Tuesday, November 27, 2012
I support President Obama’s proposal to eliminate the Bush tax cuts for high-income taxpayers. However, I prefer a cutoff point somewhat above $250,000 — maybe $500,000 or so. Additionally, we need Congress, right now, to enact a minimum tax on high incomes. I would suggest 30% of taxable income between $1 million and $10 million, and 35% on amounts above that. A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours. Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.
Above all, we should not postpone these changes in the name of “reforming” the tax code. True, changes are badly needed. We need to get rid of arrangements like “carried interest” that enable income from labor to be magically converted into capital gains. And it’s sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.
But the reform of such complexities should not promote delay in our correcting simple and expensive inequities. We can’t let those who want to protect the privileged get away with insisting that we do nothing until we can do everything.
Our government’s goal should be to bring in revenues of 18.5% of GDP and spend about 21% of GDP — levels that have been attained over extended periods in the past and can clearly be reached again. ... In the last fiscal year, we were far away from this fiscal balance — bringing in 15.5% of GDP in revenue and spending 22.4%. Correcting our course will require major concessions by both Republicans and Democrats.
Mr Buffett never mentions doing anything to eliminate the tax-avoidance strategies that he uses most aggressively. In particular:
- His company Berkshire Hathaway never pays a dividend but instead retains all earnings. So the return on this investment is entirely in the form of capital gains. By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.
- Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain. His unrealized capital gains are untaxed.
- He is giving away much of his wealth to charity. He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.
- When he dies, his heirs will get a stepped-up basis. The income tax will never collect any revenue from the substantial unrealized capital gains he has been accumulating.
To be sure, there are pros and cons of changing the provisions of the tax code of which Mr Buffett takes advantage. Tax policy always involves difficult tradeoffs. But it seems odd to me that whenever Mr Buffett talks about taxing the rich more, the "loopholes" that he uses never seem to enter into the conversation.