Note 1: I wrote this article before Warren Buffett’s recent comments he made late last week about the “Buffett tax.”
Note 2: I try to stay nonpartisan on this site. This is almost impossible especially in this political environment. In general I tend to be centerist in my economic views, and weigh each issue independently instead of taking any party line so it is not as difficult.
I have two articles about President Obama’s tax proposals coming up as well as this one. They are not anti-Obama but will try my best to truly convey that fact in the piece.
Lee Ainslie's Maverick Capital had a difficult third quarter, although many hedge funds did. The quarter ended with the S&P 500's worst month since the beginning of the COVID pandemic. Q3 2021 hedge fund letters, conferences and more Maverick fund returns Maverick USA was down 11.6% for the third quarter, bringing its year-to-date return to Read More
Warren Buffett, for several years has been quite vocal about his dissatisfaction with the U.S taxation system. In 2007, Buffett illustrated through his personal experience, how the loopholes in the U.S tax system are allowing the rich to become richer through many tax exemptions while the lower classes suffer. In 2007, Buffett stated how the U.S tax system allowed his to pay a minor 17.7% on his $46 million earnings, while his secretary had to pay a 30% tax rate on $60,000 in earnings.
Simply going with this presented example, the tax system could be deemed unfair, as often stated by the Democrats in congress, however, there is more to put into perspective before jumping into the conclusion of unfair tax system. While it makes sense to think increasing tax rates for those who earn more than $1 million a year is fair, there is evidently more to the argument if the economic factors are put in. Paul Ryan chairman of the House of Representatives Budget Committee along with Mitch McConnell, the Senate Republican leader, believe the increase would hinder growth and employment creation as it would leave little money for the wealthy to invest in business. Such a tax change would further shake up the already unstable economy. President Obama stated in an interview from 2009 stated that he would not raise taxes on anyone while the economy is still weak. Moreover, many are of the opinion that the government is already heavily reliant on the wealthy to cover the government debt, therefore, additional tax burden when the income tax rates are already hitting record high levels is not the viable solution to the debt problem.
Moreover, there are some basic facts which serve as enough reason to argue against Warren Buffett’s case of unfair tax system. According to the 2008 data of IRS, the tax rate levied on the top 10% of the earners (individuals who make an average of $114,000) was 19%. Buffett, by stating his secretary paying 30% taxes on his $60,000 income, includes not just the income tax rate, but also other federal taxes such as Social Security and Medicare payroll taxes. Additionally, Buffett comparing the tax rates of his earnings with that of his secretary is also irrelevant as Buffett’s income is derived from his investment in stocks which are categorized as ‘capital gains’.
Tax rate on capital gains is different from the normal income tax rate for many reasons. The capital gains and dividend tax rate is kept low as the corporations incur a tax which ultimately sums up to be around 50%. Increasing the tax rates of the rich, like Warren Buffett himself, converts to the increase in this corporate tax rate as majority of the wealthy in the income group earn through capital gains.
Even if the majority of Americans agree with actually raising taxes on the rich Buffett is risking his reputation. When it comes to great CEOs like Steve Jobs, most couldn’t care less whether he is a registered Republican or Democrat, the same is true with great investors like David Einhorn. Einhorn has described himself as a registered Democrat but not terribly partisan. Steve Jobs and David Einhorn are respected by Americans for their managerial skills and investing skills, respectively. However people, who constantly flout their political views like George Soros, are much more of a lightning rod for criticism (and conspiracy theories). Despite Soros’ great track record, he is hated by many on the right for his far left views.
Warren Buffett is one of the most respected CEOs in America (in 2010, Berkshire Hathaway was rated the most respected company by Harris Polling). Right or wrong, he has received criticism for his investment in Goldman Sachs and General Electric and then asking for a bailout. Goldman received TARP money, and both companies were bailed out by the Federal Reserve. Buffett also was criticized for meeting with Obama and investing almost immediately afterwards in Bank of America.
Buffett might lose the respect of a huge chunk of the American people by being Obama’s “spokesman” in the financial world. It is not because Obama is a Democrat, this criticism would be valid if Charlie Munger (a moderate Republican) was very vocal about his support for Mitt Romney, Jon Huntsman, or even Chris Christie.
Warren Buffett will go down as a legend, however, he can be remembered as the George Soros or Steve Jobs of our time; the choice is his.