Ok, Warren Buffett is a genius, and likely the most brilliant investor of all time.  But there is one issue on which he is glaringly wrong.  Taxes.

It has been widely reported that Buffett feels that there is an unfair disparity when he pays 17.7% on his income and his secretary pays 30% on hers.

Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent.

What is seldom mentioned with the same emphasis is how this happens.  It is quite simple…  Capital Gains Tax Rate.

The event comes as public frustration has grown over executive compensation and disparity in pay. It also comes as Congress debates changes to the tax code that would decrease take-home pay for managers of private-equity firms and hedge funds, pools of money for wealthy families and institutional investors. The rich can take advantage of tax loopholes, including one that allows those managers to pay the capital gains tax rate of 15 percent instead of the ordinary top income tax rate of 35 percent. (emphasis added)

So, the reason his rate was lower was that it was largely capital gains rather than ordinary income.  Before I get into that, there is something else here that bears mentioning…

It is NOT just the wealthy that directly benefit from a lower capital gains tax rate, and it isn’t a “loophole”… it is likely that the author benefits from the capital gains tax rate.  Anyone that invests money longer term benefits from the lower rate.  That investment might be stocks or bonds, mutual funds, your home or baseball cards.  In fact, there are a lot more middle class people that benefit from the lower capital gains rate than there are wealthy people benefiting.

So, back to the subject.  A lower capital gains rate is VERY desirable.  Aside from the fact that this is money that is invested after it has already been taxed, it is money that is invested.  In the case of stocks and bonds and long term CDs and mutual funds, this is money that is in turn loaned out to businesses to expand or to individuals and families to do things like buy homes.

This country already has a negative savings rate.  Should we really be doing things to punish (increase taxes on) those that DO save?  If anything, the capital gains rate should be lowered, encouraging more savings.  ***Personal note here, I think it would be much more effective to adopt the FairTax than fiddle with any income tax scheme.***

Now, despite what you might hear on the nightly news, the federal government has been experiencing record revenues the last several years… since the lowering of the capital gains rate.  We set a new record of 54 months of straight economic growth… since lowering the capital gains rate.  The issues that the government has with deficit spending have come from spending increases that far outpaced the increase in revenue… simply put, they got a raise and spent WAY more than the raise.

So, back to Warren Buffett for a minute…  And the Clintons too, since they echoed the same sentiment.  There is nothing stopping them from paying more to the IRS.  There is a form which allows them to do just that if they don’t think they are being taxed enough.  But, none of them have used that form.  Nor has Senator Obama.  Senator McCain hasn’t either, but he hasn’t been saying that he didn’t pay enough in taxes.
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