“Buffett Tax” Misleading

A Photo of President Obama Putting the Presidential Medal of Freedom on Warren Buffet in 2010

A Sept 18 Bloomberg News article is excerpted below. It discusses President Obama’s plan to call for a “Buffett” tax on millionaires.

Mega rich investor Warren Buffett has repeatedly said that he pays a lower tax rate than the other employees of his office and that this is not right.

This is deceptive, however, because Buffett pays a higher rate on this earned income. What makes his so-called overall tax rate lower is that he mostly pays tax on long term capital gains which are currently taxed at 15%.

As the Bloomberg story explains, Buffet is in effect calling for a higher tax on long term capital gains, not on rich people per se. This being the case, why doesn’t he say so directly? Why is he couching his recommendation in political “spin”.

The current  tax on long term capital gains is where it is because many  economists believe this rate encourages investment, which the economy needs.  Buffet does not address that argument at all.

We also need to understand that capital gains are not actually “income” at all. If I sell common stock shares, I am exchanging one asset (part ownership of a company) for another (cash). No true income has been created. A tax on capital gains is therefore a transaction tax, not an income tax, and to mix it up with income taxes as Buffets does is intentionally misleading.

We get enough misleading rhetoric from politicians. We don’t need it more of it from economists and business leaders.

The “Buffet” tax that President Obama calls for will not of course be a proposed tax on capital gains. It will instead be a new minimum tax on high income individuals and small businesses. This represents a back door approach to clawing back not only the current tax rate on capital gains but also the current charitable deduction. The net effect will be to leave less money in the hands of potential employers and charities and more in the hands of government. Does sound likely to make thing better for the average American, much less unemployed or impoverished Americans? No. But what is actually  being proposed is obscured by a cloud of spin.

Click here for the article in Bloomberg.

Hunter Lewis 9-19-2011