“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Wednesday, August 17, 2011

Buffett On Taxes

What do Wonderboy and his favorite billionaire, Warren Buffett, have in common? They both run organizations which have recently suffered a credit rating downgrade.

But being a billionaire doesn't stop Buffett from being used and quoted by the First Rookie at every opportunity for saying the rich should pay higher tax rates. Or more in taxes- Buffett isn't clear on that. But he seems to mean the former.

In this recent post I quoted Stephen Moore's explanation of Warren Buffett's relatively low effective tax rate. To wit,

"Democrats in Congress routinely cite Mr. Buffett's tax confessions as irrefutable evidence that tax rates on the very rich are too low and the system is unfair. And the system would be unfair, if Mr. Buffett's tax facts were the whole truth. But they aren't.

I don't know the details of Warren Buffet's personal taxes, and he hasn't made them public. But the IRS does provide reliable data on effective tax rates—the overall share of their income that various groups pay in federal income taxes (not including state or local taxes) after accounting for all deductions and exemptions. These are different than marginal tax rates, which are paid on the next dollar of income and now peak at 35% for individuals.

So how does Mr. Buffett arrive at such a low personal tax rate? He may have been referring to a 2010 IRS study of the 400 richest American taxpayers, a list he's probably on. It showed those people paid an effective federal income tax of 18.1% in 2008.

Yet that study crucially omits the corporate income tax, which is mostly borne by the owners of companies.

Mr. Buffett owns about one-quarter of his investment company Berkshire Hathaway, and his shares are worth about $38 billion. This wealth is mostly stored in what are technically called "unrealized capital gains." Eventually when those gains are converted into income, he will pay a capital gains tax. Even so, in 2008 Berkshire paid $3 billion in corporate taxes. And since Mr. Buffett is the principal owner, he shoulders a big share of that tax.

The reason for the light capital gains and dividend tax is that corporations pay up to a 35% tax on their profits before a dime of it is passed on to shareholders. The real tax rate on corporate income paid to individuals through capital gains and dividends is not 15%. It is closer to 45% once you count the tax on corporate profits. If the dividend tax rises to 20% next year from 15% today, then the total tax on dividends paid to shareholders would be closer to 50%, and that doesn't include state and local taxes.

Overall, though, Warren Buffett is wrong on taxes. The tax system is already far too reliant on the wealthy to pay the government's bills. Taxes on millionaires and billionaires are already near a record high in terms of the share of all income taxes paid. And the effective tax rate on this group is much higher, not lower, than any other income category. The best way to balance the budget is for the economy to produce a lot more American success stories like Warren Buffett."

Perhaps it's Wonderboy's complete detachment from the world of business and how the money that the federal government taxes is initially earned that leads him to think Warren Buffett is a guy who creates jobs.

Buffett is a money manager. Doesn't our president realize that? Buffett didn't invent anything. He didn't create a company. In fact, the one with which he's most closely associated, Berkshire Hathaway, is the name of a former clothing manufacturer which Buffett acquired.

If anyone were to be a true poster boy for a wealthy person who created tangible products and wealth, it might be Steve Jobs. Or the Koch brothers- but they're conservatives. So I suppose they wouldn't do.

How about Jon Hunstman, Sr? He's probably conservative, as well.

But Buffett is not the best exemplar of someone who has created much from nothing, and complains that he pays too little in taxes.

Further, even Warren confused the issue when he stated that he was very wealthy, then spoke of his low effective tax rate. You see, taxes are on income. Much of Buffett's wealth is, as Stephen Moore noted, in unrealized gains on Berkshire equity.

Maybe even ol' Warren isn't really clear on just why he pays what he pays. But one thing is sure- Warren always plays nice with the current administration, in order to avoid being the victim of a federal witch hunt. I think the tax issue is no exception.

But he does seem to be misinformed on just what share of taxes paid to the federal government are from very high earners. And when a group is that small, does anyone really believe that a single person in the group represents the views of all of the group?

I doubt it.

One thing of which you can be sure, though. When Wonderboy appears before a crowd of lower- or middle-income people, his rich-baiting calls for more taxes from higher earners is going to sound great. Especially if, thanks to the president's policies, those people have virtually no chance of becoming high earners, and, so, just like the president, evince an attitude of envy and greed when it comes to those who have earned more income than them.

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