Thursday, September 1, 2011

Stop Coddling the Super Rich

A couple of weeks ago, Warren Buffett offered up a NY Times Op-ed piece on the tax system titled "Stop Coddling the Super-Rich". If you haven't read it, you can find it here.

Since it's appearance, I've read a lot of harsh comments in the newspapers and online. Class warfare kind of stuff.

As a former corporate employee, a current business owner, and a once middle-class taxpayer who now meets the president's definition of "rich", I feel as qualified as anyone to comment.

First some good points about Buffett's article:
  • We do have a budget problem that is likely to be solved only by a combination of significant spending cuts and increased revenue over a long period of time. The cuts will have to come from entitlements (social security, medicare, medicaid) and military spending -- that where the big dollars are. The revenue has to come primarily from the people with the money -- you can't get blood from a stone.
  • Since billionaires make most of their income from investments -- much of which, when sold, will get long term capital gains treatment -- they do enjoy a very low effective income tax rate. That's the reason Buffett's rate is only a little above 15%. Yes, there are some "loopholes" taken advantage of by people (carried interest, long term treatment for what are really short term gains). These exceptions could be easily eliminated, and probably should.
  • I also agree with Buffett that a higher capital gains rate won't prevent billionaires from investing. It probably adds a little inertia -- if only because they will be a little more likely to defer selling investments to move capital to even better opportunities because there is an immediate tax consequence. But I think that's about all it would do.
  • I'm not against his proposal to raise taxes on those with an annual taxable income above $10M. I think it makes sense to increase rates even on those with a $1M annual taxable income -- as long as the increase is reasonable.
Some negative thoughts:
  • Buffett spins the statistics, just like everybody else does. He focuses on the 400 richest people in the U.S., but then extends his argument to 237,000 who had taxable income of more than $1M. Circumstances are quite different between number 400 and number 237,000.
  • It would be easy to read the article and think an across the board tax increase on capital gains would do the trick. That would be very difficult on those people who retired with a modest nest egg, and need to make that money last the rest of their lives. Erosion due to inflation and an extra 10+% off the gains in taxes might mean the difference between staying retired, and getting another job in their golden years.
  • I don't think Buffett's proposal is enough to dig us out of our debt hole -- just increasing taxes on 0.3% of the taxpayers isn't going to raise enough revenue.
  • Buffett is talking about those making $1M per year and up. President Obama has talked about taxing those making $250K per year and up. Again, there is a big difference between someone making $250K per year and a million. While this group will need to see an increase in taxes too, it shouldn't be the same as what the higher income brackets face.
  • Shouldn't everyone pay some income taxes? Or at least most everyone? It is shocking that nearly half of the population pays no income taxes, and some in that group actually receive a net credit.
Final thought --

Would increasing taxes kill jobs? I doubt it would have a huge impact. Buffett tosses some statistics around in his article about periods of high job loss during low tax eras, and high job creation during high tax eras. The lesson from this -- I think -- is the tax rate impacts job creation/destruction but only weakly. It is easily overwhelmed by other things happening in the economy -- like credit availability (or lack thereof), or wars. But it does feel like we are teetering on the razor's edge of another recessionary dip, so I suppose caution is in order....

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