The Buffett Deception

Posted: Aug 18, 2011 12:00 AM

Mr. Buffett has had a great career buying companies and integrating them into his empire. He ought to stick to that. His recent editorial in the New York Times shows the flaws in many arguments that come from the left.

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.

Last time I checked, it was an all volunteer force. Since we stopped picking winners and losers by ending the draft, our force has matured into the best fighting force in the world. The rich kids that walk the hallowed halls of the top universities in the US didn’t even have ROTC until last year. I suppose if a Republican is elected President again, they will find a way to pull the rug out of ROTC again. Rich kids can join the armed forces at any time up to age 26, same as everyone else. Our tax code ought to be applied in the same way.

Buffett is upset at the way the mega rich are taxed. People respond to incentives and his argument and behavior clearly show why taxes are simply incentives to behavior. Mr. Buffett doesn’t draw much of a salary, and lives off his capital appreciation and dividends. Most of us can’t do that, but we all aspire to that. Why? 15% tax rate. I notice that when it comes time to dissolve his empire, he is donating most of the money to charity to avoid the onerous estate taxes the little people get to pay.

Mr. Buffett goes on in his folksy manner. Don’t underestimate him, he is a genius.

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.

Guess what. Most people in the US pay an effective rate of 19% no matter what their marginal rate is. I don’t know the particulars of how Mr. Buffett pays his office employees, but if they are paying 36% on average it’s far higher than most Americans’ effective marginal rate.

Chairman Buffett’s logic also discounts how many Mom and Pop small businesses pay at the highest marginal rate. Mr. Buffett gets to avoid paying that because of the way Berkshire Hathaway, his company, is structured. Because he is a corporate conglomerate, they are able to avoid paying most US income taxes. Perhaps they ought to reorganize so the company looks like and individual taxpayer. Mr. Buffett might see things differently.

This of course will bring up the “fairness” issue with regard to tax policy. Anytime a person does that, it brings personal values into the argument. Liberals love to point out what is fair for everyone and then do all they can to avoid it.

Mr. Buffett is rich enough to be a Democrat. It won’t alter his lifestyle one bit if we made the marginal tax rate 100%. He’s got his. Imagine how much more arduous his climb to the top would have been back in the 1960's if we targeted him for tax increases.

The way to reform the tax code is to recognize how entities act, and to apply taxes accordingly. This type of reform would tax corporations at 0%, because all they do aggregate taxes anyway. Real reform would flat tax all Americans at the same rate, no deductions for anything. Real tax reform would allow capital to flow toward GDP increasing enterprises, and not be tied up in underperforming assets.

There is no hope of that happening in Washington DC by November. But, post November 2012 there is hope if they right people are elected. Before then, if Mr. Buffett feels like it he can send extra money to the federal government. I am sure his pals in DC will take it.

tip of the hat to Reformed Broker


One commenter said that Buffett also pays less when it comes to payroll taxes. I argued with him that the article wasn’t considering those taxes-yet Buffett’s quote clearly says he took those into account. This is a clear deception by Buffet trying to get you to look at the total large number paid, and not the rates. Buffett is able to limit how much he pays to payroll taxes because of the manner that he gets his income. This points to a different discussion about taxes that I wrote about here.

I also didn’t cover entitlement taxes in this post because that is a different discussion along the same lines. Short answer is entitlement reform will eventually lead to a lower tax burden on US

John Ransom | Create Your Badge

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