Buffett on dividend taxes

[Dave Farber <dave () farber net>]

> Date: Sat, 24 May 2003 21:05:17 -0400
> From: Ted Dolotta <Ted () Dolotta ORG>
>
> Worth reading.
>
> ted
> =================================================================
> Dividend Voodoo
>
> By Warren Buffett
>
> Tuesday, May 20, 2003; Washington Post, Page A19
>
> The annual Forbes 400 lists prove that -- with occasional blips -- the
> rich do indeed get richer. Nonetheless, the Senate voted last week to
> supply major aid to the rich in their pursuit of even greater wealth.
>
> The Senate decided that the dividends an individual receives should be
> 50 percent free of tax in 2003, 100 percent tax-free in 2004 through
> 2006 and then again fully taxable in 2007. The mental flexibility the
> Senate demonstrated in crafting these zigzags is breathtaking. What it
> has put in motion, though, is clear: If enacted, these changes would
> further tilt the tax scales toward the rich.
>
> Let me, as a member of that non-endangered species, give you an
> example of how the scales are currently balanced. The taxes I pay to
> the federal government, including the payroll tax that is paid for me
> by my employer, Berkshire Hathaway, are roughly the same proportion of
> my income -- about 30 percent -- as that paid by the receptionist in
> our office. My case is not atypical -- my earnings, like those of many
> rich people, are a mix of capital gains and ordinary income -- nor is
> it affected by tax shelters (I've never used any). As it works out, I
> pay a somewhat higher rate for my combination of salary, investment
> and capital gain income than our receptionist does. But she pays a far
> higher portion of her income in payroll taxes than I do.
>
> She's not complaining: Both of us know we were lucky to be born in
> America. But I was luckier in that I came wired at birth with a talent
> for capital allocation -- a valuable ability to have had in this
> country during the past half-century. Credit America for most of this
> value, not me. If the receptionist and I had both been born in, say,
> Bangladesh, the story would have been far different. There, the market
> value of our respective talents would not have varied greatly.
>
> Now the Senate says that dividends should be tax-free to recipients.
> Suppose this measure goes through and the directors of Berkshire
> Hathaway (which does not now pay a dividend) therefore decide to pay
> $1 billion in dividends next year. Owning 31 percent of Berkshire, I
> would receive $310 million in additional income, owe not another dime
> in federal tax, and see my tax rate plunge to 3 percent.
>
> And our receptionist? She'd still be paying about 30 percent, which
> means she would be contributing about 10 times the proportion of her
> income that I would to such government pursuits as fighting terrorism,
> waging wars and supporting the elderly. Let me repeat the point: Her
> overall federal tax rate would be 10 times what my rate would be.
>
> When I was young, President Kennedy asked Americans to "pay any price,
> bear any burden" for our country. Against that challenge, the 3
> percent overall federal tax rate I would pay -- if a Berkshire
> dividend were to be tax-free -- seems a bit light.
>
> Administration officials say that the $310 million suddenly added to
> my wallet would stimulate the economy because I would invest it and
> thereby create jobs. But they conveniently forget that if Berkshire
> kept the money, it would invest that same amount, creating jobs as
> well.
>
> The Senate's plan invites corporations -- indeed, virtually commands
> them -- to contort their behavior in a major way. Were the plan to be
> enacted, shareholders would logically respond by asking the
> corporations they own to pay no more dividends in 2003, when they
> would be partially taxed, but instead to pay the skipped amounts in
> 2004, when they'd be tax-free. Similarly, in 2006, the last year of
> the plan, companies should pay double their normal dividend and then
> avoid dividends altogether in 2007.
>
> Overall, it's hard to conceive of anything sillier than the schedule
> the Senate has laid out. Indeed, the first President Bush had a name
> for such activities: "voodoo economics." The manipulation of enactment
> and sunset dates of tax changes is Enron-style accounting, and a
> Congress that has recently demanded honest corporate numbers should
> now look hard at its own practices.
>
> Proponents of cutting tax rates on dividends argue that the move will
> stimulate the economy. A large amount of stimulus, of course, should
> already be on the way from the huge and growing deficit the government
> is now running. I have no strong views on whether more action on this
> front is warranted. But if it is, don't cut the taxes of people with
> huge portfolios of stocks held directly. (Small investors owning stock
> held through 401(k)s are already tax-favored.) Instead, give
> reductions to those who both need and will spend the money gained.
> Enact a Social Security tax "holiday" or give a flat-sum rebate to
> people with low incomes. Putting $1,000 in the pockets of 310,000
> families with urgent needs is going to provide far more stimulus to
> the economy than putting the same $310 million in my pockets.
>
> When you listen to tax-cut rhetoric, remember that giving one class of
> taxpayer a "break" requires -- now or down the line -- that an
> equivalent burden be imposed on other parties. In other words, if I
> get a break, someone else pays. Government can't deliver a free lunch
> to the country as a whole. It can, however, determine who pays for
> lunch. And last week the Senate handed the bill to the wrong party.
>
> Supporters of making dividends tax-free like to paint critics as
> promoters of class warfare. The fact is, however, that their proposal
> promotes class welfare. For my class.
>
> The writer is chief executive officer of Berkshire Hathaway Inc., a
> diversified holding company, and a director of The Washington Post
> Co., which has an investment in Berkshire Hathaway.
>
> c 2003 The Washington Post Company


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