Warren Buffett has me Confused

I went back and read Warren Buffett’s op-ed in the NYT again this afternoon, and heck if I can make heads or tails from it.

His message seems to be “I’m rich, and I want the super-rich like me to pay more in taxes.”

That’s great. Write a check.

But that can’t be it. He doesn’t want the super rich to pay voluntarily , if he did this would be a very simple thing to do. He wants the government to tax the super rich at a higher rate because it’s the right thing to do. He’s tired of having politicians look out after him and other super-rich “…much as if we were spotted owls or some other endangered species…”

Okay, so how come they pay so little? Because they make money on investment income — capital gains. As I read this, he seems to be saying to raise the capital gains tax.

And then I get lost again.

Investing is the science and art of placing money where it does the most good — where it grows the most, or is the safest. Good investors — and Buffett is at the top of the list of great investors — make complicated financial decisions based on what’s the best place to put their funds.

You don’t get rich as an investor unless you are watching all the pennies. Perhaps Buffett is so incredibly awesome that an extra 20 or 30 percent in taxes right off the top doesn’t bother him, but for the rest of us mere mortals that’s a big chunk of change.

…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…

Ok, I’m calling bullshit. What does “sensible investment” mean? Does it mean the amount invested, the risk, and the amount expected in return? Because last I checked, you’d take the amount you’re getting in return and decrease it by your tax rate.

Either Buffett is making a point so fine I have missed it, or he’s just blowing smoke up my ass. He doesn’t know people who don’t invest when you decrease their return by a significant percentage? What? If he’s not fighting for each percentage point here and there, just what the heck kind of investing is he doing? Can I get in on some of this action?

So Warren is going to dicker and haggle each little dollar out of the other guy when he’s in an acquisition, yet willingly give up even more money than that on his taxes? Huh?

if I had a billion bucks, would I continue to invest it in the market with a heavy capital gains tax, or just drop it in tax-free municipal bonds? Wouldn’t I just do the math and figure out which option was best? How else would you make the decision where to invest?

How would you keep the rich from going into tax-free investments? Eliminate them? Only have them be tax-free for poorer people? Remember that these bonds finance a lot of very valuable government work around the nation. Having some really rich guy come in and pick up your City’s bonds says a lot about whether he thinks the city is making good investment decisions or not — it’s a critical part of the system of public finance.

His argument seems irrational. The entire purpose of investing is to handle things like this, right? That’s why you pay the tax lawyers and accountants incredible amounts of money. If you didn’t care about 10 or 20 percent, then just file your return differently. Do the simple return and pay the AMT. You could save all those legal fees and also pay your fair share. Nowhere is it required that you categorize everything to the last detail.

I thought to get rich and be a really awesome investor, you had to manage all the little details. Perhaps I got it wrong? Maybe 20 or 30 percent off your wealth each year isn’t that big of a deal? Who knows? I guess Buffett does, but he’s not telling.

I understand that people want higher taxes on the rich. I think it’s stupid, but I’m not going to argue about it. Have fun with it. To me this entire debate over “fair share” is a diversionary tactic to take people’s focus off of how totally screwed the economy is and how terribly-managed our nation’s finances are — a mess created by both political parties. I also think there is an argument that Buffett doesn’t make, but I suspect he really thinks: that with so many uber-rich sitting around, and so much economic destruction going on in the world, it’s much better to pony up now and look like a hero than try to fight the system and end up losing it all. This is a “pay up and do the right thing because the social structure depends on it” argument — that basically poor people are so stupid and envious that unless you are seen to be a huge patriot, they are going to punish you (and society might fall apart.) Society depends on the poor folks having a feeling that they are able to sock it to the rich guys, otherwise, chaos would reign.

His real argument is probably too snooty of an argument to make in print, but something tells me that’s what he’s really getting at. I wished he’d have just come out with it, though. It would have been a lot more honest.

I also would have understood it.

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21 thoughts on “Warren Buffett has me Confused

  1. Kartik Agaram

    “If he’s not fighting for each percentage point here and there, just what the heck kind of investing is he doing? Can I get in on some of this action?”
    I think there’s a distinction between giving up a percentage point to the other side, and *both* sides giving up a percentage point to some well-defined third party (which Buffett thinks is good).

    Reply
  2. DanielBMarkham

    “… think there’s a distinction between giving up a percentage point to the other side, and *both* sides giving up a percentage point to some well-defined third party (which Buffett thinks is good)….”
    Sure, I’m not saying that paying taxes is a bad thing — I think most everybody wants our society to continue. I just don’t understand how you can say that you personally want that extra billion out of the deal so they other guy doesn’t get it, yet you’ll then give it all up, where the other guy might not — he might roll it over into some sort of tax deferment (which would be the logical thing to do if you could, right?) You’re a good investor because you lost more?
    If you’re not managing the money you haggle for — if you give up that role to government, then aren’t you doing a lousy job of being an investment guru? What’s the point?

    Reply
  3. Bruce Markham

    He did begin his conclusion with:

    Job one ... is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here.
    

    I think the fact that he didn’t spend most of his argument on this point is actually rather refreshing. Duh we need cuts.
    But it’s silly to think big promises for the future are the only thing that got us in this mess. Unless, of course, you count the (seemingly fruitless) handouts to big business as a ‘promise’ for the future as well.

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  4. Thomas

    You should read between the lines. I don’t think he’s pinching pennies here and there – the game he’s playing is at a much higher level. His comments to Congress is a way of nudging and shaping the way our government, regulation, financial and manufacturing world operates. He’s watching out for the stability of the entire political and governmental structure of the United States. He thinks that without maintaining the strength of this structure through effective taxation of each layer of income, there won’t even be a future for investments. This is the ultimate game – becoming caretaker of the playing field.

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  5. DanielBMarkham

    Yeah I think there’s a entirely bigger (and more important discussion) around how we got here, what to do about it, etc.
    I was just commenting on the position he was taking. Here is a guy famous for knowing how to allocate money, yet his entire argument seems to be based on how people feel about the super rich. Seems like to be really effective he would have shown how giving up ten billion to the government would actually be the best thing to do to help the world — that it is the smart investment. But he didn’t go there. Weird.

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  6. William

    Bonds have a low rate of return relative to equity investments (especially non-public ones), and there is a limited volume of tax-deferred bonds. Personally, treating capital gains as income wouldn’t change my approach. I would keep my portfolio allocation the same, and continue to start businesses as I have before.

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  7. DanielBMarkham

    “…Personally, treating capital gains as income wouldn’t change my approach. I would keep my portfolio allocation the same, and continue to start businesses as I have before…”
    I think maybe the issue here is how much money you already have. If you’re in scrappy startup mode, as I am, you’re counting pennies. Every little cent is one you have to be sure you spend wisely.
    If, however, you’ve got a couple million or more sitting around in a bank, it’s easy to lose track of the little stuff. From your standpoint, income is income.
    I just assumed that scrappy mode stays with people as they get more successful. This may be mistaken. Perhaps this is the serious flaw in my premise.

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  8. Mike from Vashon

    I think the point of the current conservative initiative is that we should all be paying about the same percent in taxes that the super-rich pay. We don’t want to raise their taxes, we want to lower ours, and what’s keeping us from doing that is the ginormous federal budget.
    The thing getting in the way of all this is that we had been on our way to get there in 2000, but the GOP-dominated Congress and WH in the early 2000s upped the budget, cut taxes, and started the Iraq war, on top of everything else that was going on.
    Then in 2008 the subprime mortgage fiasco hit and we poured a couple trillion into the economy to keep the system from failing. Now we need to remove that money we added to the system AND facilitate fixing a dearth of jobs. When you cut taxes, you whack jobs, so it is tricky. Part of the fix for the short term is to better balance the current budget and help resolve the long term debt.
    If the rich instead took the tax money they didn’t pay and invested it all in smart business opportunities, that would be a bell ringer. The lower tax rate wasn’t bound to a deduction with that in mind because the super-rich are supposed to do that kind of thing anyway. Are they?

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  9. Ron Garret

    > I thought to get rich and be a really awesome investor, you had to manage all the little details. Perhaps I got it wrong?
    Yes, you got it wrong.
    For starters, you got Buffet’s message wrong. The message is not: increase taxes on rich people because that will have zero impact on their internal rates of return. The message is: taxes are currently regressive, and that is ultimately counter-productive.
    Second, the measure of your skill as an investor is not your absolute rate of return, but your rate of return relative to your competitors. There are all kinds of external factors beyond your control that determine your absolute return, including things like inflation and taxation. Those things matter, of course, but they don’t matter in the same way that the details that give you a competitive advantage matter.
    Third, what you try to portray as “snooty” is nothing more than the observation that what investors do is only possible in the context of a civil society. Investors benefit more than most from social stability, and so investors should be willing to pay their share of the costs of maintaining a civil society not out of snooty patriotism but out of self-interest. Tax rates in Somalia are really really low. But you still don’t see many successful investors there.

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  10. Bijan Pourriahi

    I don’t even know where to begin. I don’t think you understand the reason (including math) of why taxing the rich at the same income rate, or more, is critical the country’s long-term health.
    Just keep this in mind. This is a very broad and open-ended point: If 70% of the country is struggling to survive, how is the quality of life going to be for the top .1%? If you’re under-taxing where most of the money is, and there’s not enough money to support the country, money is not going to matter much.

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  11. DanielBMarkham

    Ron,
    Thank you for that awesome comment. If Buffett had written that, I wouldn’t have been so confused.
    But he didn’t.
    I think once you make an argument as you have, we can begin to discuss merits and policy. I was just amazed that a guy like Buffett didn’t really make his case. Next time he should ring you up!

    Reply
  12. Chris

    Call whatever bullshit you want, but the article is pretty clear.
    1. He believes the government needs to be more careful about what it promises people and promise what it can pay for. I think both of you would agree on that.
    1. His personal tax rate is below everyone else’s in his office and in fact most people in America.
    2. Even when the tax rate was high, he still made his money from investing. Here is where your reading or reasoning skills could probably be beefed up. Higher taxes may change what he considers a good investment, but it doesn’t stop him from investing.
    3. 20-30% less wealth affects him materially much less than it effects everyone else. Furthermore, if he paid a higher percentage than many poorer people could pay much less. One of him equals many, many low-to-medium income people. So the current scheme just doesn’t make any sense.
    4. Lower taxes don’t equal more jobs as they are at record lows (for high-income personal taxes) and we don’t see record job creation. Obviously this isn’t a strong correlation because many more factors affect the economy than taxes but it isn’t at all obvious to right wing political hacks so it must be said.
    As the above poster noted, the GOP dramatically cut taxes, began two wars and increased medical benefits dramatically adding to the deficit and forcing the debt ceiling limit argument much sooner than it would have been otherwise. This was the most irresponsible fiscal governance America has seen yet, only because they didn’t cut benefits in kind at the same time.
    They then used debt ceiling brinkmanship in order to cause the most recent fiasco that we are all aware of. Now the business climate in America is being seriously affected by uncertainty about whether both sides can move the country forward through a crisis that made dramatically worse by the GOP and then further entrenched by the political brinkmanship we have seen.
    The above points cannot be made enough.
    Warren’s point was simply that in all this mess it doesn’t make sense for him to pay less taxes than anyone else and in fact there is a strong argument for him to pay substantially higher taxes. No where in the article was any bullshit and there was a lot less tripe and nonsense than in the above blog post.

    Reply
  13. Glen Raphael

    Regarding the claim that Buffett doesn’t know any investors who avoided “a sensible investment” due to the tax rate on the potential gain: I used to own a house in California. As a single person, the first 250k of increase in value in my house was tax-free; after that one would have to pay capital gains. Therefore, once my house’s gain in value was close to 250k, I immediately sold the house.
    Owning a house stopped being “a sensible investment” for me – the potential upside no longer outweighed the potential downside – once capital gains kicked in.

    Reply
  14. Peter Hamilton

    “3. 20-30% less wealth affects him materially much less than it effects everyone else. Furthermore, if he paid a higher percentage than many poorer people could pay much less. One of him equals many, many low-to-medium income people. So the current scheme just doesn’t make any sense.”
    Dan had few great points:
    Why doesn’t he write a check? Why does he itemize his his taxes? If he really felt his money would do the most good in the hands of the US government, why has he not written the check?
    I can guarantee a “The super-rich should pay more taxes” line would mean a lot more if he wrote out a check with 7 zeros on it.

    Reply
  15. DanielBMarkham

    “…Dan had few great points: Why doesn’t he write a check? Why does he itemize his his taxes? If he really felt his money would do the most good in the hands of the US government, why has he not written the check? I can guarantee a “The super-rich should pay more taxes” line would mean a lot more if he wrote out a check with 7 zeros on it….”
    Thanks!
    I know it’s easy to say he’s a hypocrite — people do that all the time when we discuss things like war, and I hate that kind of reasoning.
    But there’s a point here: he’s not saying that the government needs the money, or that even he is going to pay money to the government. He’s arguing that taxes need to be increased. So he can’t be arguing the merits of paying more taxes — that doesn’t make sense. Instead he seems to be saying that as long as the rules change, that’s the important thing, no matter how much people actually end up paying?
    I don’t know. I couldn’t follow it. There’s a lot of great discussion you can have around various facets of this issue, but first you have to have a starting point. Is he saying the government needs the money, that he should be paying more, or simply that the rules should change? If it’s a rule change he wants, then it seems to me he should be arguing the social utility of the change (including describing exactly what kind of change he wants.)

    Reply
  16. Neel Kumar

    We have, over the years, built a highly discriminatory tax structure. If you make money by working a job, the tax burden can be enormous. But if you make money by playing the stock market, the tax burden is a whole lot less. And if you do it by buying and selling houses, you could have completely tax-free income!
    Compounding this problem is the fact that the US government (and the state and local governments) have ZERO money to invest in the future. We are cutting aid to students, investments in universities, our roads, bridges, sewer systems etc are seriously out of date. We have essentially been coasting on a lot of investments that the federal government made during the depression years (think Hoover Dam etc) or during the 50s (Interstate highways).
    Warren Buffet is arguing that we should make the tax structure more equitable so that we don’t continue to be in the fiscal bind that we are. I think he is right. And if you think that voluntary taxation is such a wonderful thing, why don’t we cut all taxes to 0? Let us have the government run on charity. Now there is an idea! (NOT)

    Reply
  17. Hal

    Markham seems to misunderstand two points:
    1. Decreasing marginal utility of money
    2. Markham (and pretty much everyone else) won’t get hit with these rates
    The first means that 20% of your money when you have $10,000 is a very big deal. 20% of a Billion dollars, while a lot of money, doesn’t mean the same thing to the person who is facing 20% of $10,000. This is pretty basic stuff, and easily verified then next time you spend $5 on coffee. The more you have, the less it means. Thus, trying to “think about this” from the vantage point closer to the $10,000 mark than the 10′s of Billions mark is meaningless. It’s simply not comparable from an incentive POV.
    The second point is a sad result of the fact that people simply don’t understand marginal tax rates. It’s like Joe teh Plumber mistakenly believing that if he makes $250,001, then he gets whalloped with a higher tax rate on the entire 250K, rather than just a higher tax rate on the $1 over the 250K mark.

    Reply
  18. Juil

    The reason Buffet doesn’t write a check is because the problem with the budget is not how *much money is being spent, but *where.
    Just because Somalia’s government would be better off with more money, doesn’t mean you should trust them with yours.
    This situation is very similar to oil subsidies. The oil is inside the USA. International corporations aren’t going to stop drilling even if they have to pay higher tax rates; they already pay much higher taxes in other countries. They will &!#ch and complain, but, in the end, they will still pay their taxes on the black gold.

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  19. Anon

    If people/corporations can use loopholes to maximize profit/minimize contribution, they will and they do. Maybe Buffet is saying that the government is no longer an effective revenue collecting authority because it is biased by these loopholes in favor of a wealthy minority? If this is so, I would argue that the sensible thing for the rest of us to do is stop paying tax altogether until the playing field gets fixed. This would have to start with eliminating lobbying and political contributions and going back to one PERSON (not corporation) one vote. The problem here is that the very same folks responsible for skewing things in favor of a wealthy minority and creating and voting on the regulations in question can never be expected to do the right thing. There needs to be a public referendum.

    Reply
  20. miles

    “I can guarantee a “The super-rich should pay more taxes” line would mean a lot more if he wrote out a check with 7 zeros on it.”
    “In June 2006, he announced a plan to give away his fortune to charity, with 83% of it going to the Bill & Melinda Gates Foundation.[103] He pledged about the equivalent of 10 million Berkshire Hathaway Class B shares to the Bill & Melinda Gates Foundation (worth approximately US$30.7 billion as of June 23, 2006),[104] making it the largest charitable donation in history, and Buffett one of the leaders of philanthrocapitalism.[105]” wikipedia..
    ..couple more zeroes

    Reply

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