and still not close the deficit.
But here’s the scandal in the US tax code. Almost half of the income earners pay nothing in federal income tax. And why is that a scandal? Because if you don’t have skin in the game, you don’t pay attention to the game. We end up with a society of makers and takers. If everyone felt some tax pain around April 15, we would have better government than we have now because more people would be watching how the government spends and often wastes the money we send to Washington.
As it is, we have fewer and fewer paying the bills – the makers – whose votes pale in comparison with the votes of the growing number of free-riders – the takers. That’s not the way democracy works. Yet if it were suggested that only those who pay taxes should vote – somewhat akin to the post-Revolutionary American practice that only landowners vote – there would be a hue and cry that that’s not fair. And the present system is?
An honest portrayal of Buffett’s assertion that he paid nearly $7 million in taxes which figured to be about 17% of his taxable income would require him to reveal that he is paid only a token salary of $100,000. The majority of his income comes from dividends and capital gains, which are taxed at a lower percentage than ordinary income. There is a good tax policy reason for this: people who live off of their money assets create jobs in their investing and consumption activity, whereas people who live off of ordinary income usually hold one of those jobs. Their impact on job creation is minimal because they consume most of their income and have little left to invest.
IRS data shows that people earning more than $1 million of adjusted gross income receive only 33% of their income from wages and salaries. IRS data also show that the super-rich, those with income above $10 million, get only 19% from wages and salaries. At some point a wealthy person’s assets are substantial enough and require so much attention that his or her “job” is to manage those assets. Jobs like that pay little or no salary or wages.
As shrewd as Buffett is, particularly in tax matters, you’d have expected him to point out that he pays more taxes than meet the eye. It’s true that he pays 15% on dividends and capital gains. But the corporations he holds stock in pay 35% on profits that would otherwise accrue to his account as future dividends and capital gains. So the total tax bite, Mr. Buffett, is closer to 45% – even more when the phantom capital gains due to inflation are factored in.
US corporate taxes, I might add, are the highest in the industrialized world. And don’t forget that the government is a taker, not a maker, so capital that’s removed from the productive sector of society ceases, well, ceases to be productive. Government never allocates capital as efficiently as the private sector.
But it gets worse. Buffett pays 15% on dividends and capital gains that were earned on money left over after first paying income or corporate taxes. If he hadn’t paid those taxes, his gains and dividends would have been greater. When he takes the gain or dividend, the tax on the original income and the tax on the gain should be combined to reveal the total tax bite because that’s the real impact of taxes on gains and dividends. Whether Buffett invests ordinary income or invests gains, his real taxes on gains will always exceed the statutory tax of 15%. And a person who consumes all that’s earned will always pay less than a person who invests part of what is earned and reduces consumption to do so. The US tax code penalizes savers and rewards consumers.
Oops! I seem to have left out social security payroll taxes in my analysis. And so did Buffett. Then there’s the death tax. Hard to forget that one at 45% of Buffett’s considerable wealth. He may be very rich, but his heirs will only be rich after Uncle Sam takes his cut – again – since those assets were purchased with after-tax dollars.
My, my, my! Taxes everywhere. Now what was that number you used in your editorial, Mr. Buffett – 17.4% was it? I don’t think so.
Our tax system is currently too progressive. It’s also too open-ended, allowing politicians to increase tax revenues faster than the output of the economy is growing. Furthermore, it is littered with loopholes – loopholes made necessary so the economy can function with so progressive an income tax. Our tax system needs reform. But it doesn’t need the kind of reform Obama has in mind so he can milk “millionaires and billionaires” who really make $200,000 a year. A good start would be to get rid of corporate taxes altogether.
Corporate profits were first taxed in 1909, when Congress enacted a 1% excise tax on corporate profits over $5,000. The corporate profits tax was suggested by President Taft when the Supreme Court ruled the income tax unconstitutional. Corporate taxes were intended to be only a temporary measure until the 16th Amendment establishing the income tax could be ratified, which finally happened in 1913. Unfortunately the corporate income tax was left in place, as taxes are wont to be, causing us to have had two completely separate and uncoordinated income tax systems for most of the past 100 years. The geniuses in Washington act as if corporations are owned by untaxed troglodytes instead of already overtaxed citizen stockholders.
This has had two ridiculously inane consequences. First, it allows people like Warren Buffet to basically arbitrage the corporate and personal income tax systems against each other. If the corporate tax rate is more favorable than the personal rate, the rich and very rich can reduce their personal income and incorporate assets and income generation to pay a lower rate. Buffett takes a symbolic $100,000 in labor income and billions in investment income to arbitrage his taxes.
The other consequence, which I’ve mentioned previously, is that it misstates the real taxes paid by separating personal income and corporate income, the latter being taxed twice whether it’s a capital gain or dividend. By focusing only on the tax rates for gains and dividends, Buffett and Obama can demagogue the tax system with their “fair share” polemic. But the undeniable fact is that Berkshire Hathaway paid $5.6 billion in taxes on corporate profits last year. Buffett owes 30% of Berkshire Hathaway, so $1.7 billion in taxes were paid on his behalf – not the approximate $7 million he wrongfully claimed to have paid. Corporations are the government’s tax collectors for their shareholders.
If Obama and his socialist disciples want to get more money from the people he alleges aren’t paying their fair share of taxes, there are only two ways to do it given their ability to arbitrage the tax rates and live off of investment income.
One way is to increase the tax rates on dividends, gains, and other income – derisively called “unearned income” and “passive income” as if nothing was done to deserve it or to work for it. The rate is currently 15% if considered separately – more if all taxes are combined. But this way he could target the rich and very rich fat cats who live off of unearned and passive income, not the lower income earners who live off of income from wages and salaries.
A good argument against such taxes is that they increase the tax on capital investment. The current corporate tax, 35% and already the highest in the industrial economies, is essentially a tax on capital since it taxes capital earnings. Moreover, gains and dividends are currently taxed twice so the combined taxes are getting perilously close to 50%. Additionally, excessive passive and unearned taxes haven’t worked in the past because they force the investing class to sit on gains and exploit accounting tricks. On balance, increasing theses taxes isn’t good tax policy but they’re great for class warfare.
The other way to raise taxes is to establish a minimum tax, which the alternative minimum tax (AMT) essentially does. The AMT has a long and ill-starred past going back to the Lyndon Johnson administration. It originally targeted 21 millionaires who paid no tax in 1967. The AMT was designed to penalize taxpayers who have relatively high deductions versus income – which is how the 21 millionaires escaped taxes. Today the AMT unfairly hits families who aren’t millionaires but have high deductions, like self-employed couple who pay business expenses. Like most taxes, this one has grown like kudzu, ensnaring non-millionaires but who are thankfully vengeful voters. Inflation has pushed middle income earners into paying the AMT, which now hits some four million taxpayers. In 2008, 27% of households that paid it had adjusted gross income under $200,000. On balance, the AMT is a mean-spirited tax that throws tax tables aside when the government doesn’t think it’s gotten enough of your money. It exemplifies the justice of Peter the Great: “Better to let the innocent suffer than the guilty escape.”
Of course there is an alternative to all of this “fair share’ foolishness – cut spending. That’s what most American families routinely do when they run out of money before they run out of month. But cutting spending is hard in a society where there are more takers than makers – more votes that can be bought by spending than bought by tax reductions.
According to Gallup, Americans believe 51 cents out of every dollar sent to Washington is wasted. That’s a tough sell for an incumbent stumping for more spending and higher taxes.
As nearly every poll shows, more than 70% of Americans believe the country is on the wrong track, and the number of people calling themselves conservative continues to grow, as does the number of moderates who say they lean to the right. According to Pew, the average voter places himself twice as far from Democrats as he does from Republicans. That’s a tough sell for a Democrat incumbent asking to be reelected.
What if the nearly $7 million that Buffett paid in taxes last year had not been given to the government – the takers – but had been instead invested in the makers – those who create jobs, which would have hired the unemployed allowing them to pay mortgages and college tuition and family bills instead of propping up Fannie Mae, welfare schemes, or tilting at green-tech silliness like Solyndra?
Obama’s agenda is not about fairness or tax policy or jobs. It’s about demagoguing success and advancing his socialist ideology.
So much unfairness! So little time!
Buffett’s August 14 New York Times editorial, “Stop Coddling the Super-Rich,” provided Obama the talking points that we will hear repeated ad nauseum until next November. The fact that they are patently false seems not to disturb either man. Obama wants to be reelected; so deceptive half-truths and untruths are his stock in trade. But Buffett’s agenda in making false statements is harder to discern. He is in his 82nd year and has been the equivalent of a rock star in the financial world – the Sage of Omaha. Let’s hope his flirtations with Obama are not conclusive that there’s no fool like an old fool.
Buffett’s editorial claimed:
Last year my federal tax bill – the income tax I paid, as well as payroll taxes paid by me and on my behalf – was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4% of my taxable income – and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33% to 41% and averaged 36%.
There are reasons why this may be true for those 20 people – like having high incomes without enough deductions – but we don’t know because Buffett won’t share his tax return and neither will the people he refers to.
But here are the facts.
The IRS reports that those who made over $1 million in adjusted gross income in 2009, the latest year for which data are available, paid an average income tax rate of 28.9% in federal income taxes, compared with 24.6% for those earning from $200,000 to $500,000 and 11.6% for those earning from $50,000 to $75,000.
It sure seems that millionaires are paying more than secretaries. However, the tax progressivity is more extreme than these percentages reveal.
When all taxpayers are listed in rank order by income, the top 20% of earners pay almost 90% of the taxes that run the government. The top 1/10th of 1% – the very rich who must make about $2 million just to get into that category – paid over 16% of the tax dollars collected. When 1/10th of one percent pay 16%, that’s pretty progressive – to the point of being arguably unfair. It’s almost like a penalty, isn’t it?
The millionaires and billionaires that preoccupy Obama’s class warfare rhetoric make a lot of money per person but there’re not enough of them to pay the government’s bills – more significantly, to pay for Obama’s socialistic schemes. There are, in fact, six times more dollars earned by the bottom 80% of income earners than there are in the top 1/10th of 1%, but notwithstanding, the bottom 80% pays less than 11% of the tax dollars needed to run the government. But hey, Obama and Buffett say, the top tier is where the rich people are. True, but they aren’t six hundred times richer than the bottom 80%. The government could expropriate all of the income of the millionaires and billionaires and still not close the deficit.
But here’s the scandal in the US tax code. Almost half of the income earners pay nothing in federal income tax. And why is that a scandal? Because if you don’t have skin in the game, you don’t pay attention to the game. We end up with a society of makers and takers. If everyone felt some tax pain around April 15, we would have better government than we have now because more people would be watching how the government spends and often wastes the money we send to Washington.
As it is, we have fewer and fewer paying the bills – the makers – whose votes pale in comparison with the votes of the growing number of free-riders – the takers. That’s not the way democracy works. Yet if it were suggested that only those who pay taxes should vote – somewhat akin to the post-Revolutionary American practice that only landowners vote – there would be a hue and cry that that’s not fair. And the present system is?
An honest portrayal of Buffett’s assertion that he paid nearly $7 million in taxes which figured to be about 17% of his taxable income would require him to reveal that he is paid only a token salary of $100,000. The majority of his income comes from dividends and capital gains, which are taxed at a lower percentage than ordinary income. There is a good tax policy reason for this: people who live off of their money assets create jobs in their investing and consumption activity, whereas people who live off of ordinary income usually hold one of those jobs. Their impact on job creation is minimal because they consume most of their income and have little left to invest.
IRS data shows that people earning more than $1 million of adjusted gross income receive only 33% of their income from wages and salaries. IRS data also show that the super-rich, those with income above $10 million, get only 19% from wages and salaries. At some point a wealthy person’s assets are substantial enough and require so much attention that his or her “job” is to manage those assets. Jobs like that pay little or no salary or wages.
As shrewd as Buffett is, particularly in tax matters, you’d have expected him to point out that he pays more taxes than meet the eye. It’s true that he pays 15% on dividends and capital gains. But the corporations he holds stock in pay 35% on profits that would otherwise accrue to his account as future dividends and capital gains. So the total tax bite, Mr. Buffett, is closer to 45% – even more when the phantom capital gains due to inflation are factored in.
US corporate taxes, I might add, are the highest in the industrialized world. And don’t forget that the government is a taker, not a maker, so capital that’s removed from the productive sector of society ceases, well, ceases to be productive. Government never allocates capital as efficiently as the private sector.
But it gets worse. Buffett pays 15% on dividends and capital gains that were earned on money left over after first paying income or corporate taxes. If he hadn’t paid those taxes, his gains and dividends would have been greater. When he takes the gain or dividend, the tax on the original income and the tax on the gain should be combined to reveal the total tax bite because that’s the real impact of taxes on gains and dividends. Whether Buffett invests ordinary income or invests gains, his real taxes on gains will always exceed the statutory tax of 15%. And a person who consumes all that’s earned will always pay less than a person who invests part of what is earned and reduces consumption to do so. The US tax code penalizes savers and rewards consumers.
Oops! I seem to have left out social security payroll taxes in my analysis. And so did Buffett. Then there’s the death tax. Hard to forget that one at 45% of Buffett’s considerable wealth. He may be very rich, but his heirs will only be rich after Uncle Sam takes his cut – again – since those assets were purchased with after-tax dollars.
My, my, my! Taxes everywhere. Now what was that number you used in your editorial, Mr. Buffett – 17.4% was it? I don’t think so.
Our tax system is currently too progressive. It’s also too open-ended, allowing politicians to increase tax revenues faster than the output of the economy is growing. Furthermore, it is littered with loopholes – loopholes made necessary so the economy can function with so progressive an income tax. Our tax system needs reform. But it doesn’t need the kind of reform Obama has in mind so he can milk “millionaires and billionaires” who really make $200,000 a year. A good start would be to get rid of corporate taxes altogether.
Corporate profits were first taxed in 1909, when Congress enacted a 1% excise tax on corporate profits over $5,000. The corporate profits tax was suggested by President Taft when the Supreme Court ruled the income tax unconstitutional. Corporate taxes were intended to be only a temporary measure until the 16th Amendment establishing the income tax could be ratified, which finally happened in 1913. Unfortunately the corporate income tax was left in place, as taxes are wont to be, causing us to have had two completely separate and uncoordinated income tax systems for most of the past 100 years. The geniuses in Washington act as if corporations are owned by untaxed troglodytes instead of already overtaxed citizen stockholders.
This has had two ridiculously inane consequences. First, it allows people like Warren Buffet to basically arbitrage the corporate and personal income tax systems against each other. If the corporate tax rate is more favorable than the personal rate, the rich and very rich can reduce their personal income and incorporate assets and income generation to pay a lower rate. Buffett takes a symbolic $100,000 in labor income and billions in investment income to arbitrage his taxes.
The other consequence, which I’ve mentioned previously, is that it misstates the real taxes paid by separating personal income and corporate income, the latter being taxed twice whether it’s a capital gain or dividend. By focusing only on the tax rates for gains and dividends, Buffett and Obama can demagogue the tax system with their “fair share” polemic. But the undeniable fact is that Berkshire Hathaway paid $5.6 billion in taxes on corporate profits last year. Buffett owes 30% of Berkshire Hathaway, so $1.7 billion in taxes were paid on his behalf – not the approximate $7 million he wrongfully claimed to have paid. Corporations are the government’s tax collectors for their shareholders.
If Obama and his socialist disciples want to get more money from the people he alleges aren’t paying their fair share of taxes, there are only two ways to do it given their ability to arbitrage the tax rates and live off of investment income.
One way is to increase the tax rates on dividends, gains, and other income – derisively called “unearned income” and “passive income” as if nothing was done to deserve it or to work for it. The rate is currently 15% if considered separately – more if all taxes are combined. But this way he could target the rich and very rich fat cats who live off of unearned and passive income, not the lower income earners who live off of income from wages and salaries.
A good argument against such taxes is that they increase the tax on capital investment. The current corporate tax, 35% and already the highest in the industrial economies, is essentially a tax on capital since it taxes capital earnings. Moreover, gains and dividends are currently taxed twice so the combined taxes are getting perilously close to 50%. Additionally, excessive passive and unearned taxes haven’t worked in the past because they force the investing class to sit on gains and exploit accounting tricks. On balance, increasing theses taxes isn’t good tax policy but they’re great for class warfare.
The other way to raise taxes is to establish a minimum tax, which the alternative minimum tax (AMT) essentially does. The AMT has a long and ill-starred past going back to the Lyndon Johnson administration. It originally targeted 21 millionaires who paid no tax in 1967. The AMT was designed to penalize taxpayers who have relatively high deductions versus income – which is how the 21 millionaires escaped taxes. Today the AMT unfairly hits families who aren’t millionaires but have high deductions, like self-employed couple who pay business expenses. Like most taxes, this one has grown like kudzu, ensnaring non-millionaires but who are thankfully vengeful voters. Inflation has pushed middle income earners into paying the AMT, which now hits some four million taxpayers. In 2008, 27% of households that paid it had adjusted gross income under $200,000. On balance, the AMT is a mean-spirited tax that throws tax tables aside when the government doesn’t think it’s gotten enough of your money. It exemplifies the justice of Peter the Great: “Better to let the innocent suffer than the guilty escape.”
Of course there is an alternative to all of this “fair share’ foolishness – cut spending. That’s what most American families routinely do when they run out of money before they run out of month. But cutting spending is hard in a society where there are more takers than makers – more votes that can be bought by spending than bought by tax reductions.
According to Gallup, Americans believe 51 cents out of every dollar sent to Washington is wasted. That’s a tough sell for an incumbent stumping for more spending and higher taxes.
As nearly every poll shows, more than 70% of Americans believe the country is on the wrong track, and the number of people calling themselves conservative continues to grow, as does the number of moderates who say they lean to the right. According to Pew, the average voter places himself twice as far from Democrats as he does from Republicans. That’s a tough sell for a Democrat incumbent asking to be reelected.
What if the nearly $7 million that Buffett paid in taxes last year had not been given to the government – the takers – but had been instead invested in the makers – those who create jobs, which would have hired the unemployed allowing them to pay mortgages and college tuition and family bills instead of propping up Fannie Mae, welfare schemes, or tilting at green-tech silliness like Solyndra?
Obama’s agenda is not about fairness or tax policy or jobs. It’s about demagoguing success and advancing his socialist ideology.
Thank you for a straight forward, detailed and comprehensive description of our tax system, especially as it pertains to corporate and the wealthy. Last week I watched the Harvey Golub interview with Neil Cavuto on Fox. Golub shares many of the same ideas as you about corporate taxes. During my 19 years at American Express Harvey (always first name basis) was CEO (1993-2001). If it wasn't for his straight forward, no nonsense style and innovative investment there would not be an American Express today. He sent shock waves through the company and the financial community that was a joy to watch! With him at the helm 20,000 jobs were created, the garbage taken out, and dozens of new and profitable products put on the market. And I enjoyed a triple split in my stock. Listening to him with Cavuto, and reading your blog, I am happy to say that my simplistic ideas about corporate taxation that I have carried around for years really do make sense in the bigger scheme of things. But under a socialist president who is all to eager to use the ink of executive orders, our free market ideals are threatened. I look forward to your next "bloviation".
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