Obama's Warren Buffet? Tax

  1. russ_watters

    Staff: Mentor

    Obama's "Warren Buffet? Tax"

    Some analysis from CNN (video):

    http://www.cnn.com/video/#/video/bestoftv/2011/09/19/current-tax-structure-fair-to-all.cnn?hpt=hp_t2

    We've had a number of discussions about Warren Buffett's 'my secretary pays more in taxes than me' claim and as far as I can tell, we always at least agreed about what he was talking about: he's combining the federal income tax with the payroll tax. But the analysis from CNN above shows an oversimplified graphic of a person making $50K a year and being in the 25% bracket vs a person who makes $1 million a year via capital gains and pays 15% -- and these are compared as if the person making $50K actually pays 25% in taxes instead of that just being the marginal rate and the average rate being much less (perhaps even zero after deductions).

    Clearly, the graphic is wrong in its apples to oranges comparison, but for people who make $75-$100k who don't have mortgages or kids, it may be true that they pay a higher than 15% average rate.

    So what does this proposal by Obama actually mean? First, is he really referring to just the federal income tax or the mixed-together income and payroll tax rate we always assumed Buffett was talking about? And second, how exactly does he propose to fix this inequity? By eliminating the payroll tax cap (income >$105k doesn't get payroll-taxed)? By increasing the capital gains tax rate? By hiking the upper marginal rate? Well apparently (according to the WH press secretary in the video), he's not even going to tell us what he's talking about much less how to do it: it is up to Congress to figure it out. We've also had threads about Obama's lack of coherent plans, but wow. :bugeye:
     
    Last edited: Sep 19, 2011
  2. jcsd
  3. Re: Obama's "Warren Buffet? Tax"

    I had a long discussion over the weekend regarding the "fairness" aspects of taxation. It seems the most popular argument at this point is that working people (somehow) pay a higher percentage of taxes than business owners because of payroll deductions. In response - my argument (as a small business person) is that's CRAP for 2 reasons; 1.) the employer pays matching taxes, and 2.) the Medicare, Social Security, and Unemployment components all benefit the employee. Further, the employer pays workers comp.
     
  4. Re: Obama's "Warren Buffet? Tax"

    As for the Buffet tax - before anyone raises the capital gains rates somebody better consider the consequences to markets and investors - 401K's, pension funds, and institutional investments (insurance). How fair will it be to a teacher if their pension fund loses 50% due to an end of the year panic-driven sell-off?
     
  5. Re: Obama's "Warren Buffet? Tax"

    I thought the main way he was going to increase revenue was by limiting deductions so everyone making over $1mill had an effective tax rate of at least a certain percentage - that's the so called 'Buffet Tax' as far as I understand it.
     
  6. Vanadium 50

    Vanadium 50 18,136
    Staff Emeritus
    Science Advisor
    Education Advisor

    Re: Obama's "Warren Buffet? Tax"

    David Brooks made an interesting comment today:

     
  7. Re: Obama's "Warren Buffet? Tax"

    I think raising the capital gains tax rate probably could raise revenues, but you would want to probably do that only under two circumstances:

    1) A guarantee that the government will not just increase spending (or at least not beyond what it should, as it probably has to increase it some year-after-year as the economy grows) and instead, if not working to cut spending, at least try to keep it controlled

    2) Do it during a healthy economy, not a weak economy

    The capital gains tax is tricky, because initially, raising it tends to reduce revenues and lowering it tends to increase revenues. However, long-term, lowering it will tend to reduce revenues, and raising it can increase revenues.

    The other thing I am wondering is if Buffett is really talking about dividend taxes when he talks about his income. His actual income is only around $100K a year, the majority of his income is from the dividends his company, Berkshire-Hathaway, pays out each year, or capital gains (I would think most from dividends though). If so, this is a bit misleading, because a corporation is already taxed at the corporate tax rate (its profits are taxed at the corporate tax rate; the top marginal corporate tax rate is 35%). For owners of a company, the shareholders, if they are paid via dividends, then after the corporation that they own pays the corporate tax rate, they the shareholders then must pay a dividend tax rate. The dividend tax rate used to be tied to the income tax rate, but now it is tied to the long-term capital gains tax rate, which is 15% (0% for people in the bottom ordinary income tax brackets).

    In addition, corporations also must pay taxes on their own investment income (corporations invest in the markets and make money from the dividends paid by other corporations and so forth as well). When combined with the corporate tax rate and the dividend tax that shareholders must pay on distributed dividends, this amounts to a triple tax. While investors have their dividend tax tied to the long-term capital gains tax right now (and pre-Bush tax cuts dividend taxes were tied to the marginal income tax rates), the tax on a corporation's dividend income is tied to the corporate tax rate (the highest marginal rate being 39% (the corporate tax rates are weird in that the marginal rates go all the way up to 39% for smaller corps, then down again to 35% for the bigger ones)). Because of all this and how it amounts essentially to a triple tax for the shareholder, the law exempts 70% of the corporation's dividend income from being taxed, so the corporation only has to pay corporate tax on 30% of its dividend income.

    So when Warren Buffett says he is paying "15%," what he's really paying as an owner of the company is the profits of the corporation taxed at the corporate tax rate, plus 30% of the corporation's dividend income taxed at the corporate tax rate, plus the 15% tax on the dividends then paid out to the shareholders (that 15% will align with the marginal income tax rates if/when the Bush tax cuts expire).

    So unless Buffett's company utilizes all the loopholes to get out of paying corporate taxes as GE does (this would interesting to check), it's a bit mis-leading of him to say he pays at a 15% rate. He pays at more than that. If his company uses no loopholes, it will pay a corporate tax rate on its profits of 35%, a rate of 35% of 30% on its dividend income if high enough (which I think it is), and then the 15% on the dividends it pays to Buffett.

    If the Bush tax cuts expire, the long-term capital gains tax rate will go back to 20%, the highest marginal income tax rate will go up to 39.6%, and dividend tax rates will re-align with the marginal income tax rates.
     
  8. russ_watters

    Staff: Mentor

    Hmm. Hadn't considered that. The CNN article I linked in the other thread implied it was going to be a separate thing, different from the deduction reductions and rate increases he was proposing.
     
  9. Re: Obama's "Warren Buffet? Tax"

    As usual - IMO - Obama is fuzzy and gray on the details and the math. NPR seems to think the increases will be in capital gains.
    http://www.npr.org/2011/09/19/140599307/does-buffett-rule-add-up-for-obama-deficit-plan

    "The Bush-era tax cuts lowered the top-level income tax rate, and they also lowered the tax on capital gains, which includes sales of assets like stocks or businesses. That rate is now 15 percent.

    An analysis of IRS statistics shows that households earning near the national average — in the $40,000 to $50,000 range — get the vast majority of their income from wages. Those who bring in more than $1 million a year get only about one-third of their income from wages.

    Williams says the rich tend to get more of their money from capital gains and dividends.

    "The average tax rate at the very top end is about 29 percent at the federal level, but there are a lot of people like Warren Buffett who pay a lot lower tax rate on their total income than do working Americans," Williams says.

    Not Enough For The Deficit

    But Williams points out that more heavily taxing CEOs, celebrities, sports stars and hedge fund managers isn't the answer to the nation's deficit woes — not even close.

    He put together an estimate based on a tax rate that's so high it probably would never happen — 50 percent — and says that if you taxed all income above $1 million at that rate, you'd only get 10 percent of what most experts say is needed to tackle the nation's deficit.

    Alan Viard, a resident scholar at the American Enterprise Institute, says the president is making a mistake by putting a focus on taxing millionaires."
     
  10. russ_watters

    Staff: Mentor

    Re: Obama's "Warren Buffet? Tax"

    http://www.usatoday.com/money/perfi/taxes/story/2011-09-20/buffett-tax-millionaires/50480226/1

    That's quite a slam coming from a news outlet that isn't Fox. Now unlike CNN, USA Today's analysis includes the payroll tax. The bottom line coming from that starting assumption is most millionaires pay a higher rate than most of those in the middle class - and by quite a wide margin.
    Buffet was also talking about income+payroll taxes, since he gave tax rates for his employees that were higher than the marginal rate:
    http://money.cnn.com/2011/08/15/news/economy/buffett_taxes/index.htm

    So why the discrepancy? Two reasons, both of which should be pretty obvious:

    1. Buffett isn't the typical millionaire. He's much, much richer.
    2. Buffett's staff isn't made up of middle class Americans, it's made up of wealthy Americans.

    Apparently, CNN didn't get this. But the more important question is still open: Does Obama? Well if he does, he's not telling...
     
    Last edited: Sep 20, 2011
  11. Char. Limit

    Char. Limit 1,986
    Gold Member

    Re: Obama's "Warren Buffet? Tax"

    Can we even simplify the tax code at this point? It doesn't seem like anyone has the political capital to do it.
     
  12. Re: Obama's "Warren Buffet? Tax"

    I think I read somewhere that there was a simplified book on the US Tax code or something, and it was more than a thousand pages long.
     
  13. Re: Obama's "Warren Buffet? Tax"

    Did President Obama misunderstand Warren Buffet? my bold

    http://abcnews.go.com/blogs/politic...-buffet-rule-should-apply-only-to-ultra-rich/

    "Billionaire investment tycoon Warren Buffett, who has become the unwitting mascot of President Obama’s deficit reduction plan, is less than thrilled with one of the plan’s main provisions: the millionaires’ tax, or as it’s come to be known, the ”Buffett Rule.”
    In an interview with Bloomberg Television today, Buffett said he did not support the president’s plan to increase taxes on people who earn more than $1 million per year.
    “It isn’t [my idea] to have the rich pay more taxes. It’s to have the ultra-rich pay more,” he said, according to The Hill. “What I’m talking about would probably apply to 50,000 people in the country.”

    Later on CNBC Buffett said if it were up to him, people earning $50 million would not see any tax increases, only people who “make a lot of money and pay a very low tax rate, like me.” Buffett did not put on a number on what he considers a “very high income.”"
     
  14. Re: Obama's "Warren Buffet? Tax"

    I think we all misunderstood Buffett. 50 million a year (to me) is ultra-rich.
     
  15. Re: Obama's "Warren Buffet? Tax"

    Worse yet, Buffet said the tax increase would impact 50,000 people - the WSJ says only 72 people qualified in 2009.

    http://blogs.wsj.com/wealth/2010/11/05/how-many-americans-earn-50-million-a-year/
    "There were 72 American tax filers earning more than $50 million in 2009, down from 151 in 2007. The total income of those top filers also fell by more than half. In 2007, the $50 million-plus club’s total earnings were $14.1 billion. The club earned just $6 billion last year."

    If these people paid a 99.9% tax rate - the additional revenue wouldn't pay for President Obama's green energy "investments" - such as Solyndra.
     
  16. Re: Obama's "Warren Buffet? Tax"

    It seems Harry Reid doesn't care what Buffet said - he's drawing his own line in the sand - and citing the TEA Party as in favor of his plan.:rolleyes:

    http://news.yahoo.com/reid-even-tea-party-supports-5-percent-tax-171606362.html

    "“More than 50 percent of the tea party and about 75 percent of other people in America agree that we need to do something about this so we’re going to propose to pay for this important jobs legislation by asking people who make more than a million dollars a year to pay 5 percent more to fund job creation to ensure this country’s economic success,” Reid said at the Capitol on Wednesday. “Independents, Democrats and Republicans and even the tea party agree it’s time for millionaires and billionaires to pay their fair share of taxes.”"
     
  17. Re: Obama's "Warren Buffet? Tax"

    Methinks Harry's nose is growing a tad long at that one - I highly doubt the Tea Party supports any kind of tax increase (though I could be wrong - haven't seen any polls one way or the other).
     
  18. Re: Obama's "Warren Buffet? Tax"

    I buy the argument that corporations are taxed twice argument. If someone incorporates their company as a private company and then pays themselves dividends then they should pay the same amount of tax as if it was a private company paying them profits directly as salary.

    I guess the view though is that shareholders aren't relay working for the money they earn. I think the fairest way to handle things would be not to distinguish between regular income dividend income and capital gains income but allow the person to deduct from the income any taxes the company already paid.

    Well, in some states the total corporate tax is 35% and applying a 15% dividend or capital gains tax on this would give a combined tax of 44.75%. which is close to the top tax bracket of 35% some corporations are taxed as low as 15% in the untied states and companies do not have to pay tax on capital gains within the company. The only capital gains a company pays are on investments it has in other companies which it has a less then 10% stake in. In other words if you sallow up companies then up you don't have to pay capital gains on them.

    Now, if someone invested in a very high growth company the corporate taxes could be low or non existent. In other words, if the company borrows a lot of money, it can write of it's interest expenses from its earnings and pay less corporate tax. In such cases then the argument of the company already pays 35% tax wouldn't apply.
    http://en.wikipedia.org/wiki/Corporate_tax
    http://en.wikipedia.org/wiki/Income_tax_in_the_United_States
    http://en.wikipedia.org/wiki/Capital_gains_tax#Corporate_notes
     
  19. Re: Obama's "Warren Buffet? Tax"

    A high growth company may experience a negative cash flow - high growth doesn't necessarily indicate earnings. However, the stock price may increase in response to the expectations of future earnings. If the company requires debt to fund basic operations - the stock price may not rise.
     
  20. Re: Obama's "Warren Buffet? Tax"

    What do you think a reasonable way to tax companies with high growth and low earnings?

    My proposal would be to not distinguish the tax for individuals on capital gains and income and simply let them write off any tax the company already paid.
     
  21. Re: Obama's "Warren Buffet? Tax"

    First, I'm not certain of the business structure you have in mind (closely held private corp/LLC, a quasi-public corp, a public corp, etc.) - the tax strategy might vary by type.

    A high growth public company may have a wide distribution of shares, no earnings, cash from an IPO, and an increasing share value. If the individual shareholder sells their shares at a profit - they will pay taxes on the capital gains - there are no taxes paid by the corporation on this transaction.
     
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