Tuesday, October 30, 2007

Kindly Mr. Buffet's Wild Tale

It's happened again, this time with the "Oracle of Omaha". What is "it"? Why we're talking old guys who get rich, and then upon developing a Messiah Complex, deem it appropriate to tell the rest of us what is good for us.

To Warren, as with all these other self important boobs I say, stop. Please.

Warren's version of this all too common phenomena apparently has to do with our tax system in the United States. According to the Oracle, it simply isn't a fair system. How has he come to this great decision? Why he has determined that he isn't paying enough in taxes, or more specifically, that he isn't paying as high a percentage as his staff.

Admittedly, on first blush this sounds unfair. The Oracle is paid around $7.5 million in federal taxes on his $43 million in income, but this only represented 17.5% whereas his secretary ponied up a cool 30% of his/her $60,000 income. Can this be correct?

Well, yes I suppose (we'll get to that secretary's dubious 30% figure in a moment) but we really need to look behind the numbers to understand what is going on here. Mr. Buffet, the kindly investor from Omaha, who just happened to amass a $50B fortune without ever hurting a flea, pays a lower tax rate for a reason. You see his income, because he is an investor, is primarily made up of dividends and long-term capital gains. Because taxes are a significant inefficiency in the capital markets our tax policy is designed to limit their impact on individual's buy/sell decisions, so that market activity more closely relates to the underlying economics thereby pricing securities based on their financial fundamentals. In other words taxing capital market activity at lower rates is generally regarded as sound economic policy

Of course this policy when discussed in regard to billionaire financiers sounds a bit unfair, but if we're to look at individuals and the tax rate's broad impact we need to expand our view a bit further down the food chain. For every billionaire that kindly Mr. Buffet can point to, I can identify 1,000 or more retirees who live off of the income from their investment portfolios. I'm not going to claim these folks are poor, but their portfolios represent a lifetime of prudent financial management and provide a means of living for them that keeps their financial security separate from governmental support. Tax these folks more and they'll have less to pay for health care and day to day living expenses. Without this self funded safety net, many more will become reliant on the creaking finances of Medicare, Medicaid, and the Social Security System.

Still, I suppose Mr. Buffet's conscience must be assuaged.

And this is where I get a little hacked off. First, Mr. Buffet is comparing his investment driven income with his secretary's (nice anachronistic title there Mr. Buffet!) wage driven income. Why? Because, quite obviously, Mr. Buffet has not seen to providing this person with a similarly lucrative investment portfolio that would earn money and be taxed at the lower rates! Why he can't peel off one billion of his fifty two billion dollars in assets and spread it around the office is beyond me. Heck, I bet these folks would agree to work for the investment income they'd earn and give up their wages if it would encourage Mr. Buffet to share a bit!

Of course it's possible that Mr. Buffet has done this in the form of tax deferred 401k's and just neglected to mention this fact. If this is the case then these folks won't have to pay any tax on their investment earnings for as long as they don't liquidate the funds. Wouldn't a fair analysis of applicable tax rates include this tax deferred income in their effective tax rate? Of course it would.

And what of that 30% tax on $60k. To be candid, I'm a bit dubious. I looked up the federal tax schedules for 2006 and found the following:

Schedule X — Single

If taxable income is over-- But not over-- The tax is:
$0 $7,550 10% of the amount over $0
$7,550 $30,650 $755 plus 15% of the amount over 7,550
$30,650 $74,200 $4,220.00 plus 25% of the amount over 30,650
$74,200 $154,800 $15,107.50 plus 28% of the amount over 74,200
$154,800 $336,550 $37,675.50 plus 33% of the amount over 154,800
$336,550 no limit $97,653.00 plus 35% of the amount over 336,550

Now, if I follow these instructions (like kindly Mr. Buffet I'm not using an accountant here) I get a tax on $60k of income of $11,557.5 which represents an effective tax rate of 19%, not the 30% claimed by Mr. Buffet. Remember too, that the $60,000 in income did not get netted by any deductions for home mortgages, real estate tax or even the standard deductions. Had we considered these items, that secretary might have had a lower rate than her billionaire boss.

So Mr. Buffet has a problem, and I don't just mean with the facts. The problem is that he thinks he ought to be paying more tax. One question Mr. Buffet: If you really mean it, why not write the check?

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