Warren Buffett's Minimum Tax Rate Proposal

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In his op-ed in today's The New York Times, billionaire investor Warren Buffett reiterated his case for higher taxes on the wealthiest Americans, calling for a minimum tax rate of 30% on people making more than $1 million a year and 35% for those making more than $10 million a year.

After pointing out that no one, with the possible exception of Grover Norquist, ever turned down a good investment opportunity because the tax rate on the capital gain would be too high, Buffett argued, "So let's forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if – gasp – capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities."

Imposing a minimum tax rate on high incomes, "…will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours," Buffett said. "Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy."

While Buffett was unsparing in his criticism of those earning the highest incomes, he also suggested modifications to President Obama's plan to raise taxes on incomes over $250,000. "I support President Obama's proposal to eliminate the Bush tax cuts for high-income taxpayers," Buffett wrote. "However, I prefer a cutoff point somewhat above $250,000 – maybe $500,000 or so," recognizing that, in some parts of the country (not Omaha), $250,000 barely covers a middle-class lifestyle.

Minimum Tax Rate Just Part of Buffett's Solution

In addition to his recommended tax hikes for the wealthy, Buffett also called for spending cuts in order to stabilize the government's debt.

"Our government's goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. – levels that have been attained over extended periods in the past and can clearly be reached again," Buffett asserted. "As the math makes clear, this won't stem our budget deficits; in fact, it will continue them. But assuming even conservative projections about inflation and economic growth, this ratio of revenue to spending will keep America's debt stable in relation to the country's economic output."

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While most commentators, even those from conservative media outlets, are in agreement with the Sage of Omaha, some have been critical of Buffett's proposal.

CNBC columnist Robert Frank wrote, "Buffett's op-end implies that our tax system is regressive, that the rich pay less because of their power and lobbyist friends."

In fact, Frank points out, after mortgage interest deductions and other adjustments to income, the average millionaire paid an effective tax rate of 20.4% in 2010 while those earning between $50,000 and $100,000 paid an effective tax rate of 7.7%.

Investors Fret Over Tax Rates

Higher tax rates on dividend income are a concern for many investors.

Tony Gleason, manager of the Neuberger Berman Equity Income Fund, told Forbes, "Zero interest rates mean that dividends are really the only source of income in the investment environment right now. We're definitely focused on dividends, and the ability to grow dividends. It's an environment of little income."

Forbes noted that Gleason "…holds positions in stocks with juicy payouts, like Johnson & Johnson (NYSE: JNJ) (a 3.51% yield), Philip Morris International Inc. (NYSE: PM) (a 3.76% yield) and Cisco Systems (Nasdaq: CSCO) (a 2.97% yield). Each security there pays nearly double the benchmark T-bill."

Having made his case on tax rates and the budget, we would like to see Buffett turn his attention to the issue of zero interest rates and how this distorts the economy.

Investors, including pension funds, are starved for yield. This effectively transfers wealth from savers to spenders but, with banks still reluctant to lend to most borrowers, the only real beneficiary of zero interest rates is the federal government.

How we get out of the zero interest rate liquidity trap will require the best ideas from our most brilliant minds. Mr. Buffett, over to you.

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  1. Jim Thogersen | November 26, 2012

    A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses …

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