Tuesday, August 16, 2011

Buffett Is At It Again

Warren Buffett, legendary stock investor, penned an op-ed in the New Your Times in August once again illustrating how brilliance in one field not only does not translate into another, but may actually be an obstacle to understanding anything else. Maybe the bubble created by the yes men surrounding wealthy individuals contributes to it, or possibly it is because of the blinding ego success often creates. Whatever it is, this guy is way out there.

Buffett's first notable "contribution" to tax reform ideas was during his short tenure as the top financial adviser to Arnold Schwarzenegger's first gubernatorial campaign. Buffet advocated raising property taxes in California, reasoning that his house in Malibu (worth 20 million dollars) had a much lower tax rate (as a percentage of the home's value) than his $500,000 home in Nebraska. Think about what he said. The disparity in tax rates should automatically be adjusted in favor of the higher one, not the lower. Why? I don't know. Secondly, if anyone cared to look at the overall tax burden in California versus Nebraska they would find California tremendously higher, even though this one particular tax was lower. Apparently he thinks the disparity should be greater. Of course that exchange with the press ended Buffets career as a political financial adviser. Let's hope his role with Obama ends just as abruptly.

Here he is weighing in on federal tax rates. He objects to the 15% capital gains and dividend tax rate, proposing high income people pay a higher rate. He has made silly arguments in the past about this (claiming his secretary pays a higher rate than he does.) To address this and his foolishness in the NYT  I will give you some simple facts and common sense. Most of the revenue paid to the government is redistributive, not productive, whereas most money invested by wealthy individuals is very productive (wealth creation and jobs.)  A zero capital gains rate would produce more wealth for every level of society than even the present 15% rate. Taxes generated from more jobs and increased economic activity would more than make up for the revenue "loss" from zeroing out cap gains, although that gives rise to the question of if more government revenue/ power is a good thing. These increases occurred every time capital gains taxes were lowered, even under Democratic presidents like Kennedy and Clinton. Capital formation and risk taking is an absolute necessity for wealth creation, and a zero cap gains tax rate would encourage more of it.

In the article Buffett says his blended average tax rate (total taxes paid divided by total income) was 17%, and that his employees paid tax rates of up to 33%. But he is comparing their top rate (much higher than their blended average) with his blended average. His 17% rate is because so much of his income comes from capital gains (15% rate,) but he ignores the fact that his gains had already paid a 35% corporate tax rate, so in effect he paid 50%. He also fails to point out that half of Americans pay no taxes, that the top 5% of American earners pay 38% of the taxes, the top 20% pay over 80% of the taxes, and far more important, every time taxes were lowered on the rich (and everyone), revenue to the government went up, and the rich paid a higher percentage of total revenue.

Successful investing promotes social benefits even more than charity. Capitalism is a purely democratic process. If a business does not provide you with what you want at a better value than it's competitors it ceases to exist. It can only survive by meeting your needs, and you get to vote daily with your dollars. We need a legal framework for business to operate freely, but we should not have government in the business of business. The social good that Buffett's business's have done is being undermined by his donations to the Gates Foundation, a leftist charity with all the wrong ideas. I am not suggesting that everything they do is bad, in fact most of it is very good. But if history is any guide, a charity like this, founded on failed ideas, eventually does tremendous harm to the social fabric (see Pew and Ford Foundations for details.)

There is one school of thought that says Buffet advocates only for Buffet. The cry for higher cap gain and dividend taxes would hardly affect him at all. He has about $500 million in a portfolio from which he draws money to live. Higher taxes would affect this, but this represents just two percent of his wealth. The other 98 percent, about $50 billion, is in Berkshire stock and he never sells a share of that. So with all his grandiose proclamations, he is volunteering yo increase his taxes by an infinitesimal amount.   

Is it possible that people like Buffet, New York Mayor Michael Bloomberg, General Electrics Jeffery Immelt, and other limousine liberals know that since conservatives respect private property,  none of their property is at risk from the right, but since liberals seem to thrive on confiscating other peoples wealth, these wealthy liberals are intimidated into supporting failed policy ideas? I can't believe they are so foolish as to believe what they advocate is good for anyone, and neither do I believe they are a party to some grand evil conspiracy. Perhaps I will just have to accept the mystery.


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