There he goes again! The recent discussion on whether to keep the Bush tax cuts in place for all taxpayers, has him out doing interviews. This time he has 2 disingenuous arguments whereas he normally he only has one. In his interview on ABC’s “This week” he makes the argument that the tax cuts have not worked over the last 10 years (http://abcnews.go.com/ThisWeek/video/warren-buffett-taxes-debt-commission-12204473). This loyal liberal Democrat is reading right from the Obama/Media playbook on this, and I have refuted this in my other article on this site, (Bush Tax Cuts Caused the Recession?). The media may be lazy or agenda driven on this one, but Mr. Buffett’s background tells me he knows better.
The other canard he loves to bring up is that he pays only roughly 17% in federal taxes. He recently said “The question is, Do we get more money from the person that’s gonna serve me lunch today, or do we get it from me? I think we should get it from me.” The person serving him lunch is probably not paying federal taxes, and gets the EITC (earned income tax credit), so he gets his Social Security, and Medicare funded plus a check from the feds. His usual story of how his secretary pays a higher % in tax than he does, has been around for many years with little or no examination. Here he is in 2007 (http://www.youtube.com/watch?v=Cu5B-2LoC4s).
Warren Buffett only receives about $100,000 per year in salary. He has accumulated his estimated $47 billion (http://en.wikipedia.org/wiki/) through mostly capital gains and dividends. I have put together a very simplistic example of how he may pay roughly 17% on his personal return, but the effective rate on this income is much higher.
Let’s say that Mr. Buffett owns 50% of a Company that pays 100% of its profits in dividends. That company this year makes $2 million in profits. He would be entitled to $1 million in profits (income). Before these profits are paid out in dividends, however, they are subject to a 35% corporate tax. He will then receive $650,000. Then he files his taxes, and must pay 15% in dividend taxes. This results in him receiving $552,500 of the original $1 million in business income. This translates into an effective tax rate of 44.75% on these earnings. Companies that do not pay a dividend still pay the 35% corporate tax. The stock price of those companies with earnings goes up, and this translates into gains for the individual where they are double taxed as well.
Ordinary income (his secretary…the guy serving lunch) is counted as an expense to corporations, so there is no corporate tax on this money. Only dividends and capital gains are taxed at the corporate level and on the individual’s return. This example does not even take into consideration that in this example the investment dollars that Mr. Buffett used to invest in this company were after tax dollars, which would make his income triple taxed!
We need to have a conversation about how much our government costs, and what are the proper ways to fund it. We should include in these discussions how to create growth, and what has worked in the past. What we can’t have is hyperbole in our discourse that is apparently purposeful due to its repetition. This will only mislead and distract us from solving these real issues.Hidden Secret Revealed A simple strategy to trade stocks is uncovered!