Update: The concepts implied by Warren Buffett have formed the basis of President Obama’s Buffett Rule proposal.
Warren Buffett is staying in the news. I wrote recently about his desire to continue investing in stocks during market volatility, and today he published an opinion piece in the New York Times. He laid out the facts about how income is generally taxed. Income generated by working most jobs is taxed (overall, not marginally) about 33 to 41 percent, while income generated by money (investing, selling companies, etc.) is taxed much less thanks to the 15% rate for carried interest.
The theory making the rounds around Washington is that if investors are taxed higher, they will let their cash sit on the sidelines and not invest in businesses thanks to the fear of paying a higher tax rate on their earnings. Buffett points out that this is not how investors reacted the last time rates were high.
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.
Buffett may be a brilliant investor, but he doesn’t speak for all millionaires. Most who earn money classified as this favored type of income, millionaires or not, want to keep the 15% tax rate. The low tax rate exists, in Buffett’s mind, to coddle to the rich so politicians gain their favor (and their money, presumably).
He also criticizes the concept of “shared sacrifice,” code words designed to elicit a feeling among the middle-class and lower-class general public that it is a civic duty to bear the burden of the economic recovery, while billionaires are avoiding responsibility in this “shared sacrifice.”
Is eliminating the favorable tax treatment of the 15% carried interest rate part of a solution for improving economy in the United States?
I tend to think that quibbling over tax rates clouds the view of the bigger picture. Looking at the economy over the past few centuries, it seems like the country was until recently in its “start-up” phase, like a burgeoning company. Through innovation, venture capital, and military conquest (hostile acquisitions?), the United States grew into a major world power.
Innovation is cheaper elsewhere, venture capital (investments from overseas) might eventually become unavailable, and military conquest beyond our shores is too expensive both in financial terms and foreign relations. Looking at the United States as if it were a company, the country has settled into a phase where the domestic growth we’ve come to expect over the past few centuries is not likely. I don’t think whether the tax rate on carried interest is 15% or 28% will change this.
Updated September 19, 2011 and originally published August 15, 2011.