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Tuesday, August 16, 2011

Warren Buffett Urges Congress To Raise Taxes On Rich & Reform Tax Code

Stop Coddling the Super-Rich

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 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, 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 percent 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 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. 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.

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. 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.

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.

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. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)

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.

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent 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.

A Closer Look at Taxes on the Rich

With the budget deficit growing and tax rates at a 60-year low, one question will remain near the center of the political debate in the coming months: Should the federal government raise taxes on the rich?

Warren E. Buffett, the billionaire investor known as the Oracle of Omaha, pushed the issue to the forefront this week by urging members of the new Congressional supercommittee on deficit reduction to stop “coddling” him and other affluent Americans and raise their taxes.

In an opinion article in The New York Times on Monday, Mr. Buffett said he paid just under $7 million in federal payroll and income taxes last year, about 17 percent of his income, a lower percentage than anyone else in his office.

Echoing comments he has made in the past, he called on Congress to make the tax system more fair by rolling back the so-called Bush tax cuts on people who earn more than $1 million a year and on income from capital gains and dividends. He would also close the loophole allowing hedge fund managers to be taxed at a lower rate.

Whatever the political viability, his proposal would put a significant dent in the nation’s budget shortfall. Based on projections by the Joint Committee on Taxation, the Congressional Budget Office and the Treasury, the tax increase on all three fronts would generate as much as $500 billion in new revenue over the next decade — about a third of what the Congressional committee is supposed to cut from the deficit.

“It’s not going to solve the long-term budget shortfall all by itself,” said Eric Toder, an economist at the nonpartisan Tax Policy Center. “The only way to do that is to have broader tax increases or reduce entitlements. But it could be an important piece of the puzzle.”

Because of Mr. Buffett’s high visibility and wealth — Forbes estimates his net worth at $50 billion, making him the world’s third-richest person — his comments brought a torrent of reaction. President Obama, who has fought unsuccessfully to increase taxes on the nation’s highest earners, cheered Mr. Buffett’s remarks during his Midwestern bus tour on Monday, saying that it was only fair that the spending cuts be balanced by tax increases on the wealthy.

Conservative bloggers and commentators brushed aside the proposals as grandstanding or as a gimmick to usher in a middle-class tax increase, and Pat Buchanan, a commentator on CNN, suggested that Mr. Buffett visit the section of the Internal Revenue Service Web site that accepts donations.

Republicans have been united in their opposition to tax increases, and gave Mr. Buffett’s proposals a chilly reception. All six Republican members on the committee have taken a no-tax pledge. Representative Kevin Brady, a member of the Ways and Means Committee and a Texas Republican, flatly rejected Mr. Buffett’s ideas.

“This is not a serious solution for deficit control or getting this dismal economy on its feet,” Mr. Brady said. “Economic growth does not follow a tax increase. So as much as I respect Mr. Buffett, his proposal fails on virtually every level.”

Despite the intense antitax sentiment that has helped the rise of the Tea Party movement since Mr. Obama took office, tax rates in the United States are at their lowest level since Harry Truman was president.

In 1950, the top income bracket had a 91 percent rate; today it is 35 percent. Mr. Buffett called for two new tax brackets for high earners — for income above $1 million a year and another above $10 million. While Mr. Buffett’s proposal did not suggest a rate, the Tax Policy Center has estimated that a 50 percent tax rate on income over $1 million would raise $48 billion over the next decade.

But one of the biggest factors reducing the comparatively low tax rates on investment income is the 15 percent for dividends, capital gains and “carried interest,” the money paid to hedge fund managers and private equity investors. Eliminating the carried interest provision alone would raise $21 billion over 10 years, according to the Congressional Budget Office.

And restoring capital gains and dividend rates to the levels before the Bush tax cuts — when capital gains were taxed at a top rate of 20 percent and dividends were treated as ordinary income — would bring the Treasury an additional $340 billion over the next decade.

Any of those measures would face intense lobbying and a battle in Congress. Indeed, Democrats were unable to roll back the carried interest tax break or the Bush tax cuts on the wealthy even when they controlled both houses of Congress. But with the prospect of severe spending cuts and another round of bitter deficit negotiations in Washington, proposals like Mr. Buffett’s call to raise taxes on the affluent are likely to become an increasingly urgent part of the discussion.

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Sources: ABC News, CBS News, CNN, NY Times, Youtube, Google Maps

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