Buffett secretary to attend State of the Union

[Tim Eriksen]

Maybe Obama should just bring the tax rates back up to the Reagan years if Reagan "does it for you":

 

After all, for seven of Reagan’s eight years in office, the top tax rate was higher than the current 35 percent. In six of those years, it was 50 percent or more. And every year that Regan was in office, the bottom tax bracket was higher than the current ten percent.

 

http://thinkprogress.org/economy/2011/06/01/233526/taxes-lower-reagan/?mobile=nc

 

What matters are effective rates.  Effective rates are largely unchanged for the wealthy since then.  The left likes to harp on the lower tax rates but ignores all the other changes to deductions.  Effective rates for the top 1% were as follows:

1981  21.5%

1982  20.4%

1983  19.4%

1984  19.3%

1985  18.9%

1986  18.3%

1987  21.5%

1988  20.7%

 

from 2003 to 2007 it ranged from 18.9% to 19.7%.  Thus it is an overall change from 20% to 19.3%, not that significant.  I would bet the already enacted tax increases will push the rate above the Reagan years. 

 

What is interesting is to look at what the Reagan and Bush tax cuts did for the poor and middle class. 

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456

The lowest two quintiles now have negative effective income tax rates due to credits (Child Tax Credit and EITC).  The middle quintile has gone from an effective rate of 6% to 3%.  The fourth quintile has gone from 9% to 6%.  Yet the President uses Buffett's poor logic to argue that the middle class are taxed more than the super rich.  The facts on the whole do not support his argument.

 

[ERICOPOLY]

Effective rates for the top 1% were as follows:

 

You are sampling the wrong population.

 

The top 1% is not the right category to draw statistics from.  Too many people in there work for a living. 

 

Instead, focus on the individuals who don't -- those people who have it so good that they live on investment income.  They're the ones who got the tax cut.

 

Start your search for truth in the top 1/10 of the 1%.

[Tim Eriksen]

Effective rates for the top 1% were as follows:

 

You are sampling the wrong population.

 

The top 1% is not the right category to draw statistics from.  Too many people in there work for a living. 

 

Instead, focus on the individuals who don't -- those people who have it so good that they live on investment income.  They're the ones who got the tax cut.

 

Start your search for truth in the top 1/10 of the 1%.

 

I have already detailed their true effective tax rate on capital gains and dividends in prior posts on this thread (effectively 45% not 15%).  By the way, if 1/10 of the top 1% is paying appreciably less it would show up in the stats for the top 1%, unless you are arguing that the rest of the 1% saw an increase which is masking it.  If that is true they should be the ones upset (and not the middle class) since everyone else saw a decrease in the last thirty years. 

 

The facts are that the bottom three quintiles have actually seen their tax burdens fall significantly in the last thirty years.  Yet Buffett and Obama argue those people are getting shafted.  The lower three quintiles are getting more benefits and paying less than ever before.  The bottom line is Buffett is wrong - we are not coddling the super-rich, we are coddling everyone. 

[Cardboard]

The money that both Obama and Buffett want to tax at higher rates will simply leave the country and every other place will welcome them with arms wide open. They could also go into "tax avoidance" schemes as described by Ericopoly. Let's mention once again that Mr. Buffett is and has been the master at this kind of tax evasion. 

 

IMO, the problem with Western nations is not about taxing the rich or income inequality. It is about lack of education for the majority to compete with emerging nations and excessive consumption. The middle class is now not much more skilled than their global counterparts and they have the terrible habit of wanting everything now. So they are like Chinese workers wanting to live the life of stars.

 

If I compare the people on this board and the folks that I am talking about, which is the majority, you immediately see a big difference. The folks on this board have made sacrifices to improve their lives by putting money aside. Then they spent time to figure out how to best invest it. They are not the kind of people that constantly seek adrenaline. You know the kind that are never home, are always hiking, skiing, playing the Xbox, going out, talking to friends on Facebook, going for massage, traveling or doing other fun activities.

 

These are the people that will complain the most about the current system. They envy the rich because they see what they don't have on TV and feel that they should have it too. For the most part, they have good well paying job, but they are underperformers. They hate working, 40 hours is a lot and feel that society owes them something. They are spoiled. Forget about them saving for retirement.

 

So why would the rich or people that have made true sacrifices to get where they are today, made people work and paid a lot of taxes along the way be taxed more on their savings to encourage these people that should contribute a whole lot more to society? Said differently, why would people that have prepared themselves for the future be held accountable for those that have tried to enjoy everything now, have not saved a penny for retirement and likely got into too much debt?

 

Keep this populism mantra go long enough without morality reform and Western civilization will go the way of the Romans. And that is just a few decades from now.

 

Cardboard

[ERICOPOLY]

By the way, if 1/10 of the top 1% is paying appreciably less it would show up in the stats for the top 1%, unless you are arguing that the rest of the 1% saw an increase which is masking it.  If that is true they should be the ones upset (and not the middle class) since everyone else saw a decrease in the last thirty years. 

 

Let's put it this way.  Restore the dividend tax to regular "income" rates and watch them squirm and resist.

[ERICOPOLY]

Obama really ought to look at Australia's dividend franking system.  Australian investors in Australian companies don't pay personal income taxes on after-tax profits from Australian corporations.  This is because the corporation has already paid Australian tax.  You might pay a little bit of tax on the dividend if your personal tax rate is higher than the corporate tax rate, but their highest personal tax rate is 45%.  So some people might pay 15% or so tax on the dividend income, but others in lower tax brackets will pay nothing extra on the individual level.

 

Now you bring that rule in here to the United States and investors will be more interested in companies that have paid on-shore corporate taxes.

 

Obama could call it a jobs package, a reason to make onshore operations a bit more attractive.  Takes a bit of the advantage away from offshore operations.

 

And it wouldn't upset the Republicans of course.

[Tim Eriksen]

By the way, if 1/10 of the top 1% is paying appreciably less it would show up in the stats for the top 1%, unless you are arguing that the rest of the 1% saw an increase which is masking it.  If that is true they should be the ones upset (and not the middle class) since everyone else saw a decrease in the last thirty years. 

 

Let's put it this way.  Restore the dividend tax to regular "income" rates and watch them squirm and resist.

 

Would you support that with an elimination of corporate taxes?

[ERICOPOLY]

By the way, if 1/10 of the top 1% is paying appreciably less it would show up in the stats for the top 1%, unless you are arguing that the rest of the 1% saw an increase which is masking it.  If that is true they should be the ones upset (and not the middle class) since everyone else saw a decrease in the last thirty years. 

 

Let's put it this way.  Restore the dividend tax to regular "income" rates and watch them squirm and resist.

 

Would you support that with an elimination of corporate taxes?

 

No, the corporations need to pay tax.  I have 1/2 of my money in a Roth IRA -- if the corporations don't pay any tax then I've got it a little too good.  Corporations need roads to drive their trucks on -- it's in their best interest to have at least some form of government provided infrastructure.

 

I'd be happy to eliminate the double taxation per the Australian dividend franking system.  There is no rioting in Australia.

 

[ERICOPOLY]

Perhaps it wasn't quite clear, but the dividend franking system eliminates double taxation only on US corporate profits.

 

Taxes on profits paid in foreign lands will be assessed a second time in the form of income taxes when distributed to US shareholders.

 

So it just makes it a bit cheaper from a US taxpayer's perspective to keep manufacturing operations here in the US, if you take into account the tax savings upon getting that dividend in hand.

 

Well, it would be one way for Obama to make US based investment more attractive -- and that Republicans may actually agree with (getting rid of double taxation on US corporate profits).

[RichardGibbons]

So why would the rich or people that have made true sacrifices to get where they are today, made people work and paid a lot of taxes along the way be taxed more on their savings to encourage these people that should contribute a whole lot more to society?

 

Because it's a lie that they've made more true sacrifices than anyone else.  People like to espouse this myth, but good luck telling that to the people working two jobs to keep food on the table.

 

Largely, success is a matter of luck (being smart probably helps too, but being smart is also a matter of luck).  I think from a monetary standpoint, I'm more successful than most of my peer group.  But it was mostly luck, and there's many areas where I wasn't as lucky.

 

That's the whole idea behind the ovarian lottery.

 

If you don't want to pay your fair share, I understand it -- you would like to keep everything you have.  But you'll have to deal with it, because that's the cost of living in a democracy, and because it's basically indefensible allocating such a huge percentage of the total output of society to such a small percentage of people.  And people are figuring that out.

 

 

 

[onyx1]

There is no rioting in Australia.

 

Really? 

http://www.dailymail.co.uk/news/article-2092021/Australian-PM-dragged-safety-crowd-aborigines-protesters-ambushed-restaurant.html

[Cardboard]

"People like to espouse this myth, but good luck telling that to the people working two jobs to keep food on the table."

 

And that is exactly the source of the problem. These people need to be told that they need to make changes in their life because it won't get any easier. They likely have a problem budgeting or they need to upgrade their skills to make more money or they need to work more. Receiving a cheque from the state is not going to address their long term demise. There is no luck in there. It is making choices and sacrifices. I know it is harsh and no politician wants to go there, but it is a lot about facing reality. Maybe that Suze Orman should go for President? I also know that there are exceptions to what I am saying and that is why there are safety nets. However, they are not for the majority.

 

Regarding "wanting to keep all my money", I won't keep a dime of it! I would like to be able to do like Buffett and give it to who I want. Not to a state that is transforming itself to communism. But, yes I am totally willing to pay my fair share and I agree that taxes in the U.S. overall for investment income are too low. Anyway that is if I compare to Canada.

 

What I have a real problem with is this jealousy that I see emerging. For example, Romney has invested a fair chunk of his money in municipal bonds. As you know this is taxed at lower rates to encourage people to put money in there. If this gets taxed at the normal rate, who is going to invest in these riskier bonds vs treasury at these very low returns? Investors will demand a higher rate which in turn will be bad for municipalities and will make them raise taxes. That is not going to help the middle class. So people are upset because he pays a low rate and he is rich. That could take us to a very dangerous path.

 

So yes, fix the loopholes, remove deductions for private jets, catch tax evaders and raise rates to a "reasonable" level or competitive on a global scale. I am all for it. However, be careful how far you take this and how it is done.

 

Cardboard

[RichardGibbons]

These people need to be told that they need to make changes in their life because it won't get any easier. They likely have a problem budgeting or they need to upgrade their skills to make more money or they need to work more.

 

So, you think the solution is for everyone to upgrade their skills?  Hmm, so you'd prefer to live in a world where there are no barbers, baristas, fast food restaurants, people growing and harvesting food, child care, grocery stores, malls, garbage men, physical laborers etc.

 

I think it would be a pretty bad thing to eliminate any retail business, any businesses involving food, and really, any other business that uses low-cost labor in its supply chain.  I'm pretty sure that, given long enough without food, I'd die, and it wouldn't surprise me if the same thing would happen to you.

 

Or do you really mean that you'd just like to retain the illusion that that's possible for everyone to be wealthy, so that you can pretend that the inequities of society are entirely because the poor don't make an effort?

[Tim Eriksen]

These people need to be told that they need to make changes in their life because it won't get any easier. They likely have a problem budgeting or they need to upgrade their skills to make more money or they need to work more.

 

So, you think the solution is for everyone to upgrade their skills?  Hmm, so you'd prefer to live in a world where there are no barbers, baristas, fast food restaurants, people growing and harvesting food, child care, grocery stores, malls, garbage men, physical laborers etc.

 

I think it would be a pretty bad thing to eliminate any retail business, any businesses involving food, and really, any other business that uses low-cost labor in its supply chain.  I'm pretty sure that, given long enough without food, I'd die, and it wouldn't surprise me if the same thing would happen to you.

 

Or do you really mean that you'd just like to retain the illusion that that's possible for everyone to be wealthy, so that you can pretend that the inequities of society are entirely because the poor don't make an effort?

 

Did you have to work at mischaracterizing other people's opinions, or does it come naturally?  Let me try doing it back and maybe it will be obvious how foolish it is.

 

So, you think the solution is for people to ignore education or self-improvement?  Hmm, so you'd prefer to live in a world where there are no colleges, universities, etc.

 

I think it would be a pretty bad thing to eliminate education and an emphasis on personal responsibility,  I'm pretty sure that, given long enough without personal responsibility, I'd die, and it wouldn't surprise me if the same thing would happen to you.

 

Or do you really mean that you'd like to eliminate the fact that it is possible for everyone to improve their lot in life, so that you can pretend that the inequities of society are entirely not the fault of individuals?

 

 

Note:  Please don't misunderstand the tenor of my comments.  They are a bit tongue in cheek, but also serious in the sense that I am really amazed that one can twist another poster's comments so significantly. 

[ERICOPOLY]

There is no rioting in Australia.

 

Really? 

http://www.dailymail.co.uk/news/article-2092021/Australian-PM-dragged-safety-crowd-aborigines-protesters-ambushed-restaurant.html

 

 

Somehow they've managed to have the following policies:

1)  No inheritance or gift taxes

2)  No double tax on dividends

 

Without demonstrations in the streets!

 

Of course their unemployment level is under 5%.

 

The system of having the tax paid either by the corporation or the individual ensure that the tax is actually paid.  People can't stand the "no double tax" argument here in the US because we're not even sure if the corporation has paid any tax!  Many do not pay much if any tax and still distribute dividends that get taxed at only 15%.

 

I think people could relax a bit regarding corporate jet tax deductions and everything if they knew that the dividend recipient would be paying the full tax one way or the other.

 

You want the big corporate tax deductions?  Fine, then pay the personal income tax on the dividend instead. 

You've already paid the big corporate tax?  Great!  We'll reward you by giving you a credit towards your personal income tax on the dividend.

[Cardboard]

I would like the debate to remain calm and polite if possible.

 

Barack Obama mentioned 3 times the need for better skills and education in his State of the Union address. He pointed out the lady that has upgraded her skills at Siemens, the guy who found a job at a company that stopped making yachts and is now making wind turbines in Wisconsin and that millions of job postings go unfiled. So I would like to think that this is not a conservative notion that I am bringing up.

 

Where I have a problem with Obama is his tone and implementation plan. If you listen to the speech, notice the tone when he talks about the company that was making yachts before. He makes it sound like that making yachts is some kind of evil activity. While I am shocked when I see the spending of some very rich people and think a good portion of it is irresponsible, I do believe that demonizing such things leads to dangerous consequences.

 

Say that taxes are raised on the rich, which I agree with for the most part, and that it does not provide the boost to the economy or the reduction in debt hoped for. Very likely if it is not applied directly to the debt and used to increase spending on what is usually poor use of capital. Then I think that the way it is being presented now, the next logical step will be nationalization and asset seizure of the rich. Venezuela is a good example of populism turned bad. Raising taxes on the rich is not the all inclusive solution. It will likely help the government balancing his budget if done right, but will not address income inequality and fix all problems.

 

The other point I would like to make is that we often hear about the 99% thing, but what I find amazing is that at each election, the vote is split roughly 50% Democrats and 50% Republicans. If society is so unequal, then why so many people that are poor or in the 99% continue voting for Republicans which basically oppose bigger government, higher taxes or asset redistribution? Isn't because most people are having most of what they need? Food, shelter, education, healthcare and most commodities of modern life?

 

So what I would like to see is a Romney win in 2012 and for him to implement higher taxes on the rich, tax reform and growth plans through education. CEO's, star athletes and hedge fund managers should all pay more taxes and be denied many current tax loopholes and yes their income gap with the poor and middle class is out of whack. Not sure what is the solution on the latter although. I simply believe that the implementation by a conservative or a moderate Democrat would be a lot easier and would not lead the country down to a war against wealth. The pressure is now there, so no matter who wins, something will get done. How it is done is key.

 

Finally, the people that you mentioned: hair dressers, retail workers, etc. don't make big money. However, you would be surprised to see the income of some of these people (garbage men and farmers for example), but let's stick with the low income folks discussion. Their situation is difficult I must admit especially if they live in expensive urban areas. So I do think that the best solution is for reasonable minimum wages to be implemented based on where work is conducted for them to afford what is essential. And for them to improve their situation significantly, I still think that they would have to look at doing something else or finding a sideline. Financial literacy and better budgeting skills should also be considered.

 

On the other hand, it is wrong to assume that these people should be able to afford all they would like: expensive cars, latest Xbox, large homes, NFL seats, etc. Everything for everybody has never occured in human history under any system and will likely never happen. I can't have it myself and I am I guess close or in the 1%. Capitalism is based on merit and wanting to improve its own situation. While morally, it is certainly not perfect and it probably needs to be tweaked once in a while to avoid abuse, it generally works better than other things that have been tried. I don't have stats for it, but I would like to think that there is much more than 1% of Americans that do enjoy good living. 

 

Cardboard

[Tim Eriksen]

To go back to the original topic of Buffett versus his Secretary, there have been reports that her compensation is modest (around $60,000).  Whether true or not it is a reasonable number of a solidly middle class income (which is who Buffett and Obama are trying to imply are over paying due to our coddling the super-rich).  Under Buffett's analysis, she is highly taxed and he is not.  Where Buffett errs is that he is taking a snapshot in time versus looking at it over a lifetime.  Let's assume she has and will earn $60k per year (from age 25 to 67) and live to normal life expectancy for a white female (81 years).  In Buffett's thinking she will have been paying nearly 40% in taxes but the reality is that most of it is payroll taxes that she will recoup with "interest."  Once you add back the Social Security and Medicare benefits, which I calculate at $1,891 and $695 per month, respectively her lifetime tax rate (assuming she lives to age 81) ends up at 11.5% of total salary.  As I pointed out previously, Buffett of course uses taxable income in order to come up with a higher rate (and ignores that medical benefits are untaxed). 

 

If you do not attribute the employer portion of payroll taxes to the Secretary her lifetime effective rate becomes 3.9%.  This is all excluding tax benefits for children.  Buffett's secretary has one child, per news reports.  The additional tax savings per child amount to $34,650 over 18 years ($1,000 tax credit plus impact of additional exemption).  Factoring in one child would lower her rate to 2.5% ($63,000 versus lifetime earnings of $2.5 million).  If she lives past age 83 she would move into negative lifetime total tax. 

 

Thus the question is this - Is she being asked to pay too much for the benefits she receives in our society? 

[Kiltacular]

Tim,

 

Good post and good points.  The part that Buffett is leaving out -- though he has repeatedly alluded to -- is that her benefits are going to be cut.

 

It's a bit frustrating that Buffett isn't making a bigger deal of the other half of his argument.  That is, getting gov't spending as a percentage of GDP down to the level he has talked about -- 20 to 21% -- would require current year cuts on the order of more than $600 billion.  Buffett also knows that every day we wait to make these cuts, the more we'll have to cut in the future.

 

Moreover, and Buffett knows this, in order to make these kinds of cuts, it will have to come in large part from Social Security and Medicare -- since that's where the bulk of the spending goes.

 

No one -- including Buffett -- is yet prepared to come out and say: "We're going to cut your benefits." 

 

Interestingly, you won't get a Republican politician to say it (you might find a couple but readers get my drift) and you won't find a Democrat politician saying it.  In fact, you'll find almost no one in the public eye willing to explain this.

 

In my experience, the average person -- no matter their political affiliation -- does NOT want to hear that their benefits are going to be cut.  This is, of course, particularly true if they are at or near retirement age.  And, as readers know, this is a large voting block in any generation but with the boomers now on the cusp of this group, it is a HUGE voting block.

 

You'll often hear things like: "Well, we need to cut defense."

 

Sure, and defense is being cut.  Do citizens really want to cut it to zero?  Unfortunately for proponents of this solution, defense simply isn't a large enough portion of the pie to solve the problem.  Again, someone like Buffett, whom actually looks at all the numbers (and what the future holds) also knows this can't solve the problem.

 

The only thing to solve the problem is a cut in the Social Security and Medicare payments. 

 

People often lament that: "Politicians only want to get re-elected." 

 

Right -- and so, as voters, we get the politicians we want.  Imagine a world where no politician was worried about re-election.

 

They want to get re-elected and so they give us what we want.  And, in this instance, they're not going to give us what we don't want. 

 

The populace is not yet ready to see these benefits cut.

 

My belief is that Buffett knows that the longer this is put off, the worse the risk for the future is.  My belief is that Buffett knows, one way or another, the benefits will have to be cut.  My belief is that Buffett is only talking about one half of the problem publicly while clearly alluding to the other half of the problem because the other half of the problem is so politically unpopular.  (Recall what happened to Buffett when, as quasi-advisor for Gov. Schwarzenegger, he suggested that California should reform its property tax system.  If you don't recall, go look it up...after those comments, Buffett was shunted to the background.)

 

So, this time around, Buffett is only attacking one half of the problem.  Meanwhile, he is hoping that he can convince both parties to come together and both be willing to say what needs to be done.  If both aren't willing to say it, he KNOWS NEITHER PARTY will say it -- it is still political suicide.

 

What use is it for a congressperson to step up and say: (1) I'm in favor of tax hikes on the rich and (2) I'm in favor of significant cuts to Social Security and Medicare, IF they are immediately going to be voted out of office.  There is no way they'll be able to get anything done.

 

Both parties have to agree on this.

 

I hope, as I believe Buffett does, that this agreement is achieved before we have to enter a crisis.  And, make no mistake, there will be a crisis unless this is resolved. 

 

The math is very simple. The solution is clear.  It will require both halves.

 

But, there is no question that human nature says it is easier to blame "the other side".  The implication of this approach is that, "the problems could be solved, if only the other side would agree with me."

 

That's an easier approach than for each individual to face the fact that we've got a serious problem -- a disaster -- if we continue to grow GDP at 2.5% and debt at 10%.  There is ZERO doubt the lines eventually cross.

 

 

[ubuy2wron]

To go back to the original topic of Buffett versus his Secretary, there have been reports that her compensation is modest (around $60,000).  Whether true or not it is a reasonable number of a solidly middle class income (which is who Buffett and Obama are trying to imply are over paying due to our coddling the super-rich).  Under Buffett's analysis, she is highly taxed and he is not.  Where Buffett errs is that he is taking a snapshot in time versus looking at it over a lifetime.  Let's assume she has and will earn $60k per year (from age 25 to 67) and live to normal life expectancy for a white female (81 years).  In Buffett's thinking she will have been paying nearly 40% in taxes but the reality is that most of it is payroll taxes that she will recoup with "interest."  Once you add back the Social Security and Medicare benefits, which I calculate at $1,891 and $695 per month, respectively her lifetime tax rate (assuming she lives to age 81) ends up at 11.5% of total salary.  As I pointed out previously, Buffett of course uses taxable income in order to come up with a higher rate (and ignores that medical benefits are untaxed). 

 

If you do not attribute the employer portion of payroll taxes to the Secretary her lifetime effective rate becomes 3.9%.  This is all excluding tax benefits for children.  Buffett's secretary has one child, per news reports.  The additional tax savings per child amount to $34,650 over 18 years ($1,000 tax credit plus impact of additional exemption).  Factoring in one child would lower her rate to 2.5% ($63,000 versus lifetime earnings of $2.5 million).  If she lives past age 83 she would move into negative lifetime total tax. 

 

Thus the question is this - Is she being asked to pay too much for the benefits she receives in our society?

Gee Tim Buffetts secretary may or may not receive promised government benefits. It is pretty  clear that if any of the current Republican contenders have their way in the matter the amount of promised benefits she will receive is pretty much moot. Plus since the pie that is being cut up here is a little larger than individuals share of government benefits do you not think it just a little misleading to focus the debate around the share of govt. benefits. I wonder how much of BRK companies profits are derived  directly from govt. expenditures.

[Tim Eriksen]

To go back to the original topic of Buffett versus his Secretary, there have been reports that her compensation is modest (around $60,000).  Whether true or not it is a reasonable number of a solidly middle class income (which is who Buffett and Obama are trying to imply are over paying due to our coddling the super-rich).  Under Buffett's analysis, she is highly taxed and he is not.  Where Buffett errs is that he is taking a snapshot in time versus looking at it over a lifetime.  Let's assume she has and will earn $60k per year (from age 25 to 67) and live to normal life expectancy for a white female (81 years).  In Buffett's thinking she will have been paying nearly 40% in taxes but the reality is that most of it is payroll taxes that she will recoup with "interest."  Once you add back the Social Security and Medicare benefits, which I calculate at $1,891 and $695 per month, respectively her lifetime tax rate (assuming she lives to age 81) ends up at 11.5% of total salary.  As I pointed out previously, Buffett of course uses taxable income in order to come up with a higher rate (and ignores that medical benefits are untaxed). 

 

If you do not attribute the employer portion of payroll taxes to the Secretary her lifetime effective rate becomes 3.9%.  This is all excluding tax benefits for children.  Buffett's secretary has one child, per news reports.  The additional tax savings per child amount to $34,650 over 18 years ($1,000 tax credit plus impact of additional exemption).  Factoring in one child would lower her rate to 2.5% ($63,000 versus lifetime earnings of $2.5 million).  If she lives past age 83 she would move into negative lifetime total tax. 

 

Thus the question is this - Is she being asked to pay too much for the benefits she receives in our society?

Gee Tim Buffetts secretary may or may not receive promised government benefits. It is pretty  clear that if any of the current Republican contenders have their way in the matter the amount of promised benefits she will receive is pretty much moot. Plus since the pie that is being cut up here is a little larger than individuals share of government benefits do you not think it just a little misleading to focus the debate around the share of govt. benefits. I wonder how much of BRK companies profits are derived  directly from govt. expenditures.

 

I think your perception of where the Republican candidates (excluding Ron Paul) stand on Social Security is incorrect.  None are calling for cuts,let alone elimination of benefits, for middle class retirees.  They do admit there is a problem with the system (projected funding falling short of projected costs), which some politicians in Washington will not do. 

 

No I do not think it is misleading at all to exclude how much of BRK profits relate to government expenditures.  This is a discussion about Buffett's claim and how it is flawed and inaccurate.   

[ubuy2wron]

Tim,

 

Good post and good points.  The part that Buffett is leaving out -- though he has repeatedly alluded to -- is that her benefits are going to be cut.

 

It's a bit frustrating that Buffett isn't making a bigger deal of the other half of his argument.  That is, getting gov't spending as a percentage of GDP down to the level he has talked about -- 20 to 21% -- would require current year cuts on the order of more than $600 billion.  Buffett also knows that every day we wait to make these cuts, the more we'll have to cut in the future.

 

Moreover, and Buffett knows this, in order to make these kinds of cuts, it will have to come in large part from Social Security and Medicare -- since that's where the bulk of the spending goes.

 

No one -- including Buffett -- is yet prepared to come out and say: "We're going to cut your benefits." 

 

Interestingly, you won't get a Republican politician to say it (you might find a couple but readers get my drift) and you won't find a Democrat politician saying it.  In fact, you'll find almost no one in the public eye willing to explain this.

 

In my experience, the average person -- no matter their political affiliation -- does NOT want to hear that their benefits are going to be cut.  This is, of course, particularly true if they are at or near retirement age.  And, as readers know, this is a large voting block in any generation but with the boomers now on the cusp of this group, it is a HUGE voting block.

 

You'll often hear things like: "Well, we need to cut defense."

 

Sure, and defense is being cut.  Do citizens really want to cut it to zero?  Unfortunately for proponents of this solution, defense simply isn't a large enough portion of the pie to solve the problem.  Again, someone like Buffett, whom actually looks at all the numbers (and what the future holds) also knows this can't solve the problem.

 

The only thing to solve the problem is a cut in the Social Security and Medicare payments. 

 

People often lament that: "Politicians only want to get re-elected." 

 

Right -- and so, as voters, we get the politicians we want.  Imagine a world where no politician was worried about re-election.

 

They want to get re-elected and so they give us what we want.  And, in this instance, they're not going to give us what we don't want. 

 

The populace is not yet ready to see these benefits cut.

 

My belief is that Buffett knows that the longer this is put off, the worse the risk for the future is.  My belief is that Buffett knows, one way or another, the benefits will have to be cut.  My belief is that Buffett is only talking about one half of the problem publicly while clearly alluding to the other half of the problem because the other half of the problem is so politically unpopular.  (Recall what happened to Buffett when, as quasi-advisor for Gov. Schwarzenegger, he suggested that California should reform its property tax system.  If you don't recall, go look it up...after those comments, Buffett was shunted to the background.)

 

So, this time around, Buffett is only attacking one half of the problem.  Meanwhile, he is hoping that he can convince both parties to come together and both be willing to say what needs to be done.  If both aren't willing to say it, he KNOWS NEITHER PARTY will say it -- it is still political suicide.

 

What use is it for a congressperson to step up and say: (1) I'm in favor of tax hikes on the rich and (2) I'm in favor of significant cuts to Social Security and Medicare, IF they are immediately going to be voted out of office.  There is no way they'll be able to get anything done.

 

Both parties have to agree on this.

 

I hope, as I believe Buffett does, that this agreement is achieved before we have to enter a crisis.  And, make no mistake, there will be a crisis unless this is resolved. 

 

The math is very simple. The solution is clear.  It will require both halves.

 

But, there is no question that human nature says it is easier to blame "the other side".  The implication of this approach is that, "the problems could be solved, if only the other side would agree with me."

 

That's an easier approach than for each individual to face the fact that we've got a serious problem -- a disaster -- if we continue to grow GDP at 2.5% and debt at 10%.  There is ZERO doubt the lines eventually cross.

  A+++++.  While I was scribing my response to the debate your post appeared. This is the issue I do believe the public is ahead of both parties on this issue most believe that tax increases and enititlement reductions are required. It is only the ideologues who think otherwise.

[Tim Eriksen]

  A+++++.  While I was scribing my response to the debate your post appeared. This is the issue I do believe the public is ahead of both parties on this issue most believe that tax increases and enititlement reductions are required. It is only the ideologues who think otherwise.

 

I agree in part.  In some ways the public is ahead, but they are also ignorant of the reality.  Tax increases on the rich will not generate the needed revenue for the revenue half of the equation.  They are also being told by both parties that their (middle class) taxes are too high, yet it was their tax cut (and not the portion for those making $250,000 and over) that helped fuel the deficit.  In addition they want benefits cut but not the ones they are going to receive.  Ultimately the middle class needs to be willing to accept higher taxes or reduced benefits and they are not willing at this time.     

[Cardboard]

Kiltacular,

 

Very good point!

 

The issue I see is that it will take almost a generation for people to forget about retirement for all at 55. With stocks not returning 10% a year consistently as was inputed in so many retirement programs and treasuries yielding so little, retirement age will have to be bumped up by quite a bit and with government support inevitably declining it will become a pipe dream for many.

 

I think that we are in the early stages to get this accepted by the population. As this information becomes more main stream, both Democrats and Republicans will be able to add this to their platform and entitlement reform will become reality. Anyway that is my hope, since more taxes from whoever is not likely to solve the problem in its entirety.

 

Cardboard

[RichardGibbons]

Yeah, I largely agree with you, Cardboard.  The reason that I've raised this argument is because the last 2 pages before my comment were a bunch of rich guys chanting, "It's all the poor's fault that they're in that situation.  All they have to do is step up."  And that's clearly insane, and it's a bad idea to let insanity go unchallenged, because someone might believe it.  The easiest way to do that is to create a counterexample that shows it's insane, which I did.  (Tim, the reason that it seemed ridiculous was because it is.  Take what the person is saying to the natural extreme is what creates a counterexample.)

 

My main point is, inequalities in society are necessary, and saying "It's the poor people's fault that they're poor" is simplistic because we need the poor (and a bunch of other reasons).  At the same time, if you get too much inequality, bad stuff happens.

 

We've lived for a generation where the benefits of society's growth has gone basically entirely to the rich.  The rich might like that, but it's a really bad thing, because you will eventually get society breaking some random direction.  Like the Chavez in Venezuela and the rise of the religious rule in Iran.  USA is in a pretty good place, and it would be bad to make the inequality so great that the poor rise up and take the country in some random direction that has a good chance of being much worse than where we are now. 

 

If you get big enough inequalities, I think it's pretty obvious that it will eventually break, and the outcome will be very unpredictable, but probably bad.

 

To me, the easiest solution that's the most likely to have a good outcome is to reduce income inequality.  Actually doing it is a bit harder.  :)

 

[Packer16]

I think the statement that most of the benefits of society have all gone to the rich is wrong.  If that was the case you would have rioting in the street not just a pretend OWS protest that is a bunch of progressives trying to tax their fellow citizens.  That is why ows has not caught on outside the progressive press.  Is there a problem with investment bankers getting overpaid?  Yes and the answer is happening before our eyes - bankers salaries are going down and some of them may soon be our value investing competition.  I think the key question is not are working class folks working hard for thier wages (most folks are) but would you like to live today or 30 years ago?  I think today is the overwhelming answer.  30 years ago folks dead earlier.  How many of you knew your great gransparents growing up?  I didn't but my kids do.  Is this a benefit only available to the rich? 

 

How about something closer to home, the ease of value investing.  30 years to collect the info we can assemble via the internet to make an informed value investing decision would be much more difficult and any of the working class folks can do value investing as a sideline. 

 

I think alot of people try to explain the differences in wealth based upon factors that are not changable (how smart you are, the home you grew up in, etc.) without mentioning the factors we do have control over.  It is like saying when describing the equity market that there are too many uncontrollable factors in equity valuation therefore I should index and not even try value investing.  Lets look at the factors that wealthy folks have that we do have control over: saving by living below your salary, getting educated on a savings vehicles, the decision to stay together with a spouse, the decision to get an education in a field where you will recoup the cost of the education and the willingness to contantly learn new things.  This has been the path to wealth for the Millionare Next Door and I don't see this changing.  What has changed is the last factor; you will not be able to be in the same job for life.  An interesting sidenote is the divorce and out of wedlock birthrate amonst the middle class has been devistating to their wealth.  This factor get little press but can have a huge impact on wealth.  In the 1960s, this rate was about equal between the top 5% and the rest was below 7%.  But by 2011, the rate was 40% for the top 95% and 6% for the top 5%.  This is based upon a research from a recent book about the middle class.

 

Packer