Saturday, March 31, 2012

Warren Buffett should pay a lower tax rate than his secretary

President Obama has renewed his call for the so-called Buffett Rule, under which a person earning more than $1 million in income would have to pay a minimum 30% tax rate, suggesting that this somehow about "fairness" and that persons with high incomes are not paying "their fair share." There are a couple of problems with this claim.
First, although the "marginal rate" may be lower for people with an income mix such as Mr. Buffett's (or Mr. Romney's), their "total" tax payment are significantly higher, and it is "total" tax, not "marginal rate" which really matters.
Second, for the first portion of Mr. Buffett's income that matches his secretary's income he pays exactly the SAME tax rate. That sounds awfully fair to me.
Third, if someone has income over $1 million that is strictly or mostly salary/wage income they will in fact be paying a significantly higher marginal tax rate than his secretary for every dollar of that non-investment income, once again due to progressive tax rates. Again, nobody talks about this. That hardly seems "fair" for him, but nobody says anything about that and if he doesn't want to complain, that's that. But, to put it simply and bluntly, there is zero truth to the claim that people with non-investment income greater than Mr. Buffett's secretary are paying a lower rate for that non-investment income. Zero truth. The story should be about the relative value of salary and wage income vs. investment income, but oddly that important distinction has been lost in the noise of all the political theater.
Fourth, our tax system deliberately places a higher value on investment income since capital and investment is the very lifeblood of our economy. Without ongoing investment, the economy would quickly grind to a halt. For this reason, we intentionally and mindfully assign a significantly lower tax rate to "investment income." This is the incentive for people to invest money rather than to merely spend money. And, to be fair, we do in fact offer that same identical lower tax rate to both Mr. Buffett and his secretary for their investment income.
Fifth, my apologies to his secretary but Mr. Buffett deliver far greater economic value to society than she does. I am sure he compensates her "fairly." I am also sure that if she had a ROTH retirement account or some modest investments from savings that she would in fact pay a much lower tax rate than she pays on her salary and wage income, which is how it should be. If she wants to go back to school or teach herself investment skills and go out and raise capital to be an investment manager comparable to Mr. Buffett or Mr. Romney, all power to her, and then she will deserve a lower marginal tax rate for her investment income.
It may not seem fair to some, but working "smarter" is and should be more highly values than merely working "harder." Yes, hard work is needed, but it is only smart work that grows the economy in a leveraged manner.
So, in short, President Obama is completely misguided in his call for higher tax rates for investment income. If someone has more than $1 million in non-investment income they will already be paying a much higher tax rate (for that non-investment portion of their income) than Warren Buffett's secretary, so no change is needed on that front to achieve so-called "fairness" for taxation of entertainers, star athletes, et al whose income in primarily from their own labor as opposed to investment income.
It may not seem "fair" that capital has higher "value" than labor, but capital is more like a fuel and labor is more like water. Both have great value, but fuel is more scarce and has greater leveraged economic value and must be protected and promoted with much greater vigilance, especially since it can be so easily squandered if used in a misguided manner.

-- Jack Krupansky


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