Lesson 1

Warren Buffett Discusses Income and Capital Gains Tax for the Rich

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Executive Summary

Most rich people would be grateful to have lower taxes, but not Warren Buffett. He is one of the richest people in the world and believes that people like him should pay more taxes. The very rich are paying less in the way of taxes.


Low tax on dividends and capital gains give the low rate to rich people. They are taxed at 15% and they don't have payroll taxes. Payroll taxes account almost as much as revenue of the government as the income tax. There are more than 80 million actual tax payers who pay 33% on the average. Obviously, the high rates are falling in the middle class. By reducing taxes, economic expansion and growth will take part. People will create more jobs if they are not paying much tax. If people are paying a higher tax, they won't make many investments.


People are upset about how the government works regarding tax. Americans deserve to be educated and know the significant deficits when the economy is weak. If the government doesn't do it now, there will be more wasted time and potential outputs.


With regards to the previous paragraph, the FED is keeping the interest rates low thinking that the economy will keep on booming. However, there's no big need to under estimate the ability of America. In fact, it is already picking up since the downfall in 2009. The country is making progress! The FED should be confident!


Confidence is also required to not lose workers. There are dangers that America faces if things don't get better, but again, Buffett does not worry too much about it. In 2008, everything fell apart; leaders were saying "We'll do whatever it takes." They had the power and the people believed they will do it. However, because of many unfulfilled promises, it's hard to believe them nowadays. Promises require action.


However, even though there are unfulfilled promises, the country won't exist this way without the government. Two things to keep the financial system going well are by keeping limits of leverage and having incentives for those who are working at the top positions. They are too important in the society that they can't be allowed to fail. They need incentives, because the country will not grow without them. We have to change the behavior of the people at the top positons. There has to have restrictions and discipline.


Taxes, growth, FED - there are so many topics that one word can lead to. In reality, these are all interconnected. One cannot exist without the other. The country has to work together, hand in hand, assisting each other to succeed.

Full Transcript

How Much Should Taxes Be?


Most rich people would be grateful to have lower taxes, but not Warren Buffett.


In one of his interviews with The New York Times, he said...


Our leaders have asked for 'shared sacrifice'. But when they did the asking, they spared me. I checked my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. 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 ordinary tax breaks.


Americans are rapidly losing faith in the ability of Congress to deal with our country's fiscal problems. Only actions that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.


Job one for the 12 is to pare down some future promises that even a rich America can't fulfill. Big money must be saved here.


The 12 should then turn to the issue of revenues. I would leave rates for 99.7% of tax payers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax.


But 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.


Tax Facts


Buffett is one of the richest people in the world and believes that people like him should pay more taxes. The very rich are paying less in the way of taxes.


During 2002, tax rates have gone down significantly for the rich. America is an extremely rich country. They have $48,000 of GDP per capita, but even a rich country has limits. Buffett proposes that those who get low income in a year should not be asked to taxed much. Instead, those who are very rich should be asked to contribute more.


What really gives the low rate to rich people is the low tax on dividends and capital gains. In 1992, the rich people almost had a 10-fold in increasing capital gains and dividends. Those are taxed at 15% and they don't have payroll taxes. Payroll taxes account almost as much as revenue of the government as the income tax. Buffett is one of the rich people, which means he doesn't experience payroll income tax deduction. He has tax returns, though. His annual tax is about $100,000 as well as his super rich friends.


The regular employees of Berkshire Hathaway is surprised with that. They feel that they should be taxed less, while the rich be taxed more. Their average tax is 33%, while on the other hand, Buffett is taxed only at 17.4%.


Making money with money can tax at very low rates - 15% dividend and capital gains; no payroll taxes. Making money with muscle or hard work gets more tax deduction. The middle class is taxed between 15%-25% on income tax, but they really get hit hard on the payroll taxes. There are more than 80 million actual tax payers, and the high rates are falling in the middle class.


Reducing taxes will create economic expansion and growth. People will create more jobs if they are not paying much tax. If people are paying a higher tax, they won't make many investments.


How Should America Deal with Tax?


People are upset about how the government works regarding tax. Whatever is done should restore people's faith to a degree that the government can make things better. They should get rid of promises that they can no longer keep, so the citizens won't wait for nothing. However, Buffett isn't saying that America should cut spending dramatically now. Fairness is important as well as a sensible long-term plan. If people won't believe the ability of the government, it's not going to work.


Americans deserve to be educated and know the significant deficits when the economy is weak. If the government doesn't do it now, there will be more wasted time and potential outputs. Despite the fact that the US congress is dysfunctional, Buffett disagrees with the downgrade. He understands the reasons behind it.


The treasury can print money. it's a blessing itself, because 17 countries in Europe gave up their rights to print money. Now, they are facing problems. Unlike Europe, USA can always pay bills and debt using their own currency.


The FED is keeping the interest rates low, because they think the economy will keep on booming with the kind of rates there are now. However, there's a chance that they are wrong. The US economy can pick up! There's no need to under estimate the ability of America. In fact, it is already picking up since the downfall in 2009. The country is making progress.


The increase in GDP has been very good overtime. America doesn't have great natural resources unlike other countries, but it has a system that worked and cooperated. The Chinese were as hard working as Americans 50 years ago. China and America were equal in terms of growth, but after 50 years, USA has gone way ahead.


Going back on the formula, America can spend 21% and lend a deficit a couple percent of GDP overtime. With that, the income population wealth grows and debts and can be handed, too. That means people need to hit both sides, but they can't take the trajectory.


America has the biggest stimulus program in the world right now. Fiscal stimulus is when the government spends a lot more than what they can take in. The deficit itself is the stimulus. Whether it is 10% of GDP deficit or not, America pushed the monetary policy too much that it reached its limits. There are two reasons why the economy declines according to Buffett. One, people trust the government too much. Two, confidence is a huge damage when it's too much.


On another note, confidence is required to not lose workers. There are dangers that America faces if things don't get better, but again, Buffett does not worry too much about it. In 2008, everything fell apart; leaders were saying "We'll do whatever it takes." They had the power and the people believed they will do it. However, because of many unfulfilled promises, it's hard to believe them nowadays. Promises require action.


The members of the congress are intelligent, good-humored, and disciplined. However, they lack some things that will drive the country to work. These members were positioned in where they are now because of personal feelings of voters. These members work for months, and then get criticized. Despite the criticisms, they still work.


There are two things needed to keep the financial system going well. One, keep limits of leverage. Two, have incentives for those who are working at the top positions. They are too important in the society that they can't be allowed to fail. There are down sides though. For people who run big financial institutions, they get into big troubles; they are too big to fail. They need incentives, because the country will not grow without them. We have to change the behavior of the people at the top positons. There has to have restrictions and discipline.


More to Come


In capital investment, almost everything is in the USA and there are plenty of things to do still.


Berkshire is different today. People are seeing more and more evidence of it as they employ many more people with exception of the housing business. They offer an opportunity to look at where the US economic growth is. The success of Berkshire is different from other businesses. It is Buffett's masterpiece. They make mistakes, but they learn from them. They lay out their economic principles which they didn't change for many years.



From taxes to government to growth to GDP... There are so many topics that one word can lead to. In reality, these are all interconnected. One cannot exist without the other. The country has to work together, hand in hand, assisting each other to succeed.