I’ve long admired Warren Buffett and still do. I’ve heard him tell many times how his secretary pays a larger percentage of her small income on taxes than he pays on his large income. Sometimes he elaborates; sometimes he doesn’t. When he doesn’t, he does a great disservice to the cause of financial literacy in this country and, inadvertently, I’m sure, stokes the embers of class resentment. This is not a good time to be doing that.
I was traveling and didn’t see his August 15 New York Times opinion piece on that topic, but I saw and heard lots of references to it. I don’t think any of them got to the heart of the matter. Instead, it was, as usual, all about the unfairness of rich people paying a smaller share than poor people. I’m sure that fed and enflamed the preconceptions of lots of well-meaning, but uninformed voters, whose emotions are already running ahead of the facts.
I tracked down the piece to see if it was as bad as its superficial coverage suggested. It wasn’t, but you wouldn’t know that from the title, Stop Coddling the Super-Rich. The highlighted phrase was “Billionaires like me should pay more taxes.” I’m sure most taxpayers would agree with that, including those who don’t actually pay any federal income taxes because their incomes are below the taxable threshold.
The point—the heart of the matter—is that most of Mr. Buffett’s income consists of dividends and long-term capital gains that are currently taxed at a 15 percent rate. This is true of many money managers whose “carried interest” is taxed at that favorable rate. Somehow that doesn’t seem fair. But the picture clouds once you consider that this is not the first time that income is taxed. The corporation was first taxed on it, possibly at the high marginal rate of 35 percent, the same as the highest earned-income marginal rate on individuals. Thirty-five plus 15 add up to a 50 percent total. Thirty-five plus another 35, which Mr. Buffett presumably would suggest would add up to a 70 percent total—a pretty hefty tax on capital.
Mr. Buffet did not demagogue in his piece as one would assume based on its reporting. He gave a fair analysis of the issues involved. My experience tells me that he probably didn’t choose the title put on his piece by the editors. But I’m guessing serious damage was done by the title and the short-hand, slip-shod coverage of his piece in the popular press.
Frankly, I don’t have a firm position on the issue of carried interest or the taxation of professional investors. It still seems unfair even when you recognize the logic of it. The lead editorial in the Wall Street Journal had a good analysis of various aspects of the issue on August 17, which, as one would expect, is just a predictable as the New York Times position.
Perhaps they should leave the favorable treatment as it is up to a point, but then have some minimum tax that must be paid if gross income is above some level. They might call it an “alternative minimum tax.” But, wait! I think we tried that already, and it didn’t work out so well.