By Scott Moser, CPA/PFS, MST
I’m not going to challenge Mr. Buffett’s enviable investment acumen, but I will challenge his diagnosis of the U.S. income tax system. Buffett’s tag line is that his office assistant pays a higher income tax rate than he does! Buffett’s solution is to increase tax rates on “millionaires” to solve this inequity and make a significant dent in solving the U.S. deficit crisis. While Mr. Buffet’s statement regarding tax rates may literally be correct, his observation only serves to obfuscate the sad reality of our current income tax system. It is a complex system that often leads honest and highly intelligent Americans scratching their heads in dismay. You see, Mr. Buffet may not be aware his assistant didn’t actually pay any income tax at all! So while his observation may be perfectly accurate, he leads us to the wrong conclusion: that his assistant was being treated unfairly. Buffett’s observation ignores numerous realities of the current U.S. tax system. * Low income taxpayers receive a significant reduction in taxes owed-- via tax credits for having kids or paying for college. These credits serve to reduce the actual tax owed but do not show up in tax rates. * Lower income taxpayers often receive greater relative benefits from itemized deductions, so their tax rate is applied to a relatively lower taxable income base. * Including payroll taxes as an income tax is a smoke screen. Payroll taxes provide future retirement benefits (Social Security) and medical benefits (Medicare taxes). One can argue whether these payments are handled wisely, but their intent is to provide future old age benefits. * Buffett’s effective 16% tax rate is only achieved after his investment earnings have been subjected to corporate tax rates in the range of 35% before they are paid out to Mr. Buffett. The application of multiple tiers of tax result in a net blended rate of 44.75%. The Washington Post recently released a more realistic and shocking summation of the U.S. tax system. http://www.washingtonpost.com/business/economy/ever-increasing-tax-breaks-for-us-families-eclipse-benefits-for-special-interests/2011/09/15/gIQAgdjcaK_story.html?hpid=z1 By my calculations using data from this article, eliminating the current U.S. income tax system would be revenue neutral! In other words, all of the income taxes currently collected are simply redistributed to other “taxpayers” in the form of tax benefits and credits; so current income tax collections do nothing to reduce the federal deficit. Even if you don’t buy into this analysis, it’s clear our current system is a train wreck and expecting our politicians to fix it is akin to handing Mr. Fox the key to the hen house. Congress has burdened the IRS with the redistribution of wealth in America via the U.S. tax system. The IRS is not prepared for this task so we should not be surprised to find more prisoners filing for and receiving millions in fraudulent tax credits-- as occurred with the home buyer tax credit. While wealthy Americans can certainly shoulder higher income taxes, this will not solve our debt crisis. Mr. Buffett’s assistant will have to contribute more as well. If Mr. Buffet wants to make a sincere contribution to the American public, he should fund a credible study to identify long-term solutions to fix the U.S tax system! |
