Mr. Buffett, you lie

Warren Buffett took the time to write an op-ed piece in the Sunday New York Times and give Barack Obama some cannon fodder for his taxpayer-financed campaign bus trip. Not being a regular Times reader (I prefer the Journal), I heard about the piece after news reports of Mr. Obama quoting it on the campaign trail. It seems Mr. Buffett doesn’t think he and other wealthy Americans like him are taxed enough.

“…if Mr. Buffett really wants to pay more in taxes, he could always pay himself more payroll income. Considering his comparatively small salary and the company’s performance, it won’t be much of a hit to the bottom line at Berkshire-Hathaway.”

Oh, he phrases it in his polite, even-handed manner that has made Buffet both an investment and media darling. I met Buffett a few years ago and found him to be both charming and generous. He’s really quite funny and personable. He regaled my group of graduate students from the University of Southern California and the University of Georgia with stories of making quick hundred thousand dollar deals on companies in Korea and smart investment decisions going back to his youth. In the op-ed, he’s calm and seemingly even-handed as he chastises Congress for its “coddling” of millionaires and billionaires like him. He even mentions the liberal focus-group-tested phrase, “shared sacrifice.”

Here’s the problem with your views, Mr. Buffett: I want a chance at what you’ve got. I did long before I met you, and I still want it today. Just a piece of it would be nice. Yes, I’d like to be a successful millionaire or even a billionaire someday, but what you’re asking for makes it harder for me to get it.

Here’s just a portion of what Warren Buffett had to say:

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 percent 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 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

There’s a telling line in the third paragraph that shows how Mr. Buffett is lying: “The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes.”

Mr. Buffett, you and I both know the majority of your income isn’t from payroll income. It’s from Capital Gains. Capital Gains that come from investing in large corporations and small businesses, dividends from those investments, and the sale of those investments for greater than their purchased value. You’re treating that investment income as though it were the same as regular payroll income, and you know that’s intellectually dishonest.

A few paragraphs later, Buffett brings up capital gains: “…I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.” Yet it’s what he doesn’t say here that is most telling: In tumultuous 1976, there was no place better to invest than the United States. Western Europe’s economy was technically larger, but the regulatory hurdles were greater and taxes were even higher than here. A few parts of Western Europe still hadn’t recovered from World War II. Investing in communist Eastern Europe was forbidden. South America was at best small and hit-or-miss, and Latin America was in turmoil as pro-West and pro-Communist forces battled for control of different countries. Only Japan and Taiwan were real market-movers in Asia, South Korea was just emerging as an industrial power and China was still a communist basket case largely unable to feed itself.

So a 39.9 percent tax rate on capital gains in a troubled but stable United States was still a competitive tax rate, even compared to some countries where the rates were lower. Even after paying nearly 40% in taxes on an American investment, the expected return was still higher than higher-tax Europe or the turmoil-stricken southern hemisphere. Not so today. Since then, Europe has liberalized its income tax structure, favoring the VAT tax (which has its own issues) and Asian markets have exploded. Brazil is morphing into an economic and industrial powerhouse. Chile was and continues to be a small but stable and growing market. Much of Latin America has normalized. Eastern Europe and China have vast human and other resources available to invest and exploit. The world is a very different place from where it was in 1976. Tax rates the world-over declined significantly (thought most governments haven’t cut their budgets to match–just like the US).

Even Mr. Buffett’s assertion that middle-class Americans have tax rates of 15-25 percent is comparing apples to oranges. Buffett talks about his effective tax rate, combining his regular and capital gains taxes, as well as any deductions or tax credits he may enjoy. Then he mentions the total tax rates for middle class taxpayers. There’s just one problem: The majority of middle class taxpayers don’t pay their expressed income tax rate. They have deductions and credits, such as the mortgage interest deduction, student loans interest deductions, the Earned Income Tax Credit; thousands of deductions and credits for doing things that the government wants them to do.

Personally, I have only one deduction: My student loan interest. It doesn’t amount to much. I very nearly pay my expressed tax rate. If anyone should be upset about Mr. Buffett paying just 17 percent of his income in taxes, it should be me! After paying Payroll tax, Federal Income Tax, state taxes and local taxes and fees, I pay nearly double the rate of Mr. Buffett. Yet, I’m glad he pays such a low rate.

What am I, crazy?

Hardly. You see, I agree that Mr. Buffett pays too little compared to most Americans, but that’s not a reason in my mind to raise his taxes. Rather, it’s a reason to lower taxes on the millions of American lower, middle and upper class families and get rid of all these politically-motivated deductions and credits. Rather than raise taxes on a few, lower the overall rates and eliminate the deductions. This would make it possible for every American and business to file their taxes on a single page and not have to spend billions of man hours each year on tax preparation. Besides, if Mr. Buffett really wants to pay more in taxes, he could always pay himself more payroll income. Considering his comparatively small salary and the company’s performance, it won’t be much of a hit to the bottom line at Berkshire-Hathaway.

Raising taxes would be counter-productive. Investors aren’t going to invest in the United States out of patriotism or sentimental feelings. Mr. Buffett himself has invested in numerous companies throughout the world because they were smarter investments with better returns than investing in the US. Raising corporate rates here lowers net incomes, reducing the value of corporations. Raising personal tax rates reduces the income available to small businesses to invest and expand. Raising capital gains reduces the expected return for US investors, encouraging more investment in other markets. No, raising taxes is the wrong move.

Here’s the worst part of it all: Reduced interest in investing in America means reduced interest in investing in me or anyone else with dreams of running and operating their own business. By raising taxes, we raise the bar someone must meet before their business or product idea becomes viable.* We reduce the entrepreneurial capacity that has made this nation the most powerful economy in the world. Sure, tax rates were higher during the Clinton “Boom” years, but so were taxes in Europe and Japan; China was still a bit player and India was who we thought would be a real threat. Our tax rates, higher as they were, were more competitive than those same rates would be today. We can’t fall back on, “We’re the biggest, we can afford it,” anymore. Every great empire, from Babylon to Byzantium to Britain; many great corporations, from the Pennsylvania Railroad to US Steel to General Motors have suffered, or even collapsed, from this erroneous viewpoint.

I agree with Mr. Buffett on another point though, but it takes him nearly the whole op-ed to make the point:

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here.

Buffett goes on to say that about 0.3 percent of Americans (the wealthiest) should get a tax hike, but I and others have already covered how foolish that would be. No, tax hikes aren’t the answer, it’s Buffets first point here: Rolling back the promises we know we can’t sustain or fulfill. We can’t continue spending twice as much on Social Security and Medicare as we get from the FICA taxes that pay for them. We can’t sustain spending billions of dollars on “public art”, or have 80 government programs to help people find transportation. We can’t spend millions of dollars on equipment that the military doesn’t want just because it’s built in a politically important congressional district. We can’t continue to subsidize air service to cities where the market can’t support the service or build high-speed rail lines no one will use. We can’t continue to use the inefficiency of government to provide charity.

Americans are losing faith in Congress, but it’s not because 0.3 percent of Americans are taxed too little. It’s because Congress is like a young man with his first credit card, unable to stop spending far in excess of his means and rapidly losing the ability to ever pay it back. Even if we raised taxes on that 0.3 percent to 100 percent of their income, it wouldn’t begin to cover the deficit this year. The deficit gap is less than 25% due to lost revenues from taxes as the economy has retreated. Rather, the massive increase in spending from 2006 to the present day accounts for the majority of our deficits and a rapidly increasing percentage of our debts.

Mr. Buffett suggests that he pays too little in taxes. I rather suggest that what he’s paying is just fine, and much of the rest of America is just paying too much.

*This also affects hard-working employees with high salaries, and working professionals such as doctors, lawyers and skilled tradesmen.

Cross-posted at The Minority Report Blog.

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