Search This Blog

Monday, October 03, 2011

Buffett-Obama Tax Policy

Warren Buffett might be a great stock picker (I've never assessed his track record and am going purely on reputation here), but he is stunningly clueless when it comes to public policy, in particular, tax policy.

Buffett, like so many people, wants to base tax policy on his personal experience and preferences. And since he seems to like big government and higher taxes on upper incomes, then that's what everyone should be for. And since he is a wealthy, successful guy, then it should be obvious that high taxes do not deter wealth creation and economic growth. Right?

Besides, isn't it outrageous that Warren, according to his own reporting in an August New York Times op-ed, pays a lower effective tax rate than some of his staff who earn far less?

Buffett naturally has become President Barack Obama's favorite rich guy, since the President wants to hike taxes on upper income earners. Indeed, in the President's so-called plan for economic growth and deficit reduction, his tax ideas specifically subscribe to "the ‘Buffett Rule' that people making over $1 million should not pay lower taxes than the middle class."

Where to start?

First, let's get it straight as to what the breakdown is in terms of who pays federal taxes.

The Congressional Budget Office's most recent analysis on this was released in April 2009 (2006 data). Check out the key details:

• In terms of shares of individual income taxes, the top 1% of income earners (the super rich, as Buffett likes to call them) paid 39.1% of federal income taxes; the top 5% paid 60.9%; the top 10% paid 72.8%; the top 20% paid 86.3%; and the top 40% paid 99.2%. In contrast, the middle 20%, with average pretax income of $60,700, paid just 4.4% on individual income taxes, and the bottom 40% actually came in at -3.6%, getting money back through the EITC.

• As for shares of total federal taxes, the top 1% paid 28.3% of the total liability; the top 5% paid 44.7%; the top 10% forked over 55.4%; the top 20% paid 69.3%; and the top 40% covered 85.8% of all federal taxes. In contrast, the middle 20% paid 9.1% of federal taxes; and the bottom 40% paid 4.9%.

• What about their effective tax rates, which seems to be Buffett's issue? Well, as for effective individual income tax rates, the rate for the top 1% of income earners was 19%; the rate for the top 5% was 17.5%; for the top 10%, it was 16%; the top 20% faced a rate of 14.1%; the fourth quintile a 6.0% rate; the middle quintile 3.0%; and the second and lowest quintiles had effective rates of -0.8% and -6.6%, respectively.

• As for total federal taxes, the effective tax rate on the top 1% of earners was 31.2%; the top 5% paid a rate of 29.0%; the top 10% had a rate of 27.5%; the top 20 percent a rate of 25.8%; the fourth quintile was at 17.6%; the middle quintile at 14.2%; and the second and bottom quintiles came in with effective rates of 10.2% and 4.3%, respectively.

So, it is undeniable that the Buffett/Obama assumptions about who pays taxes and what their rates are simply do not hold up when looking at the overall data.

For good measure, it must be understood that Buffett is comparing apples and oranges, as much of the income earned by higher incomes turn out to be capital gains, dividends and other investment income.

In a recent column, Ralph R. Reiland, an associate professor of economics and the B. Kenneth Simon professor of free enterprise at Robert Morris University, pointed out: "An honest portrayal would acknowledge that dividends and capital gains are double taxed, first as corporate profits at the highest corporate income tax rate in the industrialized world, 35 percent, and then again as individual income when dividends are distributed or stock is sold. The total tax rate on capital gains is ‘closer to 45 percent than 15 percent' stated a Wall Street Journal editorial on September 20. In fact, the tax hit on capital gains is higher than the Journal states because capital gains are not indexed for inflation, producing taxes that are levied on illusory gains. The stock seller is taxed not only on real gains in purchasing power, but also on phantom gains attributable to inflation."

Finally, Buffett proclaimed in his op-ed, "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."

To say that the return on an investment - which obviously is directly affected by the tax rate - does not affect investment decisions is misleading and preposterous. The tax rate does not determine everything, obviously, but it most certainly influences investment decisions, especially when considering the risk involved in starting up, building and investing in businesses. It also matters when having a choice of investments that are taxed at different rates - such as tax-free returns on safe, government bonds, for example, versus taxed investments in risky entrepreneurial ventures.

Finally, there is the simple matter of where would resources be used more effectively for the economy. Are we really supposed to believe that economic growth and job creation would be enhanced by taking resources out of the private sector - away from astute investors such as Buffett - and handed over to politicians to spend on their politically favored projects? Again, that's just preposterous.

In the end, the so-called "Buffett Rule" is silly economics being peddled by a wealthy investor and a President who let their political ideologies inform their preferences on tax policy.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

No comments: