Warren Buffett: "Stop Coddling the Super-Rich"

Billionaire investor Warren Buffett, chief executive of Berkshire Hathaway (BRKA, Fortune 500), wrote in an op-ed piece published Sunday,  Augsut 14, 2011, in The New York Times that taxes should be raised on Americans who make at least $1 million per year.  In the event that you did not read the article, I provide it for you below.

"OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

The taxes I refer to here include only federal income tax, but you can be sure that any payroll tax for the 400 was inconsequential compared to income. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice. "

Warren E. Buffett is the chairman and chief executive of Berkshire Hathaway.

What follows appeared on the dailykos.com recently.

What Buffet Said (clickable charts version)

First, let’s look at how people actually make their money.  This chart divvies up each income range by where the money comes from.  The IRS provides more detail, but for simplicity I clumped the smaller bins together.


Salary provides the bulk of income for ranges up to $135k or so, and then it drops off to be replaced by S Corp & Partnership income, as well as capital gains.  This transition to gains is pretty important, as capital gains get a preferential tax treatment.

After you've made your money, you get to declare deductions.  Deductions allow you to reduce the amount of income you need to pay taxes on.  The government offers deductions on items it is trying to promote (such as efficiency improvements), things it values (such as home ownership via a mortgage deduction) and a whole bunch more sensical or nonsensical items (often depending on viewpoint).  The major deductions, when plotted out, kind of look like this:


Notice the mortgage deduction trend line.  It is very high as a percentage for low wage earners and drops off.  Don’t let jealously over that million dollar mortgage deduction cause you to shoot yourself in the foot.

Besides, this is chump-change compared to the hidden bonus deduction.  What is the bonus deduction?  It is my term for income is not treated as income (a portion of interest earned, social security, and pensions) plus the preferential tax rates on dividends and capital gains.  Check this out:

Think of the bonus deduction as the equivalent itemized deduction someone like Buffet would need to get his tax bill down to what he actually pays if it weren't for preferential rates on capital gains.  The preferential treatment of capital gains allows someone like Buffet to file as-if he were deducting over 1/2 of his income!

The net result is an income tax chart that looks something like this:

To create the Alt AGI, I added back in items excluded from AGI: untaxed interest earned, untaxed pensions, and untaxed social security.

Of course, the story doesn't end here.  And, unfortunately, this is also proof that people don't look at their W2s before they put on their pointy hats and protest in the streets.  If they did, they would realize that tax rates really look like this:

Buffet probably pays a lower tax rate than most janitors.

And, just because you get the FICA taxes back when you retire (as Social Security payments) doesn't mean you should disregard them.  First of all, that $2.6 trillion dollars is earning a crappy interest rate.  Oh, and did I mention that there is a $2.6 TRILLION dollar surplus?  That is $2.6 trillion dollars stash, as-in excess of payouts, as in excess FICA taxes for low wage earners and lower income taxes for high earners.  How much is $2.6 trillion dollars...?  Check this out:

The Social Security surplus is almost equal to ALL of the income taxes collected in 2007-2009.  Of course, as I mentioned, running a Social Security surplus allows income taxes to be lowered, thus benefitting the wealthy.  Personally, I think people like Rand Paul understand this and seek to play tax-payers for chumps with their phoney solvency crisis.  It is almost impossible to study tax revenues and not figure this out.

PS - i just couldn't leave this one out:  Look who still has their pensions (and it isn't the janitors...):

Spreadsheets are here and here if anyone wants to check my math (or make a student homework assignment out of it :) )

Please sign the petition for President Barack Obama to propose higher taxes on the mega rich:  click Sign the petition for President Obama to raise the highest marginal tax rate on the wealthy, scroll to bottom of article, select "Sign Petition", enter name, email address, and mailing address.  Our President needs your direction as certified public accountants since he's obviously at a loss about the economy and the deficit.  Please sign the petition so we as good little CPAs can help him see the light and help the rich find their wallets.

Thank you.

The Barefoot Accountant

Accountants CPA Hartford, Connecticut, LLC

This blog

The Barefoot Accountant—is a Certified Public Accountant, Certified QuickBooks ProAdvisor,  operating an accounting, tax, and QuickBooks consulting firm in Berlin, Connecticut, Accountants CPA Hartford, Connecticut, LLC.  Bill has instructed graduate and undergraduate courses in Accounting, Auditing, and other subjects at the University of Hartford, Central Connecticut State University, Hartford State Technical College, and Purdue University. He also taught GMAT and CPA Exam Review Classes at the Stanley H. Kaplan Educational Center and at Person-Wolinsky, and is certified to teach trade-related subjects at Connecticut Vocational Technical Schools. His articles on tax and accounting have been published in several professional journals as well as on several accounting websites. William was born and raised in New Britain, Connecticut, and served on the City's Board of Finance and Taxation as well as its City Plan Commission.  Bill is a crazed animal lover, feeding birds, squirrels, chipmunks, skunks, possums, stray cats, and any two-legged or four-legged critter traversing through his yard.  His backyard in Berlin, Connecticut has been certified as a habitat suitable for wildlife by the National Wildlife Federation.

Bill also writes an Accounting, QuickBooks, and Tax blog:  Accounting, QuickBooks, and Taxes by the Barefoot Accountant.  For entertaining articles, please see his listing at The Amazing Brighenti.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

42381

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

74574

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

47358

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

86966
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
19889

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

54472

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

79109

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

24503

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

62860

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

33878
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
100822
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
25139

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

51317
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
26964
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
31274

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

98184

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

32463

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

109069

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

59549

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

38520
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
65434

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

91254

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

52333