Warren Buffett Thinks He's Not Paying Enough in Taxes
Chuck Sheketoff
Learn about taxes from a guy who, according to one observer, is so rich he can hire Bill Gates to give away his money.
Note that not one member of the Fortune 400 has taken him up on his challenge.
Click the image or the link to watch video from October 29. 2007.
Buffet thinks he's not paying enough in taxes
Brian Williams: (There's) a looming tax fight in Congress. The Democrats want to revamp the tax structure and get rid of some of the loopholes that the wealthy and corporations enjoy to pay less taxes. And it may surprise you to learn that one of the universally accepted richest guys in the world, Warren Buffett, feels he pays too little by percentage. This interesting campaign of his was unveiled in a recent conversation with Tom Brokaw. He's here with us in the studio with more on this. This is fascinating.Tom Brokaw: It is. And it is well known that Warren Buffett is a contrary billionaire. Unlike most of his fellow billionaires, he believes they should be paying a higher tax rate. And to prove his point, he decided to compare what he pays as a tax rate with what the people who work for him pay.
(Taped report begins)
Tom: Is this what you had in mind when you were 17, Warren?
Warren: Well, in a very, very, very general way ...
Tom: It is no secret that Warren Buffett, the Oracle of Omaha, and the world's third richest man, doesn't have a great deal in common with his fellow billionaires.
Amidst the sports memorabilia and the modest office that is the nerve center of his empire, Buffett sees a fundamental injustice that he says touches all Americans.
Warren: The taxation system has tilted toward the rich and away from the middle class in the last 10 years. It's dramatic and I don't think it's appreciated, and I think it should be addressed.
Tom: You've gone very public with this.
Warren: Right.
Tom: You've talked about in your own office, for example, you pay a much lower tax rate with all of your wealth than, say, a receptionist does.
Warren: That's exactly right, Tom, and I think the only way to do it is with specifics. In our office 15 people cooperated in a survey, out of 18, I didn't make anybody do it. And my total taxes paid, payroll taxes plus income tax, mine came to 17.7 percent. The average for the office was 32.9 percent. There wasn't anybody in the office, from the receptionist on, who paid a lower tax rate. And I have no tax planning, I don't have an accountant, I don't have tax shelters. I just follow what the U.S. Congress tells me to do.
Tom: Buffett is particularly critical of the lower tax rates paid by hedge fund managers who reap millions of dollars from the investments made by others.
Warren: I do know that the hedge fund operators made a record amount lobbying in recent months, so they give money to the political campaigns, and, who represents the cleaning lady?
Tom: The hedge fund operators, and the U.S. Chamber of Commerce and others have said it's going too far. In fact, these hedge fund operators have created enormous wealth for the little guy as well, pension funds and other people who participate in those private equity partnerships.
Warren: They say they work hard, and in the process of working hard, they make other people money. And that's true of a whole bunch of people in the world, but that doesn't entitle them to a preferential tax rate.
Tom to Buffett's receptionist: Now Warren's taking care of your kids. He's worrying about your tax rate, you know (laughter) ...
Tom: Even some of Buffett's own employees had no idea what kind of a rate they were paying for taxes until he told them.
Tom to Buffett employee: You know, at the end of this year, you're going to pay a higher tax rate, percentage of your income, than this guy will.
Employee: Yes ... I've known that since I started.
Tom: He'll have a little more left over at the end of the year than you will probably.
Employee: It's not right (laughs.)
Tom to Warren: But here's your first tax return.
Warren: Right, that was when I was 13. I owed seven dollars.
Tom: Buffett doesn't hold out much hope that Congress will pass his favorite idea, a progressive consumption tax. But that does not mean he's going to stop speaking out. After all, his employees now are counting on him.
Tom to employee: If you could rewrite the rules, what would you do?
Employee: (Laughs.) I'd first would ask Warren how he would rewrite them.
Tom on set: And to further prove his point, Buffett has challenged .. he's offered a million dollars to charity to any of the Forbes 400 richest people who can show on average that they pay a higher tax rate than their secretaries pay, but so far, Brian, he's had no takers.
Brian: He believes he's paying too low a rate. Does that also mean, by extension, he feels he should be paying more to the Federal government?
Tom: He thinks it's just an unjustifiable system because the payroll tax is the tax most of the people pay on ordinary income and he gets the capital gains tax. He thinks a lot of that should be bumped up.
And, as for that charge that investors will stop working if they get taxed at a higher rate, he says he remembers when capital gains were 40 percent .. people didn't go home at 3 o'clock in the afternoon saying, 'I'm going to a movie. I've paid too much in taxes already.' He doesn't think it will have a big effect on the economy. Pretty controversial.
Brian: Yeah, it's a brave campaign and he can afford to launch it.
Discuss.
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7:08 p.m.
Oct 30, '07
It's been reasonably widely observed that sometime about the 1970s and accelerating into the 1980s there was a revolution in corporate management attitudes about the proper role of corporations. Whereas the big industrial manufacturers going back at least to the 1920s had at least a theoretical commitment to "corporate welfare" for their employees and some degree of civic commitment to the places they were located, the big merger mania and leveraged buyout movements were driven by the idea that companies' only responsibility was to maximize returns for their shareholders.
Another factor is the increasing shift of corporations to a national scale, detaching them from any particular locations. Think of Fred Meyer and Kroger, Meier & Frank and Macy's.
While the nominal ideal was unevenly held, often honored mostly in the breach, and devasted by the Great Depression & thus requiring both the New Deal and the right of industrial workers to organize, it nonetheless had an effect on corporate behavior. Warren Buffet it old enough that he came up in that era, and he is old enough that he can remember the much higher marginal rates that the wealthy paid on income until relatively recently.
He also appears not to be a knee-jerk anti-government ideologue, and as financier, probably understands very well why Republican borrow-and-spend-for-your-cronies-benefit while putting the middle classes into hock for two generations is worse than tax-and-spend for necessary government functions.
Possibly he also agrees with George Soros, who does not exactly want to see left-wing government, but thinks that lack of sufficiently vigorous opposition from the left to corporate power and will make capitalism soft and leads to the kind of corruption we saw in Washington between 1994 and 2006.
Oct 30, '07
I get so tired of the phrase "marginal tax rate" (not exactly "around the water cooler " language unless it is the water cooler of an economics department).
I looked it up on Wikipedia and found a paragraph discussion of marginal rates which reminded me of how much I disliked econ. class in college--not called the dismal science for nothing.
I don't see ordinary folks being convinced in any tax argument by use of such language. If people in his office were paying an average almost 33% and his tax was close to 18%, something is screwy. And as he says, talking about specifics is important.
9:45 p.m.
Oct 30, '07
You don't need a paragraph: marginal rates are what you pay after you've hit the income limit for a lower rate. So if you pay 5% up to $10,000, the marginal rate is what you pay for each dollar OVER $10K (in Oregon 9%). Boom.
Steve Novick has been telling that story at most stump speeches: Buffett pays a lower rate than his secretary. It fits in well with his committment to tax reform by equalizing rates for wealth earnings vs wage earnings--and it seems to get a chuckle out of people, to the point that I'm not sure most of them actually believe it.
I love Warren. He really should get part of the credit for the Watergate investigation by the Post; from her autobiography I learned he was a great friend to Katharine Graham in her early years running the paper, and gave her plenty of very solid financial advice. It was that confidence and able footing that made it possible for Ms. Graham and Ben Bradlee to stay firm in the face of withering administration attacks. How might have things gone without his sagacity?
Oct 30, '07
Well, I was surprised to hear that Buffett likes a progressive consumption tax. By definition, the FairTax Act of 2007 (HR 25 / S 1025) would qualify. It's:
• SIMPLE, easy to understand • EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes • FAIR, loophole free and everyone pays their share • LOW TAX RATE, achieved by broad base with no exclusions • PREDICTABLE, doesn't change, so financial planning is possible • UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty • VISIBLE, not hidden from the public in tax-inflated prices or otherwise • PRODUCTIVE, rewards, rather than penalizes, work and productivity
Its benefits are as follows:
For INDIVIDUALS: • No more tax on income - make as much as you wish • You receive your full paycheck - no more deductions • You pay the tax when you buy "at retail" - not "used" • No more double taxation (e.g. like on current Capital Gains) • Reduction of "pre-FairTaxed" retail prices by 20%-30% • Adding back 29.9% FairTax maintains current price levels • FairTax would constitute 23% portion of new prices • Every household receives a monthly check, or "pre-bate" • "Prebate" is "advance payback" for taxes payable on monthly consumption to poverty level • FairTax's "prebate" ensures progressivity, poverty protection • Finally, citizens are knowledgeable of what their tax IS • Elimination of "parasitic" Income Tax industry • NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals • Those possessing illicit forms of income will ALSO pay the FairTax • Households have more disposable income to purchase goods • Savings is bolstered with reduction of interest rates
For BUSINESSES: • Corporate income and payroll taxes revoked under FairTax • Business compensated for collecting tax at "cash register" • No more tax-related lawyers, lobbyists on company payrolls • No more embedded (hidden) income/payroll taxes in prices • Reduced costs. Competition - not tax policy - drives prices • Off-shore "tax haven" headquarters can now return to U.S • No more "favors" from politicians at expense of taxpayers • Resources go to R&D and study of competition - not taxes • Marketplace distortions eliminated for fair competition • US exports increase their share of foreign markets
For the COUNTRY: • 7% - 13% economic growth projected in the first year of the FairTax • Jobs return to the U.S. • Foreign corporations "set up shop" in the U.S. • Tax system trends are corrected to "enlarge the pie" • Larger economic "pie," means thinner tax rate "slices" • Initial 23% portion of price is pressured downward as "pie" increases • No more "closed door" tax deals by politicians and business • FairTax sets new global standard. Other countries will follow
While many who are invested in the current income tax system seek to demagog the well-researched FairTax plan, FairTax's theoretical underpinnings have been professionally reviewed, and its acceptance in the professional / academic community continues to grow.
Renown economist Laurence Kotlikoff believes that failure to enact the FairTax - choosing instead to try to "flatten" what he deems to be a non-flattenable income tax system - will eventuate into an irrevocable economic meltdown, because of the hidden aspects of the current system that make political accountability impossible. Tom Frey, of the DiVinci Institute, foresees the coming collapse of the income tax system.
It's well past time to scrap the tax code and pay for government the way that America's working men and women are paid - when something is sold.
(Permission is granted to reproduce in whole or part. - Ian)
11:13 p.m.
Oct 30, '07
That sounds like an administrative nightmare.
Oct 30, '07
How does the Fair Tax compare to Wyden's Fair Flat Tax?
I like what I have heard about Ron's tax plan.
12:21 a.m.
Oct 31, '07
Ian's suggestion for "The Fair Tax Act of 2007" would not be nice.
Oct 31, '07
Ian, about this: "LOW TAX RATE, achieved by broad base with no exclusions"
Does that mean min. age workers paying tax on groceries and medications?
If so, say so.
Oct 31, '07
I'd be interested in knowing how much earned income Buffet claims, versus cap gains income. A lot of high-end CEOs take a nominal salary and get most of their income from stock options and other compensation.
In any event, while I strongly disagree with the idea of going back to 90% marginal rates, as a fiscal conservative there are a couple of fundamental changes I'd like to see made to the tax code:
1) Eliminate FICA as separate taxes -- pay for Social Security and Medicare out of the general fund. These are not "retirement savings plans", that fiction should be long dead by now, they are general welfare programs and should be funded as such. This also has the benefit of eliminating the inane contribution cap for SS taxes.
2) Eliminate separate cap gains tax rates. Income is income, whether from labor or capital, and should be taxed equally.
I'm not sure what the net effect on federal income tax revenues would be from those two changes -- obviously knocking a flat 15.3% tax rate (split between employee and employer) out of the system is going to be costly, but putting back huge amounts of cap gains into (mostly) higher marginal rates is going to offset that to some degree. Once the dust settles and we have an idea how much of a shortfall there is (assuming there is a net shortfall) then general income tax marginal rates/brackets can be adjusted to make up the difference. Even if the rate in every tax bracket was increased by say 5 points, that still represents an overall tax break at the low end of the scale (compared to the 7.65% additional FICA taxes for employees now). And, it represents a modest increase at the high end of the scale -- bumping from an effective 36% (or less, because of the FICA caps) to 40% marginal rate isn't an onerous change.
Of course, treating all cap gains as regular income is going to make a huge difference to those who derive most of their income from capital instead of labor. If it's a big enough change (i.e., brings in enough extra revenue), we might be able to actually reduce tax rates across the board. But if it's a big enough change, you're gonna have some really rich, really pissed off people opposing it. The kind of people who have their own lobbyists. The kind of people who are their own lobbyists. It'd be a tough fight, but worthwhile.
Let me be clear on this -- I am generally opposed to the "progressive" attitude that the rich deserve to be taken for as much as possible just because they are rich. I'm generally opposed to progressive tax rates, in fact -- I'd far prefer to see proportional tax rates (or rather, a three-bracket very mildly progressive tax structure... but that's a topic for another post).
But even coming from that point of view, the idea that SS taxes should be capped, and the idea that income from capital is somehow deserving of greater protection from taxation than income from labor, is simply unsupportable.
I think if you approach the issue from that angle, rather than the angle of trying to raise marginal rates, you might find more support across the political spectrum.
For what it's worth.
4:07 a.m.
Oct 31, '07
I am generally opposed to the "progressive" attitude that the rich deserve to be taken for as much as possible just because they are rich.
Funny that you're "opposed" to that idea -- because it's not at all what the progressive idea is.
Rather, the idea is that wealthy people have, by definition, reaped more of the rewards of our society and our democracy and our economy than have low-income people -- and so, they have an obligation to contribute more back to that society.
If Bill Gates had been born a poor child in rural Africa, he wouldn't have founded Microsoft, no matter how brilliant, motivated, or hard-working he was.
In America, you can pull yourself up by your bootstraps, but at least we give you the boots.
Oct 31, '07
david, your suggestion of taxing income from capital gains the same as income from wages is one of the planks in steve novick's platform. pretty much verbatim, actually.
Oct 31, '07
Yup, that's the idea that I disagree with -- at least how it's implemented in our current tax code.
It's easy to cite the extreme examples of Bill Gates or Warren Buffett and say "see how much they've benefitted from society, shouldn't they pay more than their secretaries?"
And they do pay more, I'm quite sure. Not as a percentage, obviously. But I'll bet that 17.7% of Buffett's annual income is a hell of a lot more than 32.9% of the average office worker's salary. That doesn't justify the disparity in effective rates, of course, but it's something to keep in mind.
But never mind the ultra-rich. Never mind even the really rich. Heck, take all millionaires off the table. Our current progressive tax rates top out well below a million dollars.
In 2007, the 25% tax bracket starts at a little over $31K for a single person. Under $31K it's 15%.
How much more benefit from society, from the economy, and from democracy has a guy making $35K derived over a guy making $30K, Kari? What exactly is the rationale for taking a bigger proportionate chunk of the $35K? Sure it's not a whole lot, since it's just the extra $3K or so that's being taxed at that much higher marginal rate. But what's the philosophical justification for the higher rate in that situation? What about someone making $40K compared to $30K? The difference in effective tax rates would be even greater there, but is a person making $40K really significantly benefitting more from society?
At the lower end of the scale -- the 15% bracket kicks in for a single person at just under $8K of taxable income. Below that it's 10%. Why should a person who only has say $12K of taxable income be subject to a significantly higher effective tax rate than a person who has $6K of taxable income?
In any event, I totally disagree that differences in income equate to differences in benefit from society, democracy, and the economy. Income is actually a very poor indicator of that except in the broadest possible sense. But that's exactly what the "progressive" idea is -- that (as I said) just because you're rich (i.e., based solely on income) you deserve to pay a bigger chunk back.
But I realize that this is a religious doctrine among progressives and I'm not going to win any converts here. It's a far, far bigger argument than this topic in any event.
I was simply pointing out that even many of us who disagree on that philosophy of taxation can see that our current tax system is unbalanced and unfair with regard to capital income versus labor income.
Oct 31, '07
I have no idea what Warren's motive is on this issue. If he wants to pay more taxes all he has to do is write a check to the IRS and mail it in. They'll cash it. If he wants the companies that he controls to pay more taxes he can direct them to send money to the IRS. So talking about higher rates but not actually doing anythign that is within his power shows that he is just posturing. Not sure why he would posture on the issue, he hasn't ever explained that.
It is perfectly normal for the marginal rates to drop on super high incomes since a bunch of stuff like payroll taxes get topped out. Warren pays more taxes than most anyone else in the country. He probably pays the same as 10,000 other citizens combined so he more than pulls his fair share. Plus, the wealth that he has created for shareholders has all been taxed multiple times so he has contributed plenty. Just not sure what he is trying to accomplish with this issue.
Nov 6, '07
In America, you can pull yourself up by your bootstraps, but at least we give you the boots.
<h2>No, in America, we give you the opportunity to buy the boots. It is the scarcity of impediments to business enterprise that makes all wealth possible, not that we "give" you something.</h2>