Warren Buffett: I Used To Pay A 91 Percent Tax Rate

2 Dec

From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

The other night Warren Buffet appeared on Comedy Central’s The Daily Show and talked with Jon Stewart. He was in great good humor and ready to be skewered like every other guest. I’ve just got to say, it’s impossible not to love Warren Buffett. If we could all be as sweet and happy as he is, and one-hundredth as productive, the world would be a better place.

Warren and author Carol Loomis were making the rounds promoting their book, “Tap Dancing to Work.” Buy this book. Now. Learn to tap dance.

These two were a billionaire and a millionaire, telling other billionaires and millionaires to stop acting as if they are losers. A reasonable tax hike for the one percent, or even the top ten percent, is not going to hurt those poor children, they said. Buffet said that using only methods which are approved under the tax code, he paid a little over fifteen percent tax on his earnings last year.

He repeated what he’s said before. Many of his employees, who make only normal wages, paid up to 38 per cent on their income last year. This shows that the tax code is unfair and needs to be revised.

But there was a hitch in Warren when Jon Stewart repeated back to the audience that many employees were paying 38 per cent in taxes. Warren interrupted him each time and said, 38 per cent, counting payroll deductions. He was rigorous in his language, and there’s a deep lesson to be learned from Buffett’s rigor.

The lesson is that people earning under $110,000 a year pay much more than their federal income taxes out of each paycheck. They pay a percentage of salary to Social Security, a percentage of salary to Medicare. Retirement, health insurance, Health Savings Accounts and state taxes are also deducted. A few states, including Alaska, Pennsylvania and New Jersey require employers to deduct part of the unemployment taxes from employee paychecks,

In addition, independent contractors and the self-employed have to pay both federal and state unemployment taxes out of their own income, and more than double the amount of Social Security and Medicare taxes deducted from a wage-earner. This excess burden seems calculated to discourage small business owners, but that’s another story.

With all these amounts deducted, wage-earners are left to live off about 38 percent less than their stated incomes. Independent contractors and the self-employed have to pay out even more of their taxable incomes.

Now let me make it clear that I’m not advocating the elimination of these payroll deductions. They are a necessary part of the social contract and few would quibble with them. You can argue how much they should be, but not that they should be.

The bottom line is that for people making more than a million dollars a year, most of these deductions and expenses are limited and capped, and amount only to a fly buzzing around their heads. For a wage earner or for a self-employed person making $110,000 or less, these deductions have a major impact on their lifestyle and ability to save and plan for the future.

This is the deep meaning of Warren Buffett’s persistent correction of Jon Stewart’s language.

There was another thing Warren Buffett said that sent me scrambling to do some research. He said that he even made money when he was paying an income tax rate of 91 percent. What? Has that kind of confiscatory tax rate ever existed in the United States? I found it hard to believe, until I found this chart:

Historical_Mariginal_Tax_Rates

It was true! From 1944 until about 1965 the top marginal tax rate for high earners was about 91 percent. I assume this was to help pay off the WWII national debt. From 1965 until about 1982 the top marginal tax rate was 70 percent. This tax rate likely helped pay for the war in Vietnam.

Even so, I cannot understand why the wealthiest people weren’t screaming to high heaven about having to pay such a confiscatory tax rate. Maybe they were more patriotic than we thought. Nevertheless, when Ronald Reagan promised to reduce taxes, what he was really doing was agreeing to stop the federal government from confiscating wealth from the rich. There should never ever have been be a 70 percent tax rate in the United States, or a 91 percent rate, and there never should be one in the future.

The problem is, most of the wealthy undoubtedly remember or were taught about these 91 percent and 70 percent tax rates, which were actually in effect in our country for about 28 years. When politicians talk about raising taxes on the wealthy, most citizens, wealthy or not, are seeing visions of tax rates like those in the past. They see a vast calamity occurring “when” tax rates are raised back to 91 percent, or even 70 percent. If this type of tax rate ever occurred again, there would be a calamity of epic proportions, and everyone in the country would be hurt.

This is why it’s important for the politicians to stay away from the vague term “raise taxes on the wealthy.” This term is much too open to interpretation, and most people will visualize the worst case scenario when given an opportunity to do so.

A top marginal tax rate of 38 percent is as high as taxes should ever go, or will ever go; along with eliminating the capital gains rate for long term gains of over a million dollars a year. Politicians need to make their percentages definite when talking about taxes on the wealthy. General statements on tax increases are crazy-making.

Until seeing this interview with Warren Buffett, I had always wondered why ordinary citizens would be violently opposed to raising taxes on the wealthy. Now I know the answer. No loyal American wants to see taxes rise to confiscatory rates, as the government has done in the past. I’m definitely a middle-class person, yet I know that those with wealth are a necessary part of our economy, and I personally find many of them to be quite productive, creative and likeable. Including Warren Buffett.

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