Billionaire investor Warren Buffett caused a media stir this week with his op-ed in the New York Times titled "Stop coddling the Super-Rich." Buffett outed himself and his fellow mega-rich as tax-cheapskates, thanks to tax-friendly legislation, and urged Congress to raise taxes as part of a deficit-reduction plan.
"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks," he wrote.
To prove an argument for higher taxes on the rich, he says his federal tax bill last year was 17.4 percent of his taxable income, compared with the average 36 percent paid by 20 of his employees. The reason is that most of the mega-rich "make money with money" and owe tax in the form of capital gains of 15 percent on their investments, while paying very little in payroll taxes.
Buffett also dismisses any notions that the rich will refuse to invest if capital gains tax rates are increased. "People invest to make money, and potential taxes have never scared them off," he notes in the op-ed.
Higher taxes not contagious
To gain a little perspective, I turned to Bankrate's tax expert, Kay Bell. First, she wants to reassure nervous taxpayers that higher taxes are not contagious. "Taxing higher earners has long been part of the progressive U.S. tax code," she says. "In the 1950s, the top tax rate was in the 90-percent range, topping out in 1952-1953 at 92 percent on incomes exceeding $400,000. The tax reform act of 1986 set the lower baseline that we tend to use for tweaks to our current rates."
Also, several states levy "millionaire taxes" for those earning $1 million or more, Bell notes, including Maryland, New Jersey, California, Connecticut, Hawaii, Oregon and Wisconsin.
But wealthy taxpayers have long had ways to get around higher tax rates. "The beauty of capital gains is that you can have a gazillion-dollar portfolio and, for the most part, you don't owe the IRS anything until you sell and take your profit on your holdings," says Bell. "That's why so many investors take advantage of tax-deferral techniques, including structured sales, charitable trusts, installment sales and 1031 property exchanges."
In putting an end to tax breaks for the rich, Buffett is calling for "shared sacrifice." He advises leaving rates alone for 99.7 percent of taxpayers, "who need every tax break they can get." However, he wrote, "for those making more than $1 million -- there were 236,883 such households in 2009 --I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more -- there were 8,274 in 2009 -- I would suggest an additional increase in rate."
Do you agree with Buffett's plea to Congress to tax the rich at a higher rate?
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