Tuesday, August 16, 2011

Warren Buffett's Missing Facts and $3,000 Gallon of Milk

The antipopulist.com has great admiration for Warren Buffett, but we take issue with the completeness of his high profile op-ed in Sunday’s New York Times. After reading the headline, we immediately knew that it would be latched onto by President Obama and the media, and posted as a link 4,354 times on our Facebook and Twitter accounts as a “we told you so” for increased taxes on “millionaires and billionaires.”

We’re not even close to being affected by Mr. Buffett’s proposal, and are not opposed to increased tax revenue if done in a responsible and balanced manner, but it’s important to keep this issue in perspective.

Higher taxes on 0.2% of the population is a lazy and populist political solution to a major and complex fiscal problem.  As we’ve mentioned before, these taxes would have a limited impact on the deficit and only serve to distract from the real cuts and reforms required to reduce long-term deficits.

To help complete the analysis, here are some key points, derived from IRS data (i.e. cold hard facts), that everyone needs to keep in mind when referencing Mr. Buffett’s piece - points that you are unlikely to see in other media stories or populist rhetoric on TV:

  • The 245,107 households that earned more than $1 million make up roughly 0.2% of total tax returns filed, yet provide roughly 28% of total income taxes paid into the US Treasury. These taxes were paid on earnings that amount to 15% of total adjusted gross income (AGI). 0.2% of the population making 15% of total AGI is stunning, but having that same 0.2% pay 28% of the total tax bill is even more stunning, especially when the current political argument for higher taxes for “millionaires and billionaires” is made under the guise of “fairness.”
  • The top income tax bracket has a rate of 35%. We’d like to understand how his employees have effective tax rates of 33% to 41% with an average of 36%. I’m sure there is a very good reason for this, likely resulting from Mr. Buffett’s convenient and incredibly misleading inclusion of payroll taxes paid by the employees and on behalf of the employees. Most of these taxes are only paid on the first $100,000 or so of income and are paid (in theory) to fund the future benefits of Social Security, Medicare, Unemployment Insurance, etc. No different than the insurance premiums that Mr. Buffett has built his fortune on. This cost results in an insignificant rounding error in Mr. Buffett’s effective tax rate, but has a larger impact on his staff’s (who presumably make significantly less than Mr. Buffett) effective tax rate. The comparison is very misleading because Mr. Buffett will receive the exact same Social Security, Medicare, Unemployment (HA!) benefits as his employees. Why should he pay more for the same benefit? Because he can? It’s the logical equivalent of charging Mr. Buffett $3,000 for a gallon of milk because he earned 1,000 times more than the average household. 
  • Mr. Buffett’s personal effective tax rate is not representative of the 0.2% of the population that made more than $1 million in 2008, nor is it representative of his 399 peers in the “super-rich” club.  Based on this data, we estimate that those who made over $1 million paid an effective tax rate, as a group, of approximately 23%, and according to Mr. Buffett, his peers had an effective rate of roughly 22% (as compared to an effective rate of roughly 10% for the remaining 99.8% of taxpayers). Other than citing the capital gains and carried interest tax rate of 15%, Mr. Buffett does not explain why his effective tax rate is 25% less than his peers. It’s bad science and bad policy to rely on one man’s tax return to justify a change in the tax code that affects 245,107 or more people. 
  • Regarding the 15% capital gains tax, Mr. Buffett has repeatedly failed to address the interaction between capital gains taxes and corporate taxes. In theory, capital gains taxes are lower than the marginal rates because the investors economic gain has already been taxed (at least) once at the corporate level. Any distributions of those net gains (i.e. total gains less corporate tax paid) are taxed again in individual tax returns as capital gains. Using a very simplistic example, if the capital gains tax rate was 35% (same as corporate tax rate, and the highest individual rate), a $100 economic gain would result in an after tax benefit of $42.25 for the investor. $35 ($100 *35%) would be paid in corporate taxes, and $22.75 ($65*35%) would be paid in income tax. Therefore, the government will receive $57.75 for every $100 of economic gain generated by business activity. For the mathematically challenged, that’s a 57.75% tax rate on economic activity. This becomes infinitely more complicated due to the unwieldy US tax code, but the concept remains valid. Look to Europe to see the results of that level of taxation. Carried interest is a complex issue that we’re not qualified to comment on, but it’s an immaterial issue as it relates to the US debt problem. 
  • The antipopulist.com is full of CPA’s and we still can’t figure out all these various taxes, deductions, exclusions and special rates. This has nothing to do with Mr. Buffett’s op-ed, but it speaks volumes to the unnecessarily complex, voluminous, out-dated and special interest laden US tax code.
  • Mr. Buffett identifies who should pay more, but does not suggest how much more they should pay. 10% more, 25% more, 50% more, 100% more? This seems like a very important aspect of the debate. For the record, the government could take every last cent from those making over $1 million dollars (i.e. a 100% effective tax rate), and ignoring the devastating impacts of that property grab on incomes and the economy, that tax revenue would still not cover the single year deficit projected for 2011. 
  • If he feels his tax contribution is too small, Mr. Buffett is free to write a check to the IRS. 
  • Mr. Buffett fails to mention the impact a higher tax rate would have on his charitable giving programs. He’s pledged to give huge amounts of his fortune to charity – wouldn’t a higher effective tax rate take money away from that fortune, and therefore away from his charities? I’d like to hear Mr. Buffett’s views on who will make more effective use of his fortune, the US government or his preferred charities. If Mr. Buffett wanted to provide $100 million to improve education, who would he want spending that money – Congress and the Department of Education or the Bill and Melinda Gates Foundation? 
  • Here is a summary of the IRS income tax data referenced above, we think it’s quite interesting:

Again, could Mr. Buffett afford to pay more in taxes? Absolutely. Would a sensible and reasonable increase in tax rates on those making over $1 million have devastating impacts on the economy? Probably not. Would that same increase make a noticeable dent in the budget crisis? No. Is it a political winner to scapegoat “millionaires and billionaires” while at the same time asking them to pay even more in taxes? Might be, but that’s why we’re here.


  1. The WSJ must be reading this site:




    Only point they missed was the payroll tax misdirection.