Warren Buffett Keeps Trying to Break the Myth of Taxes

Warren Buffet, despite having slipped a few slots in the richest man rankings, knows a few things about the economy and what fuels investment. He's effectively built a personal empire on his investments and if his pride is anywhere it seems to be in his awareness of opportunity. For years he has spoken on business matters and been one of the most sought out economic minds out there. And for not the first time, Buffett has called out the tax code for being too lenient in its coddling of the extremely wealthy and the negative effects, not only on the national debt but the economy as a whole. Ideology fights promptly ensued.

In particular, Buffett has been trying relentlessly to address the myth that began during the Reagan administration that taxation has a inherently negative effect on the economy and by taxing the wealthy, assumed to be the job creators, the benefits will eventually trickle down to the lower classes by means of increased investment that will lead to increased employment and wages. In the short term this has been debated, but with nearly thirty years of trickle down economics in effect, studies have proven this to actually become a fallacy as the amount of increased investment from the beneficiaries is not proportional to the increased income received. They money they save is largely added to their personal wealth, which is less likely to see consumer activity than the incomes of lower and middle class workers. This one reason (amongst many) that the disparity of wealth in this country has greatly increased despite the tax burden on Americans, rich or poor, has decreased.

To make his point, Buffett reiterated his previous statements concerning his own taxation, at approximately 17 percent of his income against those of many of his white collar employees, who on average paid 36 percent of their incomes, approximately half the rate as admitted by the third wealthiest man in the world. Of particular notoriety is the form of taxation on long term capital gains, which is not taxed like salaries and have a much lower percentage. The Economic Growth and Tax Relief Reconciliation Act of 2001, aka George W. Bush's tax cut, focused heavily on this rate with it reaching 15% in 2003. This is in comparison to the 35% maximum tax rate on those who make in the 300-400k a year range.

To put this into further perspective, despite a number of tax cuts during the Reagan years, the maximum tax rate on capital gains was 28% at the beginning of the decade, cut to 20 percent in 1981 and reinstated to 28% in 1986. Yes, Reagan did have a few tax increases (mostly in the form of cleaning up loopholes in the tax code) during his tenure despite common touting of his conservative credentials.

In the years since then, investors have effectively blackmailed the nation into giving them preferential treatment in the tax code by arguing that their continued profits were dependent on low tax rates. The quote that Buffett stated that struck home the hardest was this:

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.

  We have somehow forgotten in the face of talking heads that a profit is something gained that was not there before. Anybody who is sensible about business knows that of his dollar earned he may only get to keep 60 or 70 cents of it; however, that is still money that would not have existed if he had chosen to not invest it in some capacity. While it is true that there needs to be the incentive for profit and thus you cannot tax everything, we are kidding ourselves if we believe that money is not being made and that any tax increase is going to shut off investments.

Furthermore, the current tax situation has drained our coffers at a time when middle America is already being strained. Tax rates are lower than at any point in the lifetime of most Americans, yet we are not asking where the jobs that is supposedly made by these wealthy investor beneficiaries. The idea of extreme wealthy job creators is yet another myth perpetuated by the media right. If you look at job creation data, the glut actually comes from a couple notches down on the tax bracket in the form of small businesses by people of moderate means. With them strapped further and further and opportunity denied to them, they are being nudged out of the job creation market, thus helping the wealth further compound amongst the upper 5 percentile. 

The reality is that cutting government services by such a level to balance the budget without tax increases would send the economy into recession. Roads would have poor funding leaving us with worse infrastructure and higher rates of joblessness. Teachers, already seeing their jobs cut on account of budget woes, would see larger classroom size, decreased benefits and less money allocated for necessities like textbooks. Military cuts would likely hit the VA first, leaving many of those damaged in American War for the past 50+ years with fewer means of treatment despite their sacrifices for this country. Generally good welfare programs such as WIC would likely be able to support far fewer poor children with food necessities like milk and bread. If it gets bad enough, programs for hospitals to treat the uninsured could be damaged leading to hard decisions on which of the unfortunate get treated in the ER. Government is enough of a business to create a gaping hole in growth if it is crippled. While there is plenty of waste to be consolidated and tossed aside, there's plenty out there that is probably best not left to the whims of big business. At some point, revenue has to go up to keep those essentials going.

When one of the wealthiest people on the planet says that he ought to be contributing more, could we put down that dog eared copy of Atlas Shrugged and consider it a bit? A billionaire has admitted that his tax rate is lower than most Americans making over 20k a year. While taxing them into oblivion would be a mistake, would it kill them to pay in the top tax bracket without weaseling their way out of it? If it happened, the stock market would bounce around for a few days and would recover as the Earth would continue turning and they opportunity of money would lure the investors back into the market despite them having to sacrifice getting that new Bentley for their kid's graduation.

Link: Warren Buffett New York Times Editorial Note.