What Buffett Writes Now Versus Then Part II

Warren Buffett

This is the second in a series of commentaries regarding an op-ed piece by legendary investor Warren Buffett on tax policies. Buffett continues: “The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes.” This statement may be true. However, it is only true if the mega-rich are doing what we want them to do, which is to re-deploy capital that has already been taxed at least twice. While it is true the mega-rich might pay practically “nothing” in payroll taxes, it is also true that if they do not fully fund their payroll tax contributions, they will collect “practically nothing” in social security benefits on amounts that are not subjected to payroll taxation.

Buffett suggests as follows: “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.” With this statement, Buffett is describing the structure of incentives or lack thereof to accumulate wealth and capital. Not pointing out that heavy payroll taxes should actually be characterized as heavy contributions for future retirement benefits misses the point of payroll taxes. And it is our collective unwillingness to exert control over Washington that converts “heavy” payroll taxes from what should be retirement plan contributions, into the largest compulsory ponzi financing scheme in the history of civilization.

Buffett continues: “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. I didn’t refuse, nor did others. 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.”

This is perhaps the most remarkable statement of Buffett’s entire op-ed piece. Here we must never be convinced of Buffett’s convictions, simply based on what he says about politics and policies. Instead, we should pay close attention to what Buffett has written in his letters to shareholders over the years and what he has actually done as a prudent and intelligent investor. While Buffett has never shied away from an attractive investment based capital gains tax rates, Buffett has gone to great lengths to provide detailed mathematical illustrations that reveal why deferring taxes for very long periods of time (if not forever) leads to more rapid wealth accumulation. Many times in his letters to shareholders, Buffett has explained the great wisdom of MINIMIZING the triggering of capital gain tax liabilities.

His accounting explanations of Berkshire’s unrealized capital gains go on to the point of nausea in many of his letters to shareholders. However, Buffett’s devoted followers have lapped those cap gain deferral passages up, and most have not forgotten them.

Buffett continues in his piece: “And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.” This statement is startling. It plays blazing fast and plenty loose with the historical fact that the most dramatic income tax rate cuts in history came under Ronald Reagan in the 1980’s. Those rate cuts led to the longest peacetime expansion in history and also the remarkable job creation statistics Buffett cites.

Ronald Reagan

Buffett says: “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.” What Buffett does not point out within these data points is that most of these gains in income were from the capital gains and the income taxes paid by these filers soared from $4.93 billion in 1992 to $19.54 billion in 2008. The government’s revenue glass is half full, it is not half empty. And it is half full with nearly fifteen billion additional tax dollars from the mega rich. Why the obsession with rates?
Buffett goes personal: “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.” Here again we find Buffett trying to get his op-ed piece readers to separate social security benefits from actually paying social security taxes. The most relevant factor here is that income that does not contribute payroll taxes is also not entitled to a social security benefit.

Jimmy Carter

Buffett softens his rhetorical attack on a group that paid nearly $15 billion dollars in income taxes this way: “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.” The amazing aspect of this statement by Buffett is that even philanthropy itself is NOT taxable. And we cannot help but be reminded that philanthropy contributes NOTHING to federal income tax revenues. Tomorrow we will finish with part III of this series.

What Buffett Writes Now Versus Then Part II