Warren’s Piece

One of America’s richest and most successful entrepreneurs, Warren Buffet, should have a tad of inside knowledge on the mindset of the mega-rich. Sensing a crisis of misunderstanding that could drag the U.S. economy into the proverbial crapper, Mr. Buffet felt compelled to write an editorial for the New York Times on August 14^th. He challenged the very notion that raising taxes for the richest Americans – those making more than $1 million a year (particularly those making more than $10 million a year) – will produce the investment-killing, job-destroying reality that tax-adverse politicians claim.

The fact is that with more diverse sources of income and ability to structure around the tax code, most mega-rich Americans wind up at pretty low effective tax rates, well below those of average, middle-class Americans. Take Mr. Buffet’s own tax situation in his own words: “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…

“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.”

As I wrote on August 5^th, luxury goods are flying off the shelves: “Even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy. Luxury goods stores, which fared much worse than other retailers in the recession, are more than recovering — they are zooming. Many high-end businesses are even able to mark up, rather than discount, items to attract customers who equate quality with price.” New York Times. August 3^rd. And since most of these goods – from Prada to Porsche – are manufactured overseas, they create nothing in the way of well-paying American jobs.

Are the rich also creating jobs with their excess money? Not the employers who pay the solid salaries; they’re cutting back. As noted in my August 5^th blog, most of the jobs that have been created have been short-term, part-time or at the bottom of the wage spectrum, mostly by small businesses with limited resources. Rich folks are smart enough to add staff only when consumer demand justifies the expansion, and with consumer confidence at a thirty-year low, don’t expect any miracles.

Warren continues on point: “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… The taxes I refer to here include only federal income tax, but you can be sure that any payroll tax for the 400 was inconsequential compared to income. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)

“I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

“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. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

“But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate… My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.” Couldn’t have said it any better myself. Guess that’s why he gets the big bucks… the really big bucks!

I’m Peter Dekom, and I wonder why common sense approaches to America’s obvious issues are so difficult to apply?