I respect Warren Buffett as one of the greatest value investors of all time; however, when it comes to his political views and government policies, you need to take it with a grain of salt. Mr. Buffett is also looking out for his own best interest, just like the rest of us. In a New York Times Article article “Stop Coddling the Super-Rich,” Buffett indicated hat he had paid $6,938,744 in income tax last year, which is only 17.4 percent of his taxable income. Buffett said he had paid 17.4% of his taxable income in income tax. However, if the highestincome tax bracket is 35%, how is it that he only paid 17.4%? What is evident from this is that Buffett must have taken full advantage of all the tax shelters, deductions, loop holes, income from dividends, and capital gains to reduce his income tax. If Buffett truly wanted to help reduce the budget deficit, why would he not choose to forego taking advantage of all the deductions available to him, for example, and donate the additional 17.6% to the U.S. treasury?
Furthermore, Buffett compared himself to others in his office and stated: “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 the people in Mr. Buffett’s office were paying an average of 36% of their income in taxes, you should ask what was their payroll income versus their ROI income and whether they, like Buffett, for tax year 2010 took full advantage of the tax shelters, deductions, and other loop holes in order to pay less of their income in taxes. You should also ask yourself whether Buffett’s tax reforms/suggestions would really help the people in his office. Basically, Buffett’s tax reform suggestions would only address the ‘super rich.’ Why did Buffett not suggest that the people making in excess of $1 million pay income tax, while everyone below that income bracket pays no taxes? The answer is simple—Buffett understands that the ‘super rich-wealthy’ cannot solve the U.S. economy’s problems by themselves. Therefore, why give only a partial solution and address only the revenue side and not the expense side of the budget? Moreover, this raises an important point is that although Buffett is a billionaire, that is really his net worth, which is his balance sheet and not his Annual Income Statement. My favorite quotations, which are listed below, basically address the same principle:
“……. Consumption behavior as a
proxy for income.” Laura Rowley
“ Income relates to Lifestyle,
Wealth relates to Balance Sheets.”
Further, Buffett “… urged members of a new congressional ”supercommittee” looking at ways to balance the budget to raise rates immediately on taxable income in excess of $1 million, and even more for those making more than $10 million.” In my humble opinion, this alone will not reduce the deficit. In fact, it would be more of a political solution and not an economic one; however, it is good to see he is raising it to in excess of a $1 million and not the $250K the president is suggesting. Although Buffett suggestions have some merit and might alleviate some of symptoms, it does not get rid of the chronic disease affecting the U.S. economy.
Now let us imagine that you spent $20K using a credit card, and with all things being equal you have a $20K deficit on your balance sheet. However, you want to reduce your payments; and because of the high interest rate you decide to get a personal line of credit of $20K to pay off the debt. It is good that you paid off your debt, but you would also increase your ‘debt ceiling’ to $40K. Most people will not cancel the credit card after paying the debt in full, so in the near future the person with the $20K debt would have a $40K debt, if their spending patterns did not change, which would be with a much higher payment with basically the same income. Unfortunately, in my opinion, this is exactly what the U.S. government is doing. Further, there will be a time when the wealthy will not be able to solve the problem, and the government would have to print money, which would cause hyper-inflation and then high prices for goods and services, especially when the economy is slowing down. The above example incorporates the debt ceiling debate with the income tax debate, since income tax revenue is the main source of government’s income; however, it reminds us that income tax is not the only taxes that we pay.
To resolve these problems, there must be comprehensive tax reform and not just income tax rate hikes, especially on just one class of citizens. Every social class lives in this country, so everyone should play a role in the solution. I am only looking at income tax in this post, but other reforms have to be done with respect to all government spending. Moreover, everyone, regardless of income, has a right to understand the tax code and to take full advantage of it. Tax Reform must be done to simplify the rules. Mr. Buffett, the Obama Administration, Congress, and the Media, should STOP giving ideological speeches and give specific solutions to the problem that everyone could understand. The idea behind this post is to urge you the readers to analyze everything that is put in front of you in your everyday life, beyond the superficial level, in order for you to make effective strategic decisions.
For instance: “Fitch affirms U.S. AAA rating, disagrees with S & P” this is a good sign for the US; but, based on this post, you have to analyze it further look at their bias and motives. For example, is it a business strategy to disagree with S & P and so on…