Warren Buffett noted in 2007 that his own marginal tax rate is below 20%, while his staff average is above 30%, and that remains true. For some ultra-wealthy Americans, their tax rate is much less than 20% today, while 18.5 million ordinary Americans face a rate of nearly 40%. All of this will continue under any change in US fiscal policy proposed by President Joe Biden, a persistent violation of what the Obama White House coined in 2012 as the “Buffett Rule,” that those who make millions should not pay a fee. lower rate than those who earn thousands. .
Buffett, a centrist, proposed a simple solution: a 30% annual income tax, with no loopholes, on income between $ 1 million and $ 10 million and 35% on top income. Buffett’s target for such taxes is clearly the ultra-rich, people like him, from hedge fund managers and celebrity CEOs to star athletes and entertainers. This simple proposal has yet to be enacted, and Biden is not proposing it. Sen. Elizabeth Warren (D-Mass.), A partisan progressive, has proposed a 2% annual wealth tax on the $ 50 million cohort and 3% on billionaires. While bold and novel compared to the traditional US income tax, this would not raise furious fairness objections from the overwhelming majority of Americans. Even some billionaires endorse it. However, Biden does not propose it. Instead, Biden proposes raising the maximum personal rate on annual earnings above $ 400,000 to 39.6% from 37%. This threshold is well below any conception of ultra-rich. Plus, it’s below $ 440,000, a current breaking point for higher capital gains rates; $ 500,000, a figure Buffett mentioned in supporting Obama’s repeal of the Bush tax cuts; or $ 540,000, which encompasses the top 1%. Why has Biden abandoned the simple directed approaches suggested by Buffett and Senator Warren? Billionaires and other ultra-rich are powerful, though they are a minority, and taxes like those proposed by Buffett or Warren would be inexorably applied, with no loopholes. Biden’s political calculation is to portray such proposals as extreme, making his proposal appear moderate. Under this subterfuge, the ultra-rich win while millions of ordinary people lose. Another persistent flaw in the federal tax code that the Biden plan continues is ignoring wide regional disparities in costs of living. Additionally, a single national tax rate ignores the different levels of state and local taxes across the country, a particularly pernicious oversight after Trump‘s tax law changes revoked his old federal tax deductibility. The Biden plan does nothing to address such flaws. One of the reasons the elite pay less than ordinary Americans is the many loopholes that politicians make in the tax code. The most notorious of these concerns the income of hedge fund managers. They work hard to provide financial services to clients in exchange for fees. But instead of treating these fees as ordinary income, taxable up to 37% today, they use magic to declare that such fees are actually capital gains (called “posted interest”). These capital gains have been treated for 100 years at lower rates, today around 20% for high-income people. Buffett has explicitly advocated for the abolition of carry-over interest rates that convert labor into capital for tax purposes. Biden’s plan again refrains from facing this ultra-rich hoax. Instead, the Biden plan would reduce the incentives to do so by making the same 39.6% rate apply to both ordinary income and capital gains for all those reporting more than $ 1 million in income. That may sound good on paper, but it will only partly affect the heart, not the ultra-rich, but the upper-middle class: Many savvy workers considering selling stocks to buy a bigger home will face double the taxes. Biden’s forceful proposal overlooks the many reasons why capital gains and US earnings have been treated differently for most of the past century. For example, capital gains are fully taxed, while capital losses are not fully deductible; capital gains are not adjusted for inflation to reflect their real value, but are taxed on nominal price increases, and capital gains received by shareholders have already been taxed once to the earnings of the issuing corporation That generate them. Biden’s capital gains and earnings lineup appears intended to reduce the incentives the elite have to reclassify their earnings as capital gains. But while that would make a lot of sense for the accrued interest earned by a small minority of powerful hedge fund managers, it doesn’t make sense for the millions of hard-working, investing Americans. For fund managers, they may not welcome such reform, but by avoiding being a direct target, they preserve other avenues for loophole. One final perversion leads to an investment lesson. Any capital gains tax, and especially a higher one, increases the value of a buy-and-hold investment philosophy. While it is generally a superior investment strategy, one that Buffett often follows and supports, there are times when even the most patient investor makes a rational choice to sell an investment. A high rate of capital gains imposes a significant deterrent to not doing so. Politicians across the aisle have recognized Buffett’s practical wisdom on fiscal policy. After all these years, they should finally act on it. Lawrence A. Cunningham is a professor at George Washington University, a longtime Berkshire Hathaway shareholder, and the editor, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. For updates, including an invitation to your exclusive webinar during the Berkshire Hathaway 2021 Annual Meeting, register here. More: Warren Buffett Could Teach Traders Dogecoin, GameStop, And Other Hot Trends A Few Things About ‘Mr. Market ‘Plus: Former Vanguard CEO: 5 Obstacles Investors Are Facing Now and How to Overcome Them