Taxpayers Should Be Leery Of Warren Buffett's Faux Noblesse Oblige

Billionaire Warren Buffett‘s call last week for higher capital gains and income tax rates on those with incomes above $1 million a year may appear to be an act of noblesse oblige.  In reality, Buffett has betrayed his duty to those less fortunate by lending his name and prestige to an ignoble myth – that taxes targeted at the rich do not affect the middle-class and poor.  Nothing could be further from the truth.

8 images Photos: How To Invest Like Warren Buffett

What makes the tax-the-rich myth so insidious is that Buffett most likely would not suffer any change in his standard of living if his taxes were doubled to $14 million a year.  With an annual income of approximately $40 million, he can pay more for just about anything he chooses.

So, let’s stipulate that Buffett can “afford” to pay more taxes.  But this statement ignores the more important question:  How would the middle class and poor be affected by the higher tax rates that Buffett advocates.  Let’s consider what happens when the rich pay more in taxes.  With less disposable income:

• They could reduce their consumption.  Although unlikely, this would mean a loss of sales to one or more companies, leading to layoffs;
• Or, they could make fewer investments. But that means some company or entrepreneur will be deprived of much needed capital, and would be unable to expand their business and increase employment;
• Or they could give less to charity.  But then those in need will have less sustenance, or cultural and social institutions which Mr. Buffet and other rich philanthropists support would have to cut back on their missions and perhaps employment.

No matter how you look at it, when Buffett – or anyone else pays more taxes to the government – there is an offsetting reduction in the amount of money and employment in the private sector. Although the rich may not notice the difference, the middle-class and poor pay the price.

How high the potential price may be is illustrated by the 1990 budget deal.  To raise revenue, the Democratic Congress targeted the rich with a luxury tax on such expensive goods as boats that sold for more than $100,000, jewelry and expensive cars. But, the actual consequences were born by several hundred thousand middle-class people who lost their jobs and businesses when the demand for these now-higher-tax goods fell sharply – by 70% in the case of luxury boats.

Three years later, Senate Majority Leader and liberal democrat George Mitchell led the successful effort to repeal this tax because thousands of his middle-class constituents in Maine had suffered disproportionately from the collapse in the boating industry.  Moreover, the lost revenue from the incomes that were no longer earned, and the increased government transfer payments to the now unemployed meant the luxury tax was a money loser for the government as well.  Everyone lost except the rich, who simply bought their yachts outside the U.S.

The consequences of higher capital gains tax rates that Mr. Buffett advocates would be even worse. A capital gains tax is not levied on wealth, but on the activity of creating wealth by investing now in exchange for anticipated gains in the future.  To claim, as Mr. Buffett does, that “People invest to make money, and potential taxes have never scared them off,” is disingenuous, if not silly.  People invest to make money after tax:  the higher the tax rate, the fewer investment opportunities that can produce an acceptable after-tax return. The result is fewer investments, less wealth creation, less opportunity, fewer jobs, and more poverty.
In addition, wealthy individuals avoid this tax by either matching gains with losses, or simply not selling an asset whose value has gone up.  When the capital gains tax rate was raised in the late 1980s, capital gains tax revenues went down as asset prices languished and fewer assets were sold. Conversely, when the capital gains tax rate was reduced under President Clinton, investments in new businesses increased, economic growth accelerated, unemployment fell, the stock market surged, and capital gains and income tax revenues rose to record levels, contributing to the significant budget surpluses of the late 1990s.

8 images Photos: How To Invest Like Warren Buffett

Buffett’s own actions suggest that he knows all this. He could lead by doing – and simply write a check to the federal government in an amount over and above what he has to pay in taxes.  But, in fact, he has done just the opposite.  Mr. Buffett has sheltered the bulk of his fortune from the federal death tax by putting it into several foundations that, over time, will give the money away.

In a 2007 CNBC interview he provided the following explanation:   “I think that on balance the Gates Foundation, my daughter’s foundation, my two sons’ foundations will do a better job with lower administrative costs and better selection of beneficiaries than the government.” (Emphasis added.)
Exactly.

Here’s a suggestion.  If Buffett truly wants to do more for the country, he could make the following offer to the Obama administration and Congress.  He and his wealthy friends will use their combined resources and talents to create a jobs training program that over time would replace 47 federal programs now provided by 9 federal agencies, many of which overlap and only a handful of which have assessed their outcomes. In exchange, the federal government would have to end these programs in proportion to the number of individuals served by the Buffet initiative.

The potential savings would be $18 billion a year – or in budget speak, more than $200 billion over the next 10 years.  Those savings would be far greater than any actual tax revenues realized by taxes targeted at the rich.  More important, they would actually help those seeking work to acquire the necessary skills and become employed.  By so doing, Buffet would fulfill his noble calling to contribute beyond the running of a successful business to our society but do so by affirming his faith in the private sector and increasing the liberty of the American people.

 

CNBC Survey: Feeling Better, but Still Leery About the Economy 

The American public’s attitude toward the economy is broadly on the upswing, according to the latest CNBC All-America Economic Survey, but details show deep-seated concerns that present problems for both political parties in the presidential election.

The poll of 836 Americans across the country found that 36 percent believe the economy will improve over the next year, a nearly 10-point gain from November, and the highest level of optimism since 2010.

Americans expect the biggest gains in their paychecks in nearly four years. They are also more upbeat about their homes: 22 percent expect their home’s value to increase in the next year, up from 15 percent last quarter and the highest level since December 2010.

In other findings of the survey:
• More than 51 percent of the public own an Apple [AAPL  599.41    6.89  (+1.16%)   ] product, with one in three owning more than one. The median American household has 1.6 Apple products.

• Gold [GCCV1  1619.70    -2.10  (-0.13%)   ] is seen by the American public as the best investment right now, chosen by 37 percent of respondents. Real estate is a distant second with 24 percent followed by stocks at 19 percent.

• Some 65 percent of the public think it is better to own a home than to rent. That’s a sharp drop from 1996 when, asked by Fannie Mae, 90 percent of the public thought it was better to own.

• And 73 percent of Americans still believe owning a home is an essential part of the American dream, unchanged from the survey’s findings a year ago.

• More than half of Americans say the government should not intervene in the housing market to raise home values.

• President Obama gets a bit more of the blame for the recession than he did in October 2010, with 17 percent of the public saying he’s mostly responsible, up from 13 percent. Both the president and congressional Republicans took more of the blame for the rise in the budget deficit than when CNBC last asked the question in October 2010. 

• In a warning signs for the president, independents are more likely to blame the president for economic problems such as unemployment and the recession than they were in 2010.

• Americans on average believe the government should not bail out the housing market; the Bush tax cut should not be extended and that millionaires should pay a 31 percent tax rate. 

Despite improvement in key measures in the All-America Economic Survey, most remain far below their pre-recession levels. 

For example, while 22 percent believe their home values will increase now, the figure was above 50 percent in March 2007. While Americans believe their wages on average will rise by 2.3 percent in the next year, that figure was 7.3 percent five years ago.

Significantly for President Barack Obama, only 28 percent of the public say they are better off now than they were four years ago, the lowest percentage recorded in a presidential election year going back to 1992. 

In no demographic group — including Democrats, the wealthy or those expecting higher wages — do more than half of respondents say they are better off now. When President George H.W. Bush lost re-election in 1992, 37 percent of the public said they were better off under his presidency. 

At least part of the underlying national economic malaise seems clearly to be tied to higher gasoline prices. The survey shows that 28 percent of Americans say high gasoline prices is their biggest worry, ranking it equal with concern over health care costs. The cost of retirement was a distant third at 14 percent. 

A third of the public believes that gasoline prices will remain elevated for longer than four years and expectations for price increases of everyday goods are at their highest level in a year, an inflationary concern that echoes survey from last year during a similar gasoline price spike. 

Overall, the survey presents a picture of an economy that is clawing its way back from the depths of the recession, but is far from out of the hole. For every positive statistic there is at least one counterpoint. For example, 29 percent of the public say their home is worth less than what they paid for it, up from 26 percent a year ago. 

The improvement does not appear to be broad-based. For example, when it comes to wage gains, those earning $75,000 or more expect their paychecks to rise by 4.1 percent in the next year. Those earning less than $75,000 expect an increase of just 1.1 percent. 

In another example, 41 percent of Americans earning more than $100,000 annually expect the economy to improve, but just 32 percent of those earning less than $30,000 share that optimism. Still, during the economy’s worst days, there was not even much optimism among the wealthy. 

As the All-America Economic Survey has uniquely shown over the past several years, housing remains the key to the economic outlook. No group in the survey is more optimistic than the cross-section of Americans who believe their home prices will go up; no group is more pessimistic on the economy than those predicting their home prices will fall.