Warren Buffett is picking yet another big political fight.
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The billionaire is now taking up the GOP’s challenge to pay more out of his own pocket to cut the deficit -- but he wants the GOP to match his donations.
Is this a hollow offer? And does it miss a bigger point about taxes and deficit spending?
The billionaire is now offering to donate $1 towards paying down the national debt for every dollar donated by a Republican in Congress, according to the latest issue of Time magazine. And Buffett says he would donate $3 for every $1 Senate Republican leader Mitch McConnell gives.
The latest debate stems from a New York Times opinion piece Buffett wrote last summer in which he said millionaires ought to pay more in taxes.
President Barack Obama then used the Buffett anecdote to back his effort to rewrite the tax code, as he has championed the “Buffett Rule” to raise taxes on the rich, which could hit filers who make $200,000 a year.
That means Buffett is inadvertently and perhaps unwittingly backing a tax hike on the decidedly nonrich.
But the broader point is, the White House and Buffett are misleading Americans in this debate. They are in favor of increasing income taxes on the wealthy that Buffett himself does not pay because Buffett has structured his tax bill to pay at around the same lower rate as the $50,000-$75,000 crowd pays, an average 15%. Buffett has structured his federal tax bill to drop his effective tax rate down lower than his secretary’s rate.
In other words, the President’s "Buffett Rule" would not tax the vast majority of Buffett’s own sheltered income, including either his unrealized capital gains, which are currently taxed at 0%, or charitable contributions, which are tax deductible.
And the rich already pay a mountain of tax -- which is why even Europe’s Organization for Economic Co-operation and Development says the U.S. tax system is one of the most progressive in the world.
Senator McConnell tells FOX Business that if Buffett wants to pay more, he can do so by simply checking a box on his own tax return to make voluntary donations. And that deficit spending really is to blame.
The Senator is referring to the GOP’s own “Buffett Rule Act,” legislation introduced by Sen. John Thune (R-SD) and Rep. Steve Scalise (R-La.) last fall which would require the IRS to include a line option on tax forms to donate money to the U.S. Treasury to pay down the deficit.
Senator McConnell’s spokesman Don Stewart tells FOX Business: “Sen. McConnell says that Washington should be smaller, rather than taxes getting bigger. And since some, like President Obama and Mr. Buffett want to pay higher taxes, Congress made it possible for them to call their own bluff and send in a check. So I look forward to Mr. Buffett matching a healthy batch of checks from those who actually want to pay higher taxes, including Congressional Democrats, the President and the DNC.”
In this debate, Buffett had repeatedly referred to taxable income rather than adjusted gross income, which is sizable. Buffett says in his New York Times’ editorial that he paid $6,938,744 in total income and payroll taxes in 2010.
Last October, Buffett released more detail, saying his 2010 tax return included $62.9 million of adjusted gross income and $39.8 million of taxable income, upon which he paid taxes of $6.9 million, for an effective federal tax rate of 17.3%.
However, Buffett’s net worth is an estimated $47 billion, according to Forbes magazine. As head of the conglomerate Berkshire Hathaway, Buffett reportedly pays himself a nominal salary of $100,000, lowering his payroll and income taxes.
He pays taxes at the lower effective 17% rate largely because of his capital gains, as he gets most of his income from selling things like shares in Berkshire Hathaway, whose stock rises from investing the floated money it gets from all of the insurance companies it owns.
Buffett also reportedly takes out loans taken out against his assets, and lowers his tax bill further by deducting that interest on his returns. And he makes generous charitable contributions, which he can also deduct on his tax returns.
Indeed, Buffett’s second of three contractual conditions for his ongoing pledge to the Gates Foundation reads: "The foundation must continue to satisfy the legal requirements qualifying Warren's gift as charitable, exempt from gift or other taxes."
So here Buffett notes federal tax deductions are key, which lower his tax bills. Even Buffett himself said in a 2007 television interview that the foundations he and his children donate to “do a better job with lower administrative costs and better selection of beneficiaries than the government."
And IRS data show the rich already pay a mountain of tax. The top 1% of federal taxpayers footed the bill for 38% of all federal personal income taxes, according to IRS 2008 data. The top 5% paid more than half of federal income taxes, 58.7%. The top 10% paid 69.9%. The $50,000-$75,000 crowd will pay an average 15% of their income in federal taxes; the $40,000 to $50,000 crowd will pay an average 12.5%, says the Tax Policy Center.
So if Warren Buffett wants to reduce the deficit, he should encourage policies to create more millionaires, not lobby to tax them more. And he should encourage the government to spend less instead of taxing more.
Even taxing the top 1% at a 100% rate, you still wouldn’t close the budget deficit. According to IRS data for 2007, there were about 391,000 households with income greater than $1 million, and they had aggregate taxable income of about $1 trillion. That would not close the annual budget deficit. And if the government did tax them 100%, the following year there would be no income to tax.
The only way the White House can pay for ever higher levels of government spending is through permanently higher levels of tax revenue taken from the middle class, tax data show. The irony is, tax data also show that whenever Congress increases rates on the upper brackets, federal tax revenue from those brackets falls because the rich shelter their income.
Which is what Warren Buffett does.
Taxes paid by the richest 400 in 1994 were almost identical to the amount they paid in 1992, despite the intervening Clinton tax hike, notes economist Art Laffer. But federal taxes paid by this bracket rose dramatically after President Clinton soon after signed a capital gains tax cut into law.
Also, nowhere in Buffett’s editorial does he note that his desired tax increases would hit small businesses very hard. At least 75% of small businesses file taxes on business income at individual rates, says the National Federation of Independent Business. Two thirds, or 65%, of joint filers with income above $250,000 and 50% of single filers above $200,000 earn business income.
Of the roughly 391,000 taxpayers who reported income exceeding $1 million, more than 300,000 of those had business income and met the Treasury Department's definition of business owner, says the NFIB.
Small businesses create the lion's share of jobs in the U.S. economy, so Buffett in effect would raise taxes on the country’s main job creators.
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