Warren Buffet's Stance on Taxes

[Mook]

[ QUOTE ]
I love the concept and agree that it would make for a much better and more fair system. However, I think you would see a tremendous revenue short fall under that system. It is my guess that the marginal rates you quote would have to be significantly higher to generate the same revenues.

[/ QUOTE ]
I used to be of this opinion as well - at least in the abstract - until I read Ric Edelman's The New Rules of Money, which changed my outlook on this topic forever. I won't do his argument justice here, but I'll try.

Imagine you are the proud owner of a single magic penny. This penny has only one capability; it, and any returns it generates, doubles in value every year.

If you sock that penny away in a tax-deferred account and never touch it, in 30 years that one penny will grow to a value of about $10.7 million. Assuming for simplicity a 28% tax bracket on retirement income, that would leave you with $7.7M to fund a (doubtless comfortable) retirement, and $3M of tax revenue for Uncle Sam.

But if you're forced to pay taxes (again, let's assume a 28% rate) on that 100% gain each and every year as you earn it, at the end of 30 years you'll find that you've come up a wee bit short of that $7.7M after-tax figure. As in, about 99% short. Your magic penny will provide you, in this case, a grand total of only $116,000.

But that's not the worst of it.

This is the worst of it: My God, most people instinctively react, if you only earned $116K instead of $10.7M on that penny, how much did the Feds steal away?

The answer is that the government, in its quest for immediate gratification, collects a mere $45,256 in taxes over 30 years from that magic penny ... versus the $3 million they could have gotten their hands on if they'd just left the damn thing alone until you were ready to stop saving and start spending.

Knowing that our country is governed by people who are willing to throw away $3M to get their hands on your nickels and dimes nownownow! almost makes me cry.

Mook

[Mark1808]

[ QUOTE ]
[ QUOTE ]
I love the concept and agree that it would make for a much better and more fair system. However, I think you would see a tremendous revenue short fall under that system. It is my guess that the marginal rates you quote would have to be significantly higher to generate the same revenues.

[/ QUOTE ]
I used to be of this opinion as well - at least in the abstract - until I read Ric Edelman's The New Rules of Money, which changed my outlook on this topic forever. I won't do his argument justice here, but I'll try.

Imagine you are the proud owner of a single magic penny. This penny has only one capability; it, and any returns it generates, doubles in value every year.

If you sock that penny away in a tax-deferred account and never touch it, in 30 years that one penny will grow to a value of about $10.7 million. Assuming for simplicity a 28% tax bracket on retirement income, that would leave you with $7.7M to fund a (doubtless comfortable) retirement, and $3M of tax revenue for Uncle Sam.

But if you're forced to pay taxes (again, let's assume a 28% rate) on that 100% gain each and every year as you earn it, at the end of 30 years you'll find that you've come up a wee bit short of that $7.7M after-tax figure. As in, about 99% short. Your magic penny will provide you, in this case, a grand total of only $116,000.

But that's not the worst of it.

This is the worst of it: My God, most people instinctively react, if you only earned $116K instead of $10.7M on that penny, how much did the Feds steal away?

The answer is that the government, in its quest for immediate gratification, collects a mere $45,256 in taxes over 30 years from that magic penny ... versus the $3 million they could have gotten their hands on if they'd just left the damn thing alone until you were ready to stop saving and start spending.

Knowing that our country is governed by people who are willing to throw away $3M to get their hands on your nickels and dimes nownownow! almost makes me cry.

Mook

[/ QUOTE ]

I don't think there is a magic penny that doubles every year for 30 years!!! The results are outrageous due to the impossible 100% growth rate. If you reduce the growth rate and take the discounted present value of the future tax rather than its nominal amount in 30 years you would not see anywhere near that big of a gap. Taxes are a HUGE hurdle in accumulating wealth though!!!

[Jimbo]

[ QUOTE ]
always get that reaction from fellow small business owners. Its a natural reaction, but aside from being a basic tenet of economics let me explain it to you another way. Presume you offer a $50k per year salary with a new employee. It's really a market rate, if the employee demands more you can get someone else and if you try to pay less he has other job offers at thst rate. Before he starts work the government suddenly imposes a $4k employer paid payroll tax. You tell the employee you only think his labor is worth $50k total and can only pay him $46k. He gets angry and calls his other job offers, he'll find they have suddenly dropped $4k as well, they cant pay any more than their original costs either (or they would have bid more before the tax was imposed).

Employer paid payroll taxes are paid by employees in the form of lower wages. It may not be as clean as my example, some employers may eat part of the tax when its imposed but over time a supply demand curve that intersected at $50k will now intersect around 46k. I say around because the supply demand curves are altered


[/ QUOTE ]

DesertCat,

With this I all agree but I don't see the converse as being as true (does that make sense?) In other words all things being equal if my costs increased and the costs of all my competiors increased what you describe as above should occur. But when I am already spending a specific amount and then get what amounts to a rebate I may very well share a portion of it with my employees (as I have in the past, usually in the form of bonuses) but think that I would keep a portion for myself and my competitors would as well keeping an equilibrium in the fair market value of identical labor. Am I off base here on my thinking?

Thanks for the example, it was very clear and useful.

Jimbo

[eDoNkStEr]

I find it disgusting how people can criticize a rich man for saying the rich should be taxed more. He is at a point in his life obviously where money does not matter so can speak with somewhat less of a bias about the issue.

For all the people saying the rich aren't taxed nearly enough, and that they should be paying a higher percentage than lower classes, you're disgusting. 99% of you would be so opposed to higher taxation if you somehow managed to move up into a top tier tax bracket. A great deal of the richest people in America have worked harder than any of us on this forum to achieve their wealth and frankly I think they deserve to keep it. Why should they pay a higher percentage of taxes? So that they can support government initiatives that help all the people on this forum that gripe and complain about the rich? Just my take.

eDoNk

[dazraf69]

I think DC is implying that this would not be a one shot deal as in the sense of a "rebate". His suggestion is correct. There is a correlation between your cost and the amount you are willing to pay. The effects are felt as a shift in the form of a general trend.

An example would be, say next year and every year thereafter you get the rebate. The first year you give it as a bonus. Eventually you find that a better use of it would be to offer it as a bonus to a new employee of higher skill. Eventually the average 50k starting salary averages upto 54k starting salary. The initial rebate becomes a reinvestment as opposed to a cost.

[Jimbo]

[ QUOTE ]
I think DC is implying that this would not be a one shot deal as in the sense of a "rebate". His suggestion is correct. There is a correlation between your cost and the amount you are willing to pay. The effects are felt as a shift in the form of a general trend.

An example would be, say next year and every year thereafter you get the rebate. The first year you give it as a bonus. Eventually you find that a better use of it would be to offer it as a bonus to a new employee of higher skill. Eventually the average 50k starting salary averages upto 54k starting salary. The initial rebate becomes a reinvestment as opposed to a cost.

[/ QUOTE ]

I now understand, thanks very much.

Jimbo

[dazraf69]

We must first address accountability if we hope to solve a financial issue such as taxation. Rather than focus on what we are spending on, we are consumed by who pays what. Warren Buffet is playing ball and is endorsing democrats. What better way to endorse than to suggest that democrats and their stance on taxation can solve our economic problems.

I think its brilliant, Democratic candidates just got a boost up with one of the benefactors of tax cuts saying they are unfair to the poor. Surprised no one seems to have picked up on this.

[MatthewRyan]

[ QUOTE ]
Adios,

Almost everything you wrote is true, Buffett and I just think it is unfair. Where I quibble is it is not difficult to treat incomes the same. Buffett has already proposed an unlimited IRA to shield investment income until its converted into consumption. I'd go a few steps further,

1) abolish corporate income taxes to eliminate double taxation of earnings.
2) allow taxpayers to put all investments in unlimited IRAs so they can compound tax free until the taxpayer wants to withdraw and spend the money.
3) eliminate payroll taxes, support SS and medicare from income taxes. To make this possible, restrict SS and Medicare eligibilty to people making less than median income and pro-rate it against income. SS is supposed to be a safety net, make it that and nothing more.
4) tax all income, whether W2, dividends, muni bond interest, capital gains or IRA distributions the same with three brackets. Zero up to half median income, 15% up to three or four times median income, and 20% above that, no deductions, no exemptions.

Your tax form would be about five lines. You'd never have to track stock sales and purchases for tax reasons. A million smart people who are wasted working on tax forms would suddenly be available for more productive purposes. EITC can go away, no longer needed. IRS staffing could be reduced tenfold, once again diverting resources to better things. And since payroll taxes skew supply demand curves for employment we'd actually see a reduction in unemployment among lower income brackets.

And lastly, its fair. If you make the same as your neighbor, you can be comfortable knowing you will both contribute the same in taxes.

[/ QUOTE ]

very nice proposal

[Jimbo]

[ QUOTE ]
I think its brilliant, Democratic candidates just got a boost up with one of the benefactors of tax cuts saying they are unfair to the poor. Surprised no one seems to have picked up on this.


[/ QUOTE ]

The poor will still be poor whether the rich are taxed more or not, won't they? Hillary should hire you for her staff as a spin doctor, at least you wouldn't plant questions in the mouths of children, would you? [img]/images/graemlins/smile.gif[/img]

Besides his estate will never be taxed, he is insulating it by donating the majority to charity and the remaining in trusts. Easy to be altruistic when you have nothing to lose.



Jimbo

[dazraf69]

[ QUOTE ]
The poor will still be poor whether the rich are taxed more or not, won't they? Hillary should hire you for her staff as a spin doctor, at least you wouldn't plant questions in the mouths of children, would you?


[/ QUOTE ]

Hmmmmmmmmmmm........... [img]/images/graemlins/grin.gif[/img]