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Your Take: Warren Buffett’s Proposal – Minimum Tax for the Wealthy

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TaxesWarren Buffett wrote an op-ed piece in the New York Times on Sunday in which he argued that there should be a minimum tax for the wealthy. His argument for a minimum tax hinged on a variety of reasons but the first one stuck out for me (the wealth gap reason is another powerful one) – most people don’t decide whether or not to invest in something based on the tax rate. An investment is either good or it’s bad. How it is taxed, or how much of it is taxed, only comes into play at the margins. I’m by no means wealthy but when I approach an investment the first thought isn’t – do I want to do this because my long term capital gains rate may go up from 15% to 20% next year? Do I want to do this because it’s taxed at ordinary income tax rates instead of long term capital gains rates? It’s probably not what you do either. Taxes play a role but it’s often to help determine what I invest in, not whether or not I invest.

I pick stocks with qualified dividends because I know those dividends will be taxed at 15% instead of my marginal rate, which is much higher. If long term capital gains rates disappeared tomorrow, I’d still invest in dividend stocks. For some of my savings, I’d rather take a yield of 3-4% of dividends taxed at 25% than have them sit in a 0.9% savings account taxed at 25%. I know there is greater risk in stocks, over savings accounts, but there’s also greater gains. The lower rate does impact how much I invest but that’s really at the margins. I suspect most wealthy people aren’t really spending that much time playing with dividend stocks yielding a few percent. :)

What is Buffett proposing? A minimum tax on income above a certain amount – 30% of taxable income between $1 – $10 million and 35% on amounts above that. No need to muss or fuss about deductions and whatnot, just a simple rule that all income above $1 million is taxed at a certain amount. He’d also like to extend the Bush tax cuts for everyone making under $500,000 (up from President Obama’s line at $250,000). I like the simplicity of the rule and I think the goal is reasonable – try to bring in revenues of 18.5% of GDP while spending 21% of GDP (I’m not a government budget expert so I don’t know how reasonable those % figures are).

Finally, I really enjoy reading everything Buffett writes. I enjoy his humor and how simple he makes things when explaining it. If you aren’t a regular reader of his shareholder letters, do try reading a few.

What do you think of this plan?

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20 Responses to “Your Take: Warren Buffett’s Proposal – Minimum Tax for the Wealthy”

  1. NateUVM says:

    I might be wrong because I’ve had very little experience with it, but wasn’t this sort-of what the AMT was designed to address? To provide a minimum level of taxation on those that might otherwise avoid paying a “reasonable” amount of taxes through deductions, etc…?

    Seeing as the AMT is a bit of a boondoggle in and of itself, might it not make some sense to readjust the AMT to meet the goals of what Warren Buffet is proposing? Raise the income threshhold (perhaps indexing it for inflation this time!) and raise the rate that is applied?

    You get yourself a “Buffet Rule” tax while fixing what was wrong with the AMT (hitting taxpayers that it wasn’t designed to hit)… Or am I missing something/oversimplifying?

  2. Daniel says:

    When I read this proposal by Warren Buffet, I immediately lost all remaining respect I had for him. This is a terrible idea that is borne of envy — and, it will not solve our nation’s economic problems.

    Further, it is intellectually dishonest of Warren Buffet to say that he and others do not make economic decisions based on taxes. There are mountains of evidence that tax policy affects economic activity. To say otherwise is to ignore the facts, making it nothing short of foolish.

    Our nation’s economic woes are the result of massive government overspending and overregulation. The solutions are simple but have not been tried for 15 years: deregulate, lower taxes, simplify the tax code.

    We cannot spend our way out of this mess. We cannot tax our way out of it. The only way out is to cut spending, reduce taxes, and boost the economy. A larger economy has more taxpayers that can then pay into the system.

  3. Texas Wahoo says:

    Can we stop conflating wealth with income? Warren Buffett is wealthy and will continue to be wealthy even if he quits his job and stuffs his money in his mattress (or a savings account earning minimal interest) and thus has lass than $1 million in income in a year. As long as the number is high (I’d prefer $5 million, but $1 million is probably okay), I don’t so much mind. However, when we start talking about $250k or $500k, you start getting to the point where someone that makes that much money in a year (possibly due to a big one time bonus) isn’t necessarily wealthy, particularly with the huge amounts of student loan debt.

    Also, it seems funny that he talks about how people don’t make investment decisions because of taxes, when his biography contains instances where he scuttled or almost scuttled huge deals because the tax treatment was going to be unfavorable to him.

  4. Whether Warren Buffett’s plan makes the most sense or not is not really the question that needs to be asked, he himself said he wasn’t sure the number/percentages work out properly. The point in what he is saying is very clear, the tax code needs to be simplified, if the tax structure was more straight forward and there were less loopholes and the burden was spread out more evenly then taxes would be charged more fairly and revenues would increase.

    I agree with the concept of taxing those with million dollar plus incomes in a more flat manner, I also agree that $500k is a much better threshold then Obama’s $250k for higher taxes, at $500k people in higher income/higher cost of living areas are not penalized and the net effect is the same tax those who are truly wealthy more.

  5. NateUVM says:

    Texas – There is a HUGE difference between your example and what Buffet is talking about. Buffet is talking about making stock investments (because he is referencing the preferential tax treatment of qualified dividends). TOTALLY different from making/not-making business deals. Inappropriate to extrapolate one from the other as hypocrisy.

    Also, if you make +$250k in a particular year, HOW you earned that money makes no difference, whether it’s a one-time bonus or no. You will be able to afford whatever tax liability you have just as well as anyone else making +$250k, ceteris paribus.

    • Texas Wahoo says:

      Business deals are just decisions about what you want to be invested in. One of the passages in the biography make it clear that he was concerned about personally being taxed at a higher rate because the deal was structured in such a way as to force him to pay higher taxes.

      Even if you think that personal taxation caused by business deals is somehow different, it is clearly not different when you’re running a hedge fund, as investing is its entire reason for existing.

      This Forbes article sums up some of my thoughts: http://www.forbes.com/sites/realspin/2012/11/30/buffetts-billions-cant-buy-him-exemption-from-his-tax-averse-past/

      If we are really concerned that the truly wealthy are not paying a high enough percentage on their taxes, we should do away with the charitable deduction (or limit it to those making under $1 million). That is one of the biggest reasons Buffett pays so little taxes. I would be much more likely to support tax increases for the wealthy if there wasn’t an obvious loophole.

      As for the $250k, obviously anyone that makes $250k in a year can afford to pay higher taxes – we could raise them to 90% and they could afford them (that’s what loans are for, right?) That doesn’t mean we should be taxing them at much higher rates. My point was not so much that they shouldn’t be taxed more (hey – it was their decision to take on $500k in student loan debt, let them live with it), but that we shouldn’t call it a tax on the “wealthy.”

  6. NateUVM says:

    Daniel – Yes, it has been proven, that targeted tax policy has an effect on economic activity (e.g. mortgage interest deduction, first-tiome homebuyer tax credit, etc…).

    Tax policy, specifically the tax rate on qualified dividends, however, has, as Buffet is suggesting, ZERO impact on whether one makes an investment in stock, or not. This has also been proven.

    What’s also been proven, is that higher overall tax rates have zero impact on overall economic output. Some of the greatest eras of economic expansion that this country has ever seen have been accompanied by some of the highest marginal tax rates on high income that the country has ever seen.

    http://visualizingeconomics.com/tax-rate-poster/

  7. ChrisCD says:

    I believe on the surface his idea would seem reasonable (although it is easy for me to say, I don’t make that kind of money). And I like Nate’s suggestion of fixing the AMT to incorporate it.

    However, I’m with the Republicans in demanding real cuts. If you raise $400BB but spend $1.6TT in additional funds, you are no closer to fixing the shortfall and have created an even larger one.

    I also have some ideas on generating potential revenue and stimulus at the same time. Maybe the Gov’t could provide low cost loans and the company would agree to capped executive salaries for a period (3-years?) and then the company would have to pay a percentage of profits back to the Gov’t for a time (5-years) and the percentage is based on profits before executive salaries so that the company can’t use high salaries to make it look like they are earning less then they are.

    Yes, there would be business that fail, but the ones that make it should provide enough revenue to offset losses by the Gov’t (and us the tax payers).

  8. freeby50 says:

    Yes like Nate points out this was basically the intention of AMT. Seems to me that Buffets idea equates to adding capital gains income to AMT.

    AMT actually works fine still with the only problem being that congress needs to keep increasing the exemption since for some stupid reason they havne’t yet indexed it to inflation.

    But AMT is only for normal income tax and long term capital gains aren’t treated as ordinary income. So the rich people can avoid AMT by adjusting their incomes so its all long term capital gains and get a very favorable 15% tax rate.

  9. freeby50 says:

    I agree with the idea in general. Our tax code currently allows people with very very high incomes to end up with lower effective tax rates than people in the middle. Thats not how it ought to work in general under our progressive tax system.

  10. My, this topic stirred up a lot of interest. I go with our editor. It is fun to read what WB writes, also my hat is off to him for bothering to communicate with us rather than just sitting around enjoying his money.

    The tax code should be simplified. People who earn 1 mil per year have people who help them avoid taxes. Regular folks don’t have that luxury. I agree that there should be spending cuts and the rich should pay more.

  11. Warren Buffett story. Warren was driving to one of the local greasy spoons to get a hamburger. His car was hit by a lady driving to a high end restaurant for dinner. They were both polite to each other. Warren later sent the lady some See’s candy. There is a moral here.:)

  12. Rich says:

    My wife and I are typical middle class for our area. (Washington DC). We make about $160,000 in salaries, another $10-$15,000 in dividends and another $10,000 in rental income. So about $185,000 in all. Yet we hardly pay any federal income taxes. We stuff tons of money away in tax deferred retirement account, our rental properties produce paper losses while providing extra income, and even some of our dividends, being in MLP’s reduce our tax burden.

    I think it is ridiculous how little I pay in taxes. I also find that most of the people who complain about their taxes are the people are in even lower tax brackets than us and who are paying close to nothing in federal taxes since they have a ton of kids.

    It was a republican, Oliver Wendell Holmes who said “Taxes are the price we pay for a civilized society.” Where has that sensibility in the republican party disappeared to?

  13. Jim M says:

    Agree with Daniel here – we need to deregulate, lower taxes and simplify the tax code. We can not spend our way out of this.

    I do respect Warren Buffett for what he has achieved and wish I had invested with him years ago. I also appreciate the fact he engages in the public dialogue over taxes and the economy even if I do not agree with everything he says.

  14. Mike says:

    I hope people realize that a family making $250,000 in a place like NY or CA is different from those making $250,000 in the Midwest or South. Wages and cost of living is vastly different in these areas.

  15. Edward says:

    Explain to me how taking in 18.5% of GDP and spending 21% of GDP makes any sense. Is this how Buffett runs his own budgets? It sounds like he only wants to slow the digging. The hole would still get deeper.

    How about this novel concept, we take in 18.5% and spend 17.5% and use the extra 1% to pay down the immoral debt our “representatives” have gotten us into.

    I know that would still take 106 years to pay off our current debt but it’s a hole 3/4 of the way to China, maybe further.

  16. Ray says:

    I agree with many others in that, the complexity of the current tax system allows the most wealthy people to pay a lower tax rate than then the average American.

    A lot of the tax rules currently in place are hurting the economy, but are unpopular to get rid of. This is because the average American gets a cut too, just a much smaller cut.

    Mortgage interest deduction is one of these things. The average American saves on the interest they pay for their house. The wealthy are able to build real estate empires with the same benefit. A much more realistic approach would be to only extend this deduction to first time home buyers.

    If you want to really wanted to keep taxes low for the middle class, every deduction/credit should have some type of phase out level for the super wealthy.

  17. Jon says:

    Something that bothers me deply about this whole discussion…why does anyone, in a free country, have the right to decide when someone else is making too much money? Why is it assumed that taxing high income earners (which, consequently, are mostly different people than are “the rich”) that WB and many others are so ready to take from is going to make things better for the rest of us? It is as though many have lost the desire to become a high income earner themselves, and are willing to settle for increased socialism, where everyone is “equal”, but only in that they become more equally miserable. Everywhere that this has been tried, it has led to decreased productivity, because most people will become unproductive when all of their basic needs are met at no cost to them.

    Every time that we increase the percentages and make a more progressive income tax on anyone (which a progressive income tax is one of Lenin’s stepping stones to a communist society), we make the ladder of financial achievement more slippery and difficult to climb for all of us, because we become unable to accumulate wealth.

    Most wealth is not inherited, it is generated, by people trading their time, efforts, skills, capital, and talents for it. A tax is nothing more than the government taking a percentage of your life, because earning money is actually just a transaction with your employer; a trade of your time for cash. Who is anyone to say that the government should be allowed to take more of a person’s life than they already do?

    Earlier Rich asked where Republican sensibility had gotten to (by the way, Rich, if you would like, there is an IRS form where you can voluntarily pay more taxes, if you feel that your burden is too low. Not being a jerk, just stating that so far I would bet that you have not done this. Buffett can do this too, but I seriously doubt that he would consider such a thing). I would like to ask, where has our collective sensibility gone? We cannot solve our problems by ever more taxes on high income earners, because who wants to trade their life for more money when the IRS will just confiscate it? Any takers of that deal? Higher taxes, on anyone, especially to spend on social programs, leads to everyone doing less (just look at most of Europe), and to a permanent leadership class who believe that they can do things for us better than we can do them for ourselves. They then control everyone by dividing them against each other and setting up a culture of class envy.

    This is not what the founders intended for this great land that they fought and died for!

    Several in this forum have stated that the answer is less spending and a simpler tax code. We must do this voluntarily, or it will be forced upon us someday when other countries quit buying treasuries, i.e., loaning us more money, and when hyperinflation of devalued dollars raises prices to unimaginable levels. 60% of our national budget is spent on social programs, and this must change. Stifling economic activity by increasing taxes on high earners wouldn’t generate a drop in the bucket to pay off of our national debt, so we must stop the spending. The current debt level per American is around $52,000 (see http://www.brillig.com/debt_clock/), and that is unsustainable.

  18. DonC says:

    As a CPA that frequently helps clients with determining the tax consequences of buying or selling investments, I can tell you that taxes are always part of the conversation, but it’s usually not the deciding factor. Investors need to consider the tax consequences to determine their true return on investment. If the ROI is not high enough to justify the risk, the investor will walk away.

    Sales of investments should be taxed at a lower rate. You can argue 10%, 15%, 20%, etc., but it should not be the same as the tax rate for ordinary income. Investors have to put their money at risk and they can lose it all. Wage earners have very little risk. Plus, don;t we want to encourage more people making investments?

    Dividends should not be taxed all. Dividends are already taxed by the corporation at 34% or 35%. What should really happen is that any dividends received should reduce the amount that you paid for the investment so that when you ultimately sell the investment, you have a larger gain. Proponents of taxing dividends at normal rates will most likely just want to tax everything and may not understand the underlying tax theory behind dividends.


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