Wednesday, August 17, 2011

Warren Buffett v. Republicans onTaxing the So-Called "Job Creators"

For as long as any of us can remember, the Republicans have been telling Americans that we actually need to lower taxes on the rich because, as legend has it, if the rich are allowed to keep more of their money then they will invariably find it in their hearts to use those savings in order to create jobs for the rest of us mere peasants.  The Reagan Administration used to call this theory "Trickle-Down Economics" back in the 80's.  Today, we call it the "Bush Tax Cuts" which give millionaires and billionaires one of the lowest tax rates they've ever enjoyed during modern times.  No matter what you call it, the Republicans have made it clear that raising taxes on the rich is out of the question.  They'd rather default the entire country before they raise taxes on the rich.  After all, the rich are the "job creators" so obviously they know things about the economy that our feeble cavemen brains cannot possibly comprehend.  The only problem with this "don't tax the job creators" narrative is that even the rich themselves know that it's a complete falsehood.  Enter Warren Buffett.  Buffett is currently the 3rd richest man in the world (in 2008 he held the title as the richest man in the world when he passed up the legendary Bill Gates).  Given Buffett's level of wealth, one would reasonably expect that if there was even an ounce of truth in this Republican narrative that he, of all people, would fully endorse it.  Not so much.

Per Buffett's editorial in the NY Times:

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.
These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.
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. 

What Buffett is talking about here is the difference between income tax (which is what most of us know about) and capital gains tax (which is what rich people know about).  If you have a job, then you are quite familiar with that cat named FICA and how much income tax he takes out of your check every pay period.  Depending on how much you make in a year, your income tax percentage can range from 10% all the way up to 35%.  Again, this is for those of us who have jobs, but as we all know from Rich Dad, Poor Dad, rich people don't have "jobs."  They don't work for somebody else at some 9 to 5,  so they don't have to worry about income tax because they don't have "income."  They earn their millions from "capital gains."

Unless you've ever sold stock, futures, commodities, or a business, they you may not be too familiar with the capital gains tax.  It comes in 2 different flavors: sales earned from assets that you've owned for less than 1 year and (ii) sales from assets that you've owned for more than 1 year.  The former (known as the "short-term") is slightly higher than the latter (known as the "long-term"), but both of them are fairly low rates (roughly 15% to 20%) which were lowered by the Bush Tax cuts.   15% is a considerably better tax rate than what the rest of us working-class people pay in income taxes.  So what Buffett is saying is that his capital gains are literally taxed at a lower rate than his secretary's income which, by his view, is unfair:

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent. 

And with respect to the "job creation" argument, Buffett had this to say:

I have worked with investors for 60 years and 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. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation. 

Republicans, upon hearing this blasphemy, reacted quickly to protect their narrative in the court of public opinion.  As Fox News reported:

Rep. Michele Bachmann, R-Minn., a 2012 presidential contender, said she has a suggestion for Buffett:“Write a big check today,” she said Tuesday at a campaign rally in Spartanburg, S.C. “There’s nothing you have to wait for.”

Similarly in the L.A. Times

“For tax raising advocates like Warren Buffett, I am sure Treasury would take a voluntary payment for deficit reduction,” Sen. John Cornyn (R-Texas) wrote in a tweet.
“If Warren Buffet wants to pay more taxes and send more of his money to Washington, why doesn't he just do it?” tweeted Brad Dayspring, a spokesman for House Majority Leader Rep. Eric Cantor (R-Va.), who has led the push against tax increases to help reduce budget deficits over the next 10 years.
But these responses from the Republicans are nothing more than ad hominem attacks which sidestep the merits of what Buffett is saying.   The conservative CATO Institute fired back with a more substantive rebuttal of Mr. Buffett's op ed, arguing that taxing the rich is a mistake:

Focusing on the super-rich also fosters a counterproductive attitude toward material success. The way to promote a hard-working, entrepreneurial and innovative society is to celebrate great wealth so long as it has been earned by legitimate means. When this is not the case, policy should target the wrongdoing directly, not demonize everyone who hits it big.

This raises some valid Questions:
1. By your view, are the rich currently paying their fair share?
2. Does lowering taxes on the rich actually create jobs?  
3. Should we have a "Flat" tax rate across the board which is the same % for everybody?
4. Is it fair to ask the rich to pay MORE than everybody else?
5. Are we punishing the rich for their success by focusing on their tax bracket?

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