Warren Buffett is one of the best businessmen and investors of our time.
When it comes to investing, I can state that Buffett is one of my heroes.
However, when it comes to tax policy, Buffett has strong opinions that are illogical, to say the least.
In the past two weeks, Buffett was on CNBC and ABC, strongly urging Congress not to extend the Bush tax cuts on the upper class. He thinks it is only fair for the rich to pay their fair share.
Buffett makes three fundamental mistakes in his approach on this issue.
The first issue is that even if “it is only fair” that the rich deserve to pay more taxes, the timing needs careful consideration.
We are in a weak recovery, according to economists across the board. Unemployment is 9.6 percent and even with really strong economic growth in the near future (this is likely an optimistic view), it will take years to get back to normal employment levels.
A poll conducted by CNN showed that 60 percent of the leading economists favor extending the Bush tax cuts (at least temporarily).
The survey also stated that “extending the tax cuts for all taxpayers is the most important thing Congress can do to help the economy.”
Mark Zandi, chief economist of Moody's Analytics (and a Keynesian left leaning economist), stated; "If those tax cuts expire for everybody, we go into a double-dip recession.”
While Buffett can argue that the rich don’t pay enough taxes, it doesn’t mean that now is the time to raise taxes as he seems to imply.
The second point is so obvious that it is shocking that someone as brilliant as Buffett fails to grasp it.
Although only 3 percent of Americans make more than $250,000 a year, within the top third percentile there is a wide gap.
On the higher end, you have people like Buffett who have almost $50 billion dollars and on the other end of the spectrum you have doctors, and lawyers making $250,000 a year. It is fair to say that the net worth of these individuals is likely closer to $1 million than $1 billion.
There is good reason to suspect Buffett would feel a lot differently about taxes if he only had $1 million in his bank account. If he was living in the New York area or another urban area where living costs are very expensive, he would barely be saving anything even if he was making more than 97 percent of Americans.
The third issue has to do with tax reform and not with a simple raising of tax rates, which is the reason Buffett pays only 17 percent of his income in taxes.
According to Forbes, Buffett donates appreciated Berkshire Hathaway stock — which costs him pennies on the dollar — to charity, and receives a fat, juicy tax deduction at the appreciated price without having to pay a capital gains tax on the appreciation. (And, note that the money actually sits in his own charitable organization). He’s saving income taxes with the ordinary deduction so it’s essentially a tax shelter.
He builds up his massive net worth and doesn’t have to sell stock while deferring capital gains. When he does take a capital gain, it’s at a 15 percent rate, and he lives in a low-tax state.
I don’t understand why Buffett doesn’t get it. Maybe one day he will or maybe he is too ideological to understand.
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