The past few days have been occuppied with an email debate with a dear friend of mine, who is a certified liberal/progressive, who is convinced that the Bush tax cuts are the source of all evil. He has bought into the leftist dogma that paying more taxes is honorable and essential and was inspired by Warren Buffet’s exhortations on Sunday:
Billionaire Warren Buffett rebutted claims that the Obama administration is unjustly hurting business orders with high taxes by saying that in fact, the wealthy have never had it so good.
“I think that people at the high end, people like myself, should be paying a lot more in taxes. We have it better than we’ve ever had it,” he told ABC’s Christiane Amanpour in a clip played on “This Week” on Sunday.
When Amanpour pointed to critics’ claims that the very wealthy need tax cuts to spur business and capitalism, Buffett replied, “The rich are always going to say that, you know, ‘Just give us more money, and we’ll go out and spend more, and then it will all trickle down to the rest of you.’ But that has not worked the last 10 years, and I hope the American public is catching on.”
Let me tell you why Warren is so completely full of shit. Ever heard of tax free bonds?
A bond is:
A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer does not gain any kind of ownership rights to the issuer, unlike in the case of equities.
A tax free bond means that any interest you earn on the bond is not subject to taxation. So, let’s imagine that there is a wealthy guy like Warren Buffet or Bill Gates and that wealthy bloke buys up $100 million in tax free bonds. Let’s also assume that the interest rate on that bond is 5%. Can you live on $5 million tax free for a year? I bet you can. That in a nutshell is why the very wealthy are so cavalier about paying “higher taxes.” They have so much money that they can afford the tax advisors that find them shelters like the tax free municipal bond.
So what did Buffet do last year with respect to tax free bonds?
Warren Buffett’s Berkshire Hathaway Inc. doubled its municipal-bond holdings in nine months amid record swings in the value of the securities that the billionaire investor labeled “unthinkable.”
Berkshire increased its investment in debt issued by state and local governments to $4.05 billion as of March 31 from $2.05 billion on June 30, 2008, the Omaha, Nebraska-based company said in regulatory filings. Berkshire added $1.09 billion to the bet in last year’s third quarter and $985 million in the first three months of 2009.
Buffett’s firm bought municipal bonds while scaling back stock purchases and as its cash position fell to the lowest level in five years. As Berkshire was adding to the stake, hedge funds, mutual funds and other institutions that use borrowed money to boost returns were forced to sell holdings to meet margin calls and investor withdrawals, especially after Lehman Brothers Holdings Inc. collapsed in September.
Here is what Buffet does not tell you. The so-called “wealthy,” i.e., those who make more than $250,000 are carrying the load of society. If they make less than $4 million they are likely a small business owner and employ other people. Folks in the range of $1 million to $4 million tend to be the small business gurus that provide a critical element in driving economic growth.
Warren Buffet can wipe his ass with $50 million and pay such a tax bill and won’t suffer one damn bit in terms of lifestyle. Not so for the guy and gal who own a Pizza Parlor, who bring in $3 million a year and employ ten people. Whe the Bush tax cuts go away such a couple is facing at least $50,000 in new expenses between paying higher taxes and providing health benefits for employees. What do they do? They start by hoarding cash. Why? Because come January 15 they have to make an estimated tax payment to the Federal Government. If their net income in 2010 was $1.5 million they will have to pay at lest $500,000 in taxes. You may fell wealthy with $1.5 million but after you kiss one third of it good bye you don’t feel so flush. And if you live in New Jersey, New York or Maryland you can say so long to at least another $100,000 that goes to pay the state income tax.
I realize if you have never made more than $50,000 a year in your life you have no sympathy for someone in this position but it is real.
The idea of society is to create a system where those in power cannot arbitrarily take what you have worked to produce. Remember the movie Braveheart? There was a time in England and Scotland that a wealthy landowner could fuck your bride if you lived on his land. It was a form of taxation. Ultimately we got to the point of imposing limits on the power of the state and, through our consent, agreeing to pay taxes that serve a public good. I am all in favor of the public good, but what is going on in Washington these days is not good. It is spending for spending sake.
I would encourage Warren Buffett, if he really means what he says, to first divest himself of all tax free investments and shelters. Live like the rest of America. Then turn over half of your wealth to the state. If you think it is such a great idea then lead the way hotshot. But you know what? Buffet is all talk. He can advocate the “rich” pay more taxes because he is in a tax bracket that is so wealthy he is sheltered from paying his fair share.