Warren Buffet and I Make Taxes 1

Dear Mr. Buffet,

First of all, did people call you “Warren” growing up? It just doesn’t sound like a very appropriate name for a little kid, and I can’t think of any nick names other than “Warney,” which is unlikely to catch on any time soon (like I mentioned in my last post, naming isn’t my forte).

How's that golden popsicle taste?

Second of all, Mr. Buffet, I’m a little bit upset you didn’t at all mention my blog post in your New York Times editorial piece the other day. Clearly you read it: most of your logic about how the super rich are paying too little came from my discussion. I mean, I guess you could have just looked at your tax return and calculated the 17% rate yourself, but that seems much less likely than your reading my obscure accounting blog.

So anyway, Mr. Buffet, you think you and your buddies aren’t paying a big enough percentage of your income in taxes. That’s fair enough. You say you’d raise taxes on the super wealthy, but that’s not really good enough. I want logistics. What amount should these people pay? How should we accomplish that? I have some suggestions to get you and your friends paying a bit more: Let’s shoot for 25% on those capital gains this year, just to take baby steps. If it works, maybe we can work something out where you can give me a share or two of Berkshire Hathaway (Class A, please).

The first thing you could do is just pay more. Add a few extra zeroes to that huge check you send in every quarter. Then, when April 15 and your accountants ask if you want a refund, just say “no.” Sure, that’ll just be applied to next year, but I can guarantee the government will spend it while they’re holding onto it for you. And, at least to my knowledge, there’s not a limit on how much overpayment you can make. In fact, I bet if you talk to the right person at the IRS, they’ll even find a way that you’ll never get the money back at all.

Now I can understand, Mr. Buffet, that you probably have some doubts. Your accountants are just too good, aren’t they. They work too hard to get you additional deductions and credits, and when they offer to find you more, you just can’t turn them down. It’s like a drug, isn’t it? Or are your accountants just too darn bossy? Either way, I can see how your accountants are going to, in the long run, force you pay less money to the government, so let’s see if we can find a longer term solution to make them make you pay more.

We need a new law to tax the rich. I’m not talking about the “tax the rich” talking point that’s constantly being debated back and forth but doesn’t really mean anything. Let’s come up with something that can actually be implemented. I know, Mr. Buffet, that you wanted the tax starting on those making $1 million, but for now we’ll start targeting just the super rich, those who have so much money that it’s not even worth their time to pick up a vagrant thousand dollar bill stuck to the bottom of their shoe. I’ve heard that the top 400 people control the very elements, so let’s just tax them. There’s no way the Republicans can complain about that too, right? Democrats might be more of a challenge, thinking we haven’t gone far enough, but we’re still talking baby steps.

Obviously the easiest way to handle this would be to create an official government list and make sure those super rich people pay some minimum rate, but it turns out that’s unconstitutional, so we’ll have to find a way around it. What do you think, Warren, how about we propose a parallel tax system? Everyone with certain kinds of incomes, especially things like those capital gains you mention, have to compute their taxes twice. This alternate system will have a whole bunch of tests and formulas that figures out if you’re one of those super rich. If you owe more taxes under this alternative system than the regular one, you have to pay the difference on top of your normal taxes. Then your rich buddies will have to pay a minimum rate of taxes.

Suddenly I feel like I’m getting déjà vu. Hmm.

Whatever, let’s carry on.

Since a $20,000 jump in salary sounds like a ridiculously large amount to me, I’m probably not the best qualified to determine what income is going to be considered super rich. For now, let’s just say if someone makes over $10 million a year we’ll put them in our other system. It’s a nice round number, and it’s bigger than I can fathom. Once it’s in place, we can adjust the number much easier, maybe drop it down to the $1 million a year range that you want so much.

Just one sec, Mr. Buffet…$10 million…I can’t even comprehend how much that is. I probably never will. You probably spend more than that when you go out to dinner in some obscure country that’s only on maps handed out to those listed on Forbes Riches.

You know, Warren, $10 million is so much, we shouldn’t bother including an administrative provision to link such a high amount with inflation. That would just cost the government every year to figure out, and normal people are never going to make $10 million a year anyway.

Yep, I think that’ll about do it. We gotcha, Warney. You’ll be paying a higher rate now for sure.

Oh crap…now I know why this sounds familiar. It’s exactly like the Alternative Minimum Tax, or AMT. It is also known in accounting world as Satan’s tax. It’s about as fun as driving a Yugo cross country during the middle of summer.

Brief history: the AMT was originally passed in 1969 to stick it to the richest of the rich (literally, just the top 150). Changes have been made over time, but the intention has always been to catch those very wealthy who figured out how to get around the normal tax system. Unfortunately, someone forgot to index this alternative system for inflation.

A million dollars a year is a lot now, right? What will it look like in 40 years? The amount they considered super rich in 1969 was $200,000 a year. 40 years and a few stagflation periods later, while $200k would certainly be a big pay bump for me, probably even be considered upper middle class, it’s hardly super wealthy. Because of this lack of foresight, AMT catches more and more middle class every year. Current government rules make it extremely difficult to now link it to inflation, too, so every couple of years Congress get into a huge debate about “patching” AMT, or temporarily increasing what income level to consider as wealthy. Since no one will just to pull the whole system and start again, we’re going to have to constantly deal with the current AMT law (at least until it’s to a string of accounting murders).

Want to know what’s worse? Let’s just think for a moment, Mr. Buffet: if this AMT is still law, yet we’re having this discussion, how well do you think it is at catching the super rich?

Yeah….your accountants have obviously figured how to get around it by now. I’m not even sure if it was successful at increasing taxes on the super rich at the time, though I do know that total tax revenue actually dropped from 1969 to 1970 (the first year AMT was implemented), both in constant dollars and a percentage of GDP. I’m not saying it was because of AMT (I can’t believe that Devil tax had that much sway), I’m just saying it wasn’t the magic revenue bullet people thought it would be.

But you never know, maybe if we try it again, it’ll work this time.

Or maybe, Mr. Buffet, you and your friends can just start paying a higher tax rate out of the goodness of your hearts. Both possibilities seem equally likely to me.


Disclaimer: This is not tax advice, just my opinion, so don’t use it as anything other than my personal rantings