Buffett's Specious Argument

I am growing rather tired of seeing Warren Buffett in the news – not because I have disdain for the man. In fact, I rather admire his past, developing an investment empire from the application of Benjamin Graham’s theory concerning undervalued companies. It was not just a matter of picking ‘lucky’ stocks, but getting down and dirty building companies he purchased. He certainly earned his living.

But while Buffett is a business genius, he lacks political perception in this instance.

The example he uses – and the President employed this week in his State of the Union address – has little relevance to a typical American or even a ‘standard’ millionaire. Buffett, garnering the majority of his income from capital gains and dividends of his equity enterprise Berkshire Hathaway, is taxed at a lower rate than his secretary who derives her income from salary. He fails to mention there are very few Americans that make their living from investment income.

Even ruthless stock brokers working for the top investment firms make their living from transaction commissions – taxed as normal income. And while there are CEO’s that have highly valued stock options, their substantial salary is still taxed at normal rates. No, Buffett is an anomaly when it comes to earning a living.

There some other factors that Buffett  and others overlook. First of all, investment dividends have already been taxed once due to our system of double taxation. All corporations on the stock exchange, by definition, have their income taxed at high federal and state rates before being distributed as dividends or retained for future use. Thus, while some of Buffett’s income is taxed at a lower dividend rate, he receives much less than he would have because the government already took a share. A hidden tax.

Second, while salary consists of a contractually determined sum to be paid on a timely basis, investment income is subject to high levels of risk. While capital gains are not directly taxed twice, the mechanism that makes capital gains possible involves tying up money in the market for an indefinite period of time, exposing funds to high levels of risk. Capital gain income is a reward for taking on risk and this need be recognized in the argument. Buffett could lose a huge portion of his wealth in a stock market crash while his secretary continuously receives a salary.

Yes, it's true that Buffett’s secretary’s salary is taxed at a higher rate. But she has an equal opportunity to risk her money in the stock market.  She could quit her job, place her savings in the hands of the market, reap lower-taxed capital gains in the future and live out the rest of her life investing. The benefits of capital gains are not limited to billionaires.

So, the real question is whether we should alter our system in order to target those rare investors who by wit and incredible luck are able to make money directly from the markets.

I, for one, do not wish to interfere with the vast majority of Americans, rich or poor, that look to investment income to grow their hard earned salary over many years, for purposes of retirement, schooling, and other life goals.

Buffett is wholly unrepresentative of how Americans support their families and his example should be thrown out as a useless non-sequitur.

Yaffe