by Alexander Green, Investment U Chief Investment Strategist
Friday, November 30, 2012: Issue #1916
I’m a longtime admirer of Warren Buffett.
He taught me a lot about stock investing, including the most important thing about it I know: Forget about outguessing the market and focus instead on identifying businesses that are selling for less than they are worth.
While Buffett is a genius at equity analysis, he is no expert on government policy issues. And so it was with regret that I read his New York Times Op-Ed piece this week calling for higher taxes on the nation’s top income earners.
I won’t bore you with arguments about fairness or job creation or economic growth. The truth is confiscatory tax rates won’t change the slightest thing about the national debt crisis we face. And every American should understand why.
Imagine that your 18-year-old son goes off to college for the first term of his freshman year. You are happy to pay for his education costs – room, board, tuition, books, etc. – but you also give him a credit card “in case of emergencies.”
When he comes home for Christmas, you discover that he has run up $70,000 on his MasterCard. You hit the roof and demand an explanation.
“Now hold on, Dad,” he says. “Before we start talking about how much less I might spend, let’s talk about how much more money you’re going to give me.”
Consider your response – and whether it would be printable in a family paper. Yet Congress makes our hypothetical spendthrift look like a piker.
Most reasonably well-informed Americans know that our $16.1-trillion federal budget deficit is now larger than the nation’s GDP. But what most don’t realize is this figure doesn’t include the unfunded liabilities for Medicare, Medicaid, Social Security and the Prescription Drug Benefit. That’s another $121.6 trillion. Combine the federal budget deficit with the unfunded liabilities for current entitlement programs (excluding ObamaCare) and it comes to a mindboggling $1.2 million per taxpayer. (To understand how this fiscal mess is already affecting you – even if you don’t realize it – click here).
Some will argue that this is exactly why we need to stick it to the ultra-rich, an approach that has clear populist appeal. But here’s a bit of perspective. Less than a hundred years ago, the nation’s richest man, John D. Rockefeller, could have written a personal check and paid off all the entire national debt, every penny accumulated since 1776. Today the government could confiscate the entire net worth of the nation’s wealthiest man, Bill Gates, and it wouldn’t pay six weeks’ interest on the national debt.
Our elected misrepresentatives have spent so recklessly, promised so promiscuously and behaved so immodestly, that raising the revenue required to meet future outlays isn’t just difficult, it’s impossible.
Writing in The Wall Street Journal this week, former Congressional Committee Chairmen Chris Cox and Bill Archer note that even if the government confiscated the entire adjusted gross income of every individual and corporation in America, it still wouldn’t cover U.S. entitlement obligations. Yet the first order of business according to President Obama, Senator Reid and Mr. Buffett is not to reform entitlements or rein in spending but to raise tax rates? You might as well try bailing out the Pacific Ocean with a teaspoon.
Congress has a world-class spending addiction, but then so do most other Western democracies, including Canada, Britain, Western Europe and Japan. In every case, politicians on both side of the aisle have learned that promising lush government benefits paid for by “someone else” is a big winner at the polls.
As for the current fiscal cliff negotiations, the Congressional Budget Office estimates that raising the top marginal tax rate to 39.6% – as Obama proposes – would generate approximately $70 billion a year. That’s not an inconsequential sum. But it won’t come close to fixing this year’s $1.1 trillion federal budget deficit. Where would we get the other $1.03 trillion?
Finally, it’s also interesting to note that while Warren Buffett feels strongly about raising taxes on “the rich,” he has done a masterful job of avoiding them himself. As he notes in his New York Times piece, past taxes on dividends ranged as high as 91%. But Berkshire Hathaway has never paid a dividend, so Buffett has never paid a dime in dividend taxes on his own multi-billion-dollar holdings. And he has sold few shares, so he has avoided paying capital gains, as well.
He won’t be selling those shares and paying taxes on them down the road, either. He has pledged most of his fortune to the Bill & Melinda Gates Foundation. That’s certainly a worthy thing to do. However, his contribution came with a single string attached. The donation is contingent on charitable contributions remaining tax deductible.
In short, when it comes to taxes, you’d be well advised to do what Buffett does. And pay no attention to what he says.
Editor’s Note: Over the past few months, many readers have asked what the tax debate has to do with investing. The fact is, taxes are the biggest cost investors face – and thus the most unyielding attack on your wealth. That’s why one of our Four Pillars of Wealth is the effective management of both fees and taxes in your portfolio.
And these four pillars are behind everything we do here at Investment U, and at our sister organization The Oxford Club. For more information on just how successful these core tenets have made us over the past 20 years, click hereWarren Buffett: Tax Dodger?,