Paul L. Caron

Monday, August 15, 2011

Warren Buffett: Stop Coddling the Super-Rich

New York Times op-ed, Stop Coddling the Super-Rich, by Warren Buffett:

Our leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

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. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15% tax rate. Others own stock index futures for 10 minutes and have 60% of their gain taxed at 15%, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

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% 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% to 41% and averaged 36%. ...

Since 1992, the IRS 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% 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%. ...

I would leave rates for 99.7% 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.

(Hat Tip: Francine Lipman.) Press and blogosphere commentary:

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I will listen to Warren Buffett the minute he stops filing a schedule A and takes the standard deduction. Automatic tax increase for him without bickering in Congress.

Posted by: Cheyanna Jaffke | Aug 17, 2011 3:14:52 PM

>Are there any articles on converting labor income to capital income?

Try this recent overview of the pros and cons:

Posted by: AMTbuff | Aug 17, 2011 9:39:07 AM

(1) In line with previous commenters, Mr. Buffett's first policy call should be for eliminating the stepped-up basis for capital gains at death or donation. His tax rate would still be around 15%, but he'd pay a lot more taxes. (A paradox, of course--- it's because his lifetime measured income would be much higher.)

(2) He makes one good point, as the Atlatnic article (I think) notes. He gets to tax his labor income as capital income, because he's paid in capital gains rather than cash. The first solution, and most important, is to tax as labor income the capital gains of people who receive equity interests without putting up any capital (e.g., the non-silent partner who gets 50% of the equity in return for doing all the labor work). I'm surprised this isn't done already. Or is it?

What's harder to do is to tax someone's hard work or talent in picking stocks in which he invests his own money. We could try getting into the business of taxing excess returns as labor income, but we'd need an IRS model of expected returns and we probably don't want that.

Are there any articles on converting labor income to capital income? Let me know at I might try modelling this. The topic came up in our law-and-econ lunch at Indiana Law, as a possible reason for taxing capital.

Posted by: Eric Rasmusen | Aug 17, 2011 8:02:56 AM

American greed is manifest. Spend less, pay more or this country will be no more. Stimulous spending doesn't have a net benefit in a consumer economy. Neither do stimulous tax cuts.

Posted by: Matt | Aug 17, 2011 7:21:25 AM

Anonymous, that is not the message of the Tea Party. Cutting wasteful government spending is a pretty smart message. But, you can't deny that Obama's cuts to Medicare represent "rationing," something that would have to be done with Obamacare through "death panels?"

Posted by: Woody | Aug 17, 2011 5:56:50 AM


Tea Partiers are most famous for the rallying cry of "keep your government hands off my Medicare!"

That's pretty stupid...

Posted by: Anonymous | Aug 16, 2011 9:21:34 AM

To get a low effective rate, is Buffett claiming 19 children with the same birth dates as dependents on his tax return?

Posted by: Woody | Aug 16, 2011 9:08:02 AM

Mr Buffett can easily structure his affairs to increase his effective tax rate. Rather than contributing shares of Berkshire Hathaway in kind to the Gates Foundation as he has publicly pledged to do, he can sell them first and contribute cash. Moreover, I am not aware of anything in the tax law forcing anyone to claim a charitable deduction. I'm sure the knowledgeable readers of this blog can come up with many other ideas.

Posted by: Randall Kau | Aug 16, 2011 8:42:02 AM

When is somebody going to call Buffet's intellectually dishonest bluff. His message is spun for maximum political resonance, by leading people to believe that his upside down (relative to the common folk) personal effective tax rate is simply caused by insufficiently high marginal tax rates in income. (To wit, see George W, above.) Buffet's tax inversion is "curable", but it would require arguing the less appealing case for increasing taxes on income (distributed or retained) that has already been taxed (which should arguably NOT EVEN be taxed at the "lower rates"), or forcing the run of the mill investor to pay taxes on income that has not even been recognized (MTM paper gains). Moreover, does Mr Buffet really think that the tax fairness line would be drawn at the billion dollar level? Does he think that a tax scheme that would be "fair" for a billionaire is also "fair" for a couple making $250K?

Posted by: MG | Aug 16, 2011 7:27:45 AM

I am a CPA, tax accountant and a "tea partier". I am not stupid. Until Warren Buffett and his other rich associates put their money where their mouth is, by voluntarily paying additional taxes above and beyond the statutory tax they are required to pay, I will not take them seriously. I have many extremely wealthy clients who pay me a lot of money to make sure they pay the least amount of taxes possible. They whine and complain about how high their tax bills are. They don't understand why they have to pay so much in taxes. And, they are all liberal Democrats. When they ask me what they can do to not have to pay so much in taxes, I want to say "Vote Republican", but I bite my tongue. There is amazing hypocrisy among liberal Democrats in this area.

Posted by: Linda | Aug 16, 2011 5:54:43 AM

From what I've seen, George W, the Tea Partiers are not stupid, and it's because of them that the debt and deficit issue rose to the forefront. Of course, I know that it's beyond the ability of liberals to discuss something without calling other people names.

Posted by: Woody | Aug 15, 2011 9:58:33 PM

Mike is intergenerational debt burden not a moral issue? Is the sustainability of this country and maybe the free world itself not a moral issue? Anyone that cares about this country should be willing to "sacrifice" (as if we have a right to live beyond our means) by paying more tax and getting less government services (along with working towards a more more efficient/less corrupt government). He also has as much legal "standing" as you and actually more standing in terms of real world credibility so I don't even know what you are talking about there. Buffett and Gates can't change our citizens' apparent abject greediness through their personal donations. If you perhaps get your morality from the Bible, then I suggest you read Micah and see what God thought about Isreal's greediness.

Posted by: Matt | Aug 15, 2011 8:05:21 PM

What he doesn't tell the reader is that his income tax rate is higher than approximately 50% of the population whose rate is 0%.

Posted by: Roger | Aug 15, 2011 6:01:16 PM

There's a line on the tax form for voluntary contributions to reduce the public debt. If Buffett, Gates, et al. want to pay more, nobody is stopping them. But they have no standing, legally or morally, to tell others to do so.

Posted by: mike livingston | Aug 15, 2011 1:56:02 PM

Buffett's primary tax shelter is non-taxation of unrealized capital gains. This is a mismeasurement of true economic income (Haig-Simons income).

I will take Buffett seriously when he calls for taxation of paper gains, for example applying "mark to market" gains reporting above a $10M lifetime exemption. Until then he is advocating taxing other people, not himself.

Posted by: AMTbuff | Aug 15, 2011 12:31:33 PM

Good advice. How about raising their rates, getting rid of the Bush era tax "cuts" and cutting spending by 3 trillion over the next 10 years across the board. If people really want to cut the deficit then that is the way to do it. Or maybe it is just a political gimmick to get votes from the Loud, Proud and Dumb "Tea Partiers" and they are not really serious about the debt at all.

Posted by: George W | Aug 15, 2011 12:16:24 PM