Finally, a real duct tape moment topic!
You recall that a few weeks ago Warren Buffett was quite public in his pronouncements that he pays taxes at a lower rate on his income than does his secretary. That's shocking, isn't it? But is it true? Certainly politicians have picked up on this and have run with it. There's even a "Buffett Rule", named after the legendary Berkshire Hathaway CEO, being proposed to add a surcharge to the income taxes of wealthy folks like Warren Buffet. But was Mr. Buffett truthful in his remarks? Did he tell the whole truth? Does our tax system really work that way?
Well, it's not supposed to. The progressively higher tax rates on income as it goes up are 10%, 15%, 25%, 28%, 33%, and the highest rate of 35%. The tax system is one area of specific expertise for me, so you can trust me when I tell you, someone with a salary of $500,000 a year has a marginal tax rate of 35%. There are no gimmicks or tricks to get around that fact. However, there is another rate built into our system for certain kinds of income that doesn't come from salary.
If you invest in stocks, buying low and selling high, and if you hold those stocks more than a year then your tax rate on that income is 15%. That is indeed lower than the rate paid by some middle to upper middle class folks. In addition, dividends paid out of a corporations profits to shareholders on most stocks are also taxed at 15%. This was implemented in 2003. Prior to that, dividends were taxed just like salaries. Also, when Bill Clinton was in office capital gains were taxed as a maximum rate of 20%. Under Ronald Reagan's administration, it was 28%. So it is certainly legitimate to discuss whether 15% is the right rate, whether that lower rate should also apply to dividends, etc. But what about Mr. Buffett's claim?
Not having seen Mr. Buffett's income tax return, I have to presume from his public comments that he derives most of his income from dividends paid by Berkshire Hathaway, which is where most of Mr. Buffett's money is invested. But remember, Berkshire is a holding company for many other corporations. Corporations also have a 35% top rate just like individuals. Some corporations avoid taxes by leaving their profits overseas, as General Electric has done, thereby paying no taxes on those profits and using them to build factories overseas instead of here in the U.S. But U.S. companies doing business in the U.S. that are profitable generally pay 35%. Mr. Buffett's company is currently fighting a $1 billion tax bill with the IRS right now. That corporation pays an enormous amount in taxes. Therefore, Mr. Buffett's income has been taxed at a rate of 35% before he ever gets a nickel of it out of the company.
See, human beings own every financial asset on earth. We speak of corporations as if they are some sort of Dark Side entities run by mysterious Darth Vader types, but really, human beings own every bit of all of them. If Mr. Buffett owns Berkshire, and Berkshire pays 35% in taxes on the profits, then Mr. Buffet is getting taxed twice. That's how it works for corporations. But Warren Buffett somehow neglected to mention the taxes already paid on the profits his company generates. He focused solely on his personal income tax return. His secretary does not own Berkshire Hathaway, so she doesn't pay the double taxes.
Now, I have no problem with the Warren Buffetts and the Bill Gates' of the world paying more in taxes. Heck, if Mr. Buffett thinks he should pay more taxes he could just mail a check payable to the United States Treasury to Washington. And he could drop his company's resistance to paying that $1 billion the IRS is trying to collect.
But it doesn't help when deceitful information is bandied about, picked up by politicians and the media, and then used to mislead or deceive the public. Most people do not have detailed personal knowledge of how individual and corporate taxes work. That is why I've chosen to write about it here. Decide what ever you want to as far as what policies are right. Now that we've recovered from the financial shock of 9/11/2001 perhaps we should go back to taxing dividends as we used to. Fine. But at least know what is being proposed, and how the system works. Otherwise, you're just being manipulated by big wigs in the political and media world to accomplish their agenda, and they are using your ignorance to their own advantage. The time is now to destroy ignorance through education and communication. The better we all understand these things the harder we are to manipulate.
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