Honestly, it’s difficult for me to be so disrespectful to two people of such prominence; I prefer to simply express an opinion regarding public policy and then make the case for my argument. But neither of these two esteemed gentlemen has a clue about how our tax system operates, nor the history and consequences of changes to the nation’s tax laws. As someone who has studied and worked within our tax system for over 35 years, I can safely and assuredly make that statement.
President Obama has made a two-fold proposal, both parts of which are motivated by a desperate attempt to reinvigorate his re-election campaign. First came the jobs plan, which was yet another transparent giveaway to his union cronies. Money was allocated for our overfunded and underperforming schools, which continue to be owned and operated by teachers’ unions. Then there was money thrown at infrastructure construction – done with union labor, of course. And a little more money for a few major corporations, mostly ones managed by large Democratic contributors and every one a sizeable employer of – surprise! –union members. The temporary reduction in payroll taxes for both employers and employees is a short-term handout that even Democrats are unhappy about, principally because it drains money from Social Security and Medicare. Once again, Democrats have to decide whether these are entitlement programs or retirement programs (which would have to be funded on an actuarial basis). They can’t have it both ways.
Second, the President presented his non-negotiable payment plan, in which he insisted that there can’t be any spending reductions without tax increases. To be fair, the President did propose some “budget cuts” but only if you accept his definition of budget cuts. Saving $1.1 trillion because of troop drawdowns, for example, is not a budget cut. Obama plans to withdraw 30,000 soldiers from Afghanistan in 2012. Regardless of the wisdom of this policy, the fact that the troops won’t be there in 2013 is not a cut. The primary purpose of the federal government is defense, and soldiers should be withdrawn for military, not budgetary reasons.
Mr. Obama’s claim of $430 billion in interest savings is a joke, nothing more than political and financial smoke-and-mirrors. And while he did propose reductions in Medicare, Medicaid, farm subsidies and federal benefit plans, these almost always turn out to be phantom cuts – restored by future Congresses – principally because Democrats adamantly refuse to consider any changes to Medicare and Medicaid. Even if they do go into effect, more doctors will stop accepting those patients, which is yet another reason that the problems of Medicare and Medicaid will only be resolved with large-scale structural reform.
I was pleased to see that the President actually listened to my proposal in last week’s column to cut federal employee wages. Unfortunately, while I suggested 10% in one year, he countered with 1.2% over three years; and, worse, he couldn’t see any reason to eliminate even one of the 158,470 employees added to the federal payroll in the first two years of his Presidency.
So now we come to his proposal to tax “millionaires and billionaires,” a battle cry of the left that MoveOn.org is now using in their ad campaign. This is, of course, just an outright fabrication. It’s been repeatedly explained how top earners already pay a huge chunk while the lower earning 50% contribute close to nothing. But President Obama and his hard-core left-wing supporters prefer to ignore the facts and demagogue the issue. Obama’s proposal is just another stale attempt to eliminate the Bush tax cuts. This would impose significant tax increases on Americans earning $200,000 to $999,999 – not the “millionaires and billionaires” he claims. Ironically, the majority of these people live in high-cost, high-tax blue states that favor Obama and the Democrats; so, if Republicans were unprincipled, they would sit back and let Obama’s leftist supporters pay for this. Fortunately the Republicans are not, and they clearly understand that imposing higher taxes on Americans most responsible for job creation is bad public policy.
Enter Mr. Buffett, who claims that at 17%, he pays a lower tax rate than his secretary. We know that this is not the norm; according to the IRS, people who earn over $1,000,000 pay an average of 23.3% of their income in federal tax. That’s a good bit higher than the 8.9% average rate paid by the middle class. The real question is why Mr. Buffett pays less than other millionaires? Since we don’t have his tax return, we can only speculate based on some of the information he has released.
First, Mr. Buffett takes a salary of only $100,000, an amount less than the maximum social security wage (currently $106,800), which means that the Oracle of Omaha doesn’t even pay his fair share of payroll taxes. Most executives of companies his size receive multi-million dollar salaries, and, as a result, pay a lot more in Medicare and income taxes. Buffett circumvents this by taking most of his income in capital gains, which is taxed at a lower rate. In addition, he avoids a lot of taxes because his company doesn’t pay dividends, which are taxable to the recipient. But where Buffett is amazingly ignorant is that his company, Berkshire Hathaway, pays corporate taxes at a 30% rate, which means that even if Buffett were only paying 17%, his effective combined tax rate is 42%. Maybe they don’t teach this stuff in Nebraska.
Even more noteworthy, however, is that Buffett avoids taxes by not getting any return on his investment. Based on the information he provided, it appears his taxable income was $40 million on his estimated net worth of $50 billion, a rate of return of .08%. Now if he were providing that rate of return to his investors, he wouldn’t be called the Oracle of Omaha; in fact, no one would care what he says because he would be an investment disaster.
So Buffett is sheltering income by not taking any salary and not paying any dividends – resulting in relatively little personal income. But who needs income when you’re worth $50 billion?
Buffett is encouraged to base his income on the performance of his stock because government officials, in one of their tirades against corporate chieftains, preferred it that way. Furthermore, we don’t know if Buffett also owns a boatload of municipal bonds that pay favorable interest rates, but are not subject to taxes. Note that Obama didn’t suggest cutting back on this boondoggle because that would have sent every governor, mayor, and union boss into a tizzy.
You would think that our President would know all these things, but apparently he doesn’t. You would also think he would know that a2008 study by the Organization for Economic Cooperation and Development found that the highest-earning 10% of the U.S. population paid the largest share among 24 countries examined, even after adjusting for their relatively higher incomes. “Taxation is most progressively distributed in the United States,” the OECD study concluded, meaning that we already have not only a progressive tax system, but we already tax our “rich” citizens more than any major country in the world.
It’s obvious that Mr. Buffet should stick to running his business and stay away from being a shill for big government. He has been duped by these left-wing sharpies. What’s not quite as clear is how ignorant President Obama is of all this, or whether he’s just playing dumb for political purposes. His proposal for a special tax for millionaires was tried in 1969, and it morphed into the most dreaded tax in America – the Alternative Minimum Tax -- which was aimed at nineteen millionaires and now mostly exempts them and taxes millions in the middle-class.
In his Rose Garden speech, Obama said: “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.” He has to know that this is unadulterated malarkey. He has decided what he wants is a permanent expansion of government and he will say or do whatever to accomplish that goal. Obama says that it’s just math, but it appears from the facts at hand that it’s nothing more than class warfare.