Call the bereaved, and hire an accountant. The key political consensus of the 1980s tax reforms is dead, and one of America’s greatest investors may just dance on the grave.
It is hard to recall now that tax policies in the Reagan era were not the partisan slugfest they are at the moment. In the 1980s, congressional Democrats like Bill Bradley, Dick Gephardt and Dan Rostenkowski were instrumental in helping President Reagan reduce the top marginal income tax rate from 70 percent to 28 percent. In fact, early in the first Reagan term, the sponsor of an amendment to accelerate the reduction in the top rate was a Democratic congressman from Michigan, Rep. Bill Brodhead.
Politicians on both sides of the aisle understood that eliminating various exemptions and shelters from the income tax code allowed a general lowering of tax rates across the economy. Lawmakers could trumpet lower taxes and a fairer tax code, and economists viewed the result as causing fewer distortions in economic activity and a better allocation of resources in the marketplace.
Those days are long gone. The Wall Street Journal recently reported that congressional Republicans passed a tax bill with a specifically targeted exemption for members of the Professional Golfers Association (a perennially needy group). Sen. John Kerry, in turn, has been adamant that the recent federal tax cuts were too favorable to the rich, even as he and his wife paid just 13 percent of their total 2003 income in federal income taxes, according to figures from CBS and Bloomberg.
Stepping into this fray is renowned investor Warren Buffett, who is acting as an economic advisor to Sen. Kerry. Buffett has famously observed, “My receptionist pays a higher tax rate than I do.”
The logical remedy to this injustice is either to lower the receptionist’s tax rate or to raise Mr. Buffett’s. Alas, Sen. Kerry’s response is to raise the tax rate on a whole lot of folks who have as much resemblance to Warren Buffett as I have to Robert Redford.
My family is among the “rich” that Sen. Kerry would target for a higher federal income tax rate. My wife and I were married in 1981, when we were in our mid-20s, and we started out together with zero in monetary assets. We both have graduate degrees in business and have usually worked full-time in corporate positions, with occasional periods “between jobs.” Well along in our marriage, we did inherit some money from my parents, but that accounts for less than 5 percent of our net worth. More important than money, the social and intellectual capital we acquired from our parents has been the greatest reason for our success, and thankfully, our government doesn’t tax that.
Curious as to how much in taxes I’ve paid during my lifetime, I recently reviewed our tax returns going back to 1981. I was somewhat surprised to learn that from 1981 to 2003, my wife and I paid a total of 30 percent of our income in federal income taxes. This does not include any payments to Social Security, Medicare or state and local taxes. Our lifetime rate is not significantly skewed by a few exceptional years; if you remove the year of our highest earnings (when Bill Clinton was president), our lifetime average tax rate drops only to 29 percent. Even after the “huge” recent tax cuts, our rate for the year 2003 was 31 percent — slightly more than President Bush’s 2003 tax rate of 28 percent.
Some of my friends say that I’m a sucker, and that I should use deductions and tax shelters more aggressively to reduce my tax liability. For a variety of reasons that probably include risk-aversion as well as civic-mindedness, I’ve never felt comfortable with hiring lawyers and accountants to develop complex schemes to avoid taxes. Aside from mortgage interest and local taxes, our only significant deduction is for charitable contributions. My wife has been gently pressuring me to increase our giving, and she’s right, but in my defense, I’d point out that in this one year we will contribute to charity many times more than Sen. Kerry’s total reported contributions to charity in the first five years of the 1990s.
So while I don’t feel I need my tax rate to go down dramatically, I have to confess that I don’t carry around a large burden of guilt that I’m not paying my “fair share” — particularly when I contemplate what people even more fortunate than my wife and I are paying.
Such as Warren Buffett. His worth is estimated by Forbes Magazine at around $40 billion. Since he also started out with basically zero, the $40 billion figure represents the minimum amount he’s made in his lifetime. If he had paid my lifetime average rate, he would have signed over at least $12 billion in federal income taxes to the U.S. Treasury.
I wonder if a review of Warren Buffett’s 1040s over the years would total $12 billion in taxes paid. Given that so much of the money he has made consists of unrealized capital gains, and therefore has never been taxed, we all know this to be impossible.
So I would ask Mr. Buffett to use his advisory capacity with Sen. Kerry to suggest that the tax system be simplified by eliminating deductions and lowering marginal rates. If this doesn’t appeal to him, then perhaps Sen. Kerry and he should be compelled to pay a rate equal to mine. Maybe then my rate wouldn’t have to increase.
Chris Bachelder is communications director at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.