Billionaire Sezwhat?

In Taxes on August 15, 2011 at 9:09 pm

You may have seen the New York Times article in which billionaire investor Warren Buffett asks the U.S. to “stop coddling” him when it comes to taxes. Buffett cries foul that, for all the billions that he’s worth, he paid a mere $6.6 million in taxes last year. If that seems low, you’re right.

What Buffett, the Oracle of Omaha, leaves out is the corporate taxes that have already been taken from his earnings. Let me explain:

A company makes an investment of, just to use an easy, round number, $100. For the sake of the example, this company is able to sell that investment for $200, giving itself a $100 profit or capital gain. Buffett wants you to believe that he paid $15 in taxes on that gain and put $85 in his pocket. He did not. The bit that he left out is the corporate tax of 35%. Combined, the corporate and personal income taxes confiscate 50% of his company’s profits.

That example paints a pretty rosy picture of investing because returns like that are virtually unheard of. Investors generally count themselves successful if they achieve an 8% return. In other words, investing $100 and getting $108 in return is considered a good day. Now, after taxes, you’ll receive $4 for your trouble. Or, if you’ve chosen your investments poorly, you may lose money on the deal. Your ‘thank you’ for investing $100 may be nothing more than the return of a tattered $50 bill. That is the risk that investors take.

Now, let’s examine Mr. Buffett’s call to take more of that return. Let’s make it a ‘stick-it-to-the-rich‘ 25% tax rate. Now your return, on a good day, mind  you, is $3.20 but your risk is still $100. Are you more or less likely to make an investment at a higher tax rate? Logic, and human nature, say ‘less’.

Why are more cautious investors a bad thing? Well… let’s look at what investment does.

Capital investment in a company allows that company to, for instance, purchase new machinery. New machinery means that the company will need to hire someone to run that machine. Jobs! Another company may take an investment of capital and use it to expand its business into new markets or streamline its supply chain so that product can be sold at a lower cost. That is how the economy grows. We want the economy to grow, right?

So, why would Warren Buffett ask to pay more taxes? Your guess is as good as mine. It’s not because the U.S. is behind the rest of the world in how much revenue it takes from top earners. We lean more heavily on the top income brackets than any other industrialized nation in the world.

I do have a theory, though, and I could be way off base… A higher tax and riskier market may scare off some of the smaller, emerging investors. That would make the market easier for someone with enough capital to absorb risk (you know… billions) to have greater control of market share. This would also make sense of Bill Gates parroting almost the same message as Buffett. One does not become a billionaire by being an altruist, one becomes a billionaire by being shrewd.

If I’m wrong, then Warren and Bill are always welcome to write a check to the U.S. Treasury for whatever amount above the current tax rate they think is fair. I’m sure Timmy Geithner still takes checks.

  1. Someone needs to forward this link to Buffet:

    Of course, he already knows this. He’s just assuming the people he’s talking to are too uninformed to know it.

  2. Yep. The really rich don’t mind high taxes because they create a barrier-to-entry that makes it harder for the little guys to compete.

  3. A very plausible hypothesis. Thanks.

  4. “Your guess is as good as mine”? Why is real compassion so difficult to comprehend for some right wingers? Buffet does it because he really cares, because he understands that it is not fair to possess so much without SHARING it.

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