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Warren Buffett Doesn’t Want to Be Coddled

Update: The concepts implied by Warren Buffett have formed the basis of President Obama’s Buffett Rule proposal.

Warren Buffett is staying in the news. I wrote recently about his desire to continue investing in stocks during market volatility, and today he published an opinion piece in the New York Times. He laid out the facts about how income is generally taxed. Income generated by working most jobs is taxed (overall, not marginally) about 33 to 41 percent, while income generated by money (investing, selling companies, etc.) is taxed much less thanks to the 15% rate for carried interest.

The theory making the rounds around Washington is that if investors are taxed higher, they will let their cash sit on the sidelines and not invest in businesses thanks to the fear of paying a higher tax rate on their earnings. Buffett points out that this is not how investors reacted the last time rates were high.

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.

Warren Buffett CoddleBuffett may be a brilliant investor, but he doesn’t speak for all millionaires. Most who earn money classified as this favored type of income, millionaires or not, want to keep the 15% tax rate. The low tax rate exists, in Buffett’s mind, to coddle to the rich so politicians gain their favor (and their money, presumably).

He also criticizes the concept of “shared sacrifice,” code words designed to elicit a feeling among the middle-class and lower-class general public that it is a civic duty to bear the burden of the economic recovery, while billionaires are avoiding responsibility in this “shared sacrifice.”

Is eliminating the favorable tax treatment of the 15% carried interest rate part of a solution for improving economy in the United States?

I tend to think that quibbling over tax rates clouds the view of the bigger picture. Looking at the economy over the past few centuries, it seems like the country was until recently in its “start-up” phase, like a burgeoning company. Through innovation, venture capital, and military conquest (hostile acquisitions?), the United States grew into a major world power.

Innovation is cheaper elsewhere, venture capital (investments from overseas) might eventually become unavailable, and military conquest beyond our shores is too expensive both in financial terms and foreign relations. Looking at the United States as if it were a company, the country has settled into a phase where the domestic growth we’ve come to expect over the past few centuries is not likely. I don’t think whether the tax rate on carried interest is 15% or 28% will change this.

New York Times

Updated September 19, 2011 and originally published August 15, 2011.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 22 comments… read them below or add one }

avatar 1 Anonymous

Warren fails to mention that there aren’t enough millionaires or billionaires to cover the annual deficit even if they were taxed 100%. Taxed more maybe, will it make a difference no. Warren might be a great investor, but when it comes to politics he’s naive.

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avatar 2 Anonymous
avatar 3 Anonymous

I’ve written about this and am posting it tomorrow. Buffett knows this won’t fix the deficit. He just wants a fair system.

There is no question that taxing capital gains lower than regular income is an unfair advantage for those wealthy enough to invest. If I start my own business and make money, I’m taxed at regular rates. However, if I invest in a public business and make money there, I pay less? How is that fair? In both cases, someone is an owner of a company, but they are being taxed differently.

Speaking of fair taxation, the fact that half the country pays zero income tax is also ridiculous. There is no question that America needs comprehensive tax reform (my preference is the Fair Tax) to promote equality and drive growth.

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avatar 4 Anonymous

I think it’s reasonable that LT capital gains is so low. In fact, I think it should be eliminated. It’s double taxation.

Money is earned by producing something of value and then it is taxed by the federal government. Then, if the money is invested and sees a passive gain (nothing is produced), it’s taxed again.

What a ripoff! The government will always seek to get their grubby hands on more of our money. They’ll tax it fifteen times till Friday if you let them. Avoid the capital gains by being in a Roth.

Buffett is right in that people won’t stop investing or go somewhere else. But it’s not because they aren’t being taxed enough already. It’s because there isn’t a real alternative to the U.S. stock market.

There is no other stock market as stable and desirable as the U.S. stock market. If you raise cap gains, investors will just take their medicine and keep rolling as long as they are making money.

(If there were an alternative, be sure they would go somewhere else. Look at what corporations are already doing with their corporate earnings to avoid the corporate 35% tax rate. Look up how many companies have moved to Zug, Switzerland.)

But just because you can take something doesn’t mean you should. Like I said, at it’s core, capital gains is double taxation.

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avatar 5 Anonymous

I think the government does need to increase taxes, especially on the wealthy.

If you run it like a corporation, you either have to raise revenue or cut costs. The government just cut a bunch of costs, but it wasn’t enough. Now, they need to raise revenue!

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avatar 6 Anonymous

Robert, what was cut from our government? The amount cut is a complete joke. $1.5T over ten years. We over spend that amount in just one year. So our deficit every year for the next ten will only be $1.2T instead of $1.7T. Not only that but it’s back loaded. As I stated in above there isn’t enough rich (even taxed at 100%) to cover that gap annually. So clearly more cuts need to occur, much more.

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avatar 7 Luke Landes

I read the OpEd again, just to make sure… Warren Buffett doesn’t say this alone will fix the debt or the deficit. He doesn’t say anything about the debt or the deficit. So arguing that we shouldn’t raise taxes on income levels $1 million and higher because it doesn’t solve the debt problem is like arguing a middle-class worker shouldn’t ask for a deserved raise because it won’t cure his credit card habit. He should still ask for the raise… and take care of his debt problem.

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avatar 8 Anonymous

No he doesn’t state this specifically, but if it’s not for repairing the deficit, then what else for? If it’s not for that then is it to specifically punish that group?

The very same group that Warren tries to minimize his taxes so he doesn’t pay that much? Nothing prevents Warren from sending in his donation to the IRS.

The very same taxes that also helps him with his insurance biz (ie life insurance with death taxes)?

The Democrats (Warren is one of them) this has been the talking point for why taxes should be increased on that class. Nothing but class warfare. Hence why I’m for a flat tax 18% and send it in, no exceptions. Everyone has a stake in our government and cuts out the BS from either side of the aisle or economic class.

The fact of the matter, fine increase taxes on that group. It won’t do squat to the deficit. The problem, is if you look at history, our government will increase taxes, yet won’t decrease spending. It will just ask for more and more, as it always has.

The decreases our government so far approved will not do anything for the deficit. $4T was at minimum needed and IMHO is just a starting point.

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avatar 9 Anonymous

@Investor Junkie: You’re either very rich, or very stupid. It’s going to take a COMBINATION of spending cuts and tax increases to solve the problem. The rich can afford the most increase. A flat tax will ruin the poorest people in our country. I guess you’re too morally broke to pay attention.

avatar 10 Anonymous

@Brian – FL

When one does not care how taxes are used (since they themselves pay no taxes) do they care how tax money is spent? When everyone has a vested intrest in the government (by paying taxes), then people will be less likely wanting government services not understanding the true cost.

“The rich can afford the most increase. A flat tax will ruin the poorest people in our country.”

Since you making hyperbole statements I’ll put it in more concrete terme. The poor in the US are some of the richest poor people in the world. The “poor” is defined as 80k and below depending upon the exact situation.

The “rich” at least in terms of Obama definition isn’t so rich of $250k annually isn’t so rich especially if it’s a biz owner.

Instead of making “stupid” statements with no facts, please do some research.

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avatar 11 Anonymous

@Investor Junkie: As I’m sure you know, the median household income in 2006 was $50,233. And, just to make sure you understand what “median” means… it means that half made more than $50,233 and half made less. So… if 51% of US households pay no taxes, then those making less than about $50,233 pay no taxes.

If that’s true, then I agree that those making such an income should pay some taxes. However, it’s difficult for me to believe that someone making $45-50K pays no taxes. I know that I paid taxes when I was making about that much… of course that was in the 90’s for me.

Now, in regard to my comment… note that I wrote “poorest”… it’s the “est” ending that matters here. If a flat tax is applied to the poorEST in our country, it will ruin them. Our country has always had a progressive tax rate for a good reason… those making the most money can afford it. Our country has been successful for the very fact that the richest in our country have always had a greater responsibility for helping those less fortunate to get an education, have a good transportation system and other infrastructure, etc.

The rich in this country got rich because of the opportunities provided by our social system. If you grew up in a 3rd world country, do you think you would have the life you have today? Would you have had the ability to pull yourself up and make a decent wage without the support of society? No, probably not.

We need to stop this race to the bottom.

avatar 12 Anonymous

@Brian – FL. Poor exist no matter what the ‘ism’ Our capitalistic society has “raised the boat” for everyone including the poor. When 80% of rich today (over $1 mil in net worth) today are first generation that tells you how they got it. They got it from hard work, applying themselves – not from inherited trust fund babies.

So for the moochers and leaches to take money off of my back.. no thank you. Yes I contribute taxes, with my business, real estate, sales and personal more than many make in one year, but I also add economic value to society. I create jobs directly and indirectly.

The productive are getting penalized, because the “poor” in many cases aren’t applying themselves (yes there are exceptions). So your statements are complete backwards. If it weren’t for the productive, the non-productive couldn’t exist!

So it’s no accident that many people leave other countries to the USA because of the economic freedom, not the rules and regulations they are coming from.

It’s a nice ideal to have no one poor, but that isn’t reality. How has it worked out in Cuba? Or any other socialistic or communistic nation? The government determining the winners and losers isn’t economic freedom. Taxing the “rich” to give the poor is inefficient at best, corrupt at worst.

With more progressive taxes we will still have poor. If anything the gap between the poor and rich will get worse based upon your suggestions. The less than 1% rich won’t pay the rates through various means, or leave the country all together. The poor do pay not taxes, but get the brunt of the social services. The middle class gets squeezed because they pay the brunt of the taxes, paying for most of the poor’s services. A flat tax solves this issue. Everyone has their fair share and it’s not representation without taxation.

“However, it’s difficult for me to believe that someone making $45-50K pays no taxes. ”

Federal taxes – in many cases yes they don’t and many cases people get money back.

See an interesting discussion on Zero Hedge about entitlements:

So in many cases the poor with entitlements make out better. Why work hard when you can do better at a lower rate, the government will take care of you. There is no incentive to work hard and take care of yourself.

“rugged individualism” is what made the USA great, on progressive statism.

That is the core issue at hand.

avatar 13 Anonymous

@Junkie: I agree, the poor will exist no matter what we do.

“When 80% of rich today (over $1 mil in net worth) today are first generation that tells you how they got it. They got it from hard work, applying themselves – not from inherited trust fund babies.”

Yes, exactly. They got rich because they live in America… where our social system gave them the opportunity to get ahead. Yes, they did have to work hard to get there, but it would not have been possible without our social system.

I read the article on Zero Hedge. It’s very interesting. The tax paid by the family making $60K was way out of line though… it assumed 15% federal tax (plus payroll taxes), with no deductions for those three children, their child care expenses, or any deduction for mortgage interest, etc. However, even with the money saved by those deductions, it’s pretty surprising how much a minimum wage family can get in public assistance. Maybe I’m naive, but it’s difficult for me to believe that there is a high percentage of people who are taking advantage of the system that much. Personally, I never received any form of welfare benefits, even back when I was young, and had young children, and could probably have qualified for some benefits.

I know some people scam the system… and there are some people who would rather get something for nothing instead of working hard to make a decent living on their own. But I don’t think that’s a majority or even 25% of those who receive public assistance. If I were given a choice of getting benefits equal to a $60K job, or the potential to make $100K on my own, I think I would choose to make $100K on my own. It’s hard to imagine that very many people would choose to be stuck at the bottom and never make an attempt to get ahead.

avatar 14 tbork84

Buffet has been making this same point for a long time, but some of the other comments have it exactly right. There is no way to balance the budget, or even make a dent in the deficit by only taxing the wealthy more. The tax base needs to be broadened and everyone has to have a stake and not just be on the receiving end of money from the government.

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avatar 15 Ceecee

I think that Buffett is right. The wealthy can build up huge coffers with investments, and remember, they are only taxed on capital gains when they actually sell the investment. If they hold it longterm(because being so wealthy, they don’t need the money) they can pass it on to their heirs. With a new cost basis, the heirs may never pay any taxes on that huge gain. It’s a cushy system if you have money to spare.

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avatar 16 Anonymous

In an interview with Charlie Rose that I watched last night (don’t know when it was taped), Mr. Buffett also said there should be an income cap on Social Security benefits. He showed Charlie his own tax return that showed he received some $32,000 in ss benefits. This is a man with an AGI of $6.2 MILLION in 2010. Even he said – why do I need social security benefits? People who make over a certain amount of $ should not get benefits even if they have paid in all their lives. They simply don’t need it.

He also noted that his effective tax rate was less than half of most of the people that work for him (and earn significantly less income). he may not have all the answers, but he does believe our tax code is illogical and a mess and that other program rules don’t make sense either (like SS). Congress and the POTUS should listen to common sense, intelligent, financially savvy people like Buffett. He may not have all the answers, but we can’t solve this country’s financial problems with one huge move. We need to enact numerous small changes to make the savings add up (just as households do)

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avatar 17 shellye
avatar 18 lynn

How does he get so much in benefits? And yes, I totally agree with a cap.

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avatar 19 Anonymous

This is all a publicity stunt. Buffett is hiding behind congress so he can appear altruistic and concerned in his call to raise taxes, but such an increase in not needed. He and his “coddled” buddies can step up to the donation plate and write a big, fat check to the government any time they want:

If he really felt more money would solve Washington’s fiscal problem, then he should be calling on the wealthy to donate more to the government, rather than complain the government isn’t forcing them to pay more.

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avatar 20 lynn

Would you write a check to the government? It can be equated to writing a check to a drup addict. A waste of resources.

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avatar 21 qixx

No tax levels will ever solve the problem of lack of restraint. When the government can and will spend any monies they receive then increasing taxes will only increase spending.

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avatar 22 lynn

Herein lies the true problem.

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