And though the colossal wreck was avoided in the nick of time on August 2nd, the 14 trillion pound train was not derailed and even continues to gain momentum. So we are left with the question;
How will the Runaway train be stopped?
Although we came together as a nation this summer to collectively hold our breath as the melodrama played out in Washington, we remain very far apart on solutions to resolve the debt problem. While any lasting resolution will have to commit to earnest reform in both government spending and tax collection, the idea of extracting new revenue from the rich “corporate jet owner” class in particular has been ruffling feathers following Warren Buffett’s op-ed in the New York Times in August. Mr. Buffett argues that the top priority for lawmakers “is to pare down some future promises,” but he then states that job number two is to “Stop Coddling the Super-Rich” through preferential tax rates. He says legislators “feel compelled to protect us, much as if we were spotted owls or some other endangered species” and urges higher taxes for the super-rich.
“There is no such thing as a good tax.” – Winston Churchill
West Coast Asset Management greatly admires Buffett’s investment philosophy and we value his perspective, so we read his opinion on increasing taxes for the rich with reflective interest. Public reactions to his op-ed have ranged from those applauding his courage and frankness, to accusations of self-serving motives, hypocrisy, senility, and even socialism. Yes, some have accused perhaps the most successful capitalist in our country of being a socialist. The unspoken agreement among citizens of all civilized societies is that taxes are flawed, unpleasant and unfair; no matter the race, social status, or point in history. So when one of the world’s wealthiest individuals and most successful investors argued that he and his $50 billion net worth are not taxed enough, it was received like a broken promise.
“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.”
– Russell B. Long, US Senator
Efforts to resolve the nation’s deficit problems have positioned “the rich” as a lightning rod in the political discourse on tax reform. Tax reform sounds like a good idea to everyone; the obstacle is that it means different things to different people. For conservatives, tax reform means rate reductions which incentivize investment and economic growth, while liberals define tax reform as expanding rates for the top income earners. When it comes to taxes, perhaps the only point of agreement is that when assessing what is “fair,” there can be no agreement.
“Be thankful we’re not getting all the government we’re paying for.” – Will Rogers
The point that Buffett made in his op-ed that had the most resonance with us was this: “people invest to make money, and potential taxes have never scared them off.” As entrepreneurial investors, we have long sung the refrain of investing in simple businesses with strong competitive advantage that trade at a discount to intrinsic value. We cling to this philosophy in good times and bad and have confidence that the long-term results will be rewarding. A smart investment is a smart investment.
If Buffett feels as though he is treated like an endangered species as one of the “super-rich,” it might be for good reason. A study by University of California Santa Cruz shows that the wealthiest 20% of Americans enjoy 85% of the nation’s wealth. That figure rises to 93% when home values are excluded from net worth calculations. In other words, 80% of the population is sharing just 7% of the nation’s privately held wealth. Therefore, those at the top become easy targets when the government looks for more money. Many argue that the wealthiest already assume an unfair burden of the nation’s taxes and point to a Congressional Budget Office report which shows that the top 20% of income earners pay roughly 87% of income taxes.
As previously stated, and as Buffett himself points out, taxing the ultra-rich (Buffett suggests raising taxes for only the top 0.3% of tax payers) can not solve the deficit trouble without also tackling the irresponsible spending. Buffett sites that the 400 wealthiest individuals had a combined income of $90.9 billion in 2008. If the federal government swallowed all of that income, every penny, this would cover less than 3% of its costs, or keep the government running at current spending levels for roughly 11 days. Just like teenager who gets into trouble with credit card debt, America too must learn to spend within its means instead of looking to rich moms and dads for rescue.
“This is a question too difficult for a mathematician. It should be asked of a philosopher.”
– Albert Einstein, on income taxes
Tax Old Dogs with New Tricks
Scott Adams, creator of the Dilbert Cartoon, wrote “How to Tax the Rich” in a January Wall Street Journal article and offered some refreshing ideas on how to generate new income from the upper class. He says “fairness is not so much about the actual distribution of loot as it is about the psychology of how you feel about it.” He then suggests exchanging with the rich increased tax revenue for various forms of “time, gratitude, incentives, shared pain and power.” For example, individuals in top tax brackets could get their own car pool lane, skip lines at the DMV, get an extra vote, or could direct a portion of their taxes to specified social services.
He describes these suggestions as “really bad ideas” intended only to get more creative and intellectual minds on the path to solving our problems in new ways. He says “the people who oppose taxing the rich are either rich or want to be someday…and the people who want to tax the rich are mostly the people who think Bernie Madoff is a good example of a rich person. I like any notion of adding some sense of choice to paying taxes.” We applaud this outside-the-box thinking. What if the rich had the same feeling of personal gratification paying income taxes as when giving to their favorite charity? What if they had the confidence that government institutions were managed as efficiently as their local food bank? There are many government services that we all revere and enjoy; the military, the judicial system, education, infrastructure, product safety, yet tragically paying taxes has the same level of satisfaction as giving to the bum on the corner.
“To tax and to please, no more than to love and to be wise, is not given to men.”
– Edmund Burke, 18th Century
Warren Buffett closes his op-ed with “it’s time for our government to get serious about shared sacrifice.” We take this sentiment at face value and appreciate his commitment to seeking solutions for the country’s problems. Americans are entrepreneurial, generous, and patriotic but are left with a lingering sense of injustice at tax time. However, if the sacrifice returned some level of psychological compensation in the form of fairness or efficiency, taxation would be a much less bitter pill to swallow. This newsletter is peppered with three hundred years of aggravated comments on taxation. It is unlikely the tax fairness impasse will be resolved anytime soon. However, Americans are also known for their ingenuity and creativity and it is time to apply it to fixing problems and leave the drama for the soap operas.
Link to the WCAM website: http://wcam.com/exclusive-outlook/nothing-is-fair-in-debt-and-taxes/#more-1313
How will the Runaway train be stopped?
Although we came together as a nation this summer to collectively hold our breath as the melodrama played out in Washington, we remain very far apart on solutions to resolve the debt problem. While any lasting resolution will have to commit to earnest reform in both government spending and tax collection, the idea of extracting new revenue from the rich “corporate jet owner” class in particular has been ruffling feathers following Warren Buffett’s op-ed in the New York Times in August. Mr. Buffett argues that the top priority for lawmakers “is to pare down some future promises,” but he then states that job number two is to “Stop Coddling the Super-Rich” through preferential tax rates. He says legislators “feel compelled to protect us, much as if we were spotted owls or some other endangered species” and urges higher taxes for the super-rich.
“There is no such thing as a good tax.” – Winston Churchill
West Coast Asset Management greatly admires Buffett’s investment philosophy and we value his perspective, so we read his opinion on increasing taxes for the rich with reflective interest. Public reactions to his op-ed have ranged from those applauding his courage and frankness, to accusations of self-serving motives, hypocrisy, senility, and even socialism. Yes, some have accused perhaps the most successful capitalist in our country of being a socialist. The unspoken agreement among citizens of all civilized societies is that taxes are flawed, unpleasant and unfair; no matter the race, social status, or point in history. So when one of the world’s wealthiest individuals and most successful investors argued that he and his $50 billion net worth are not taxed enough, it was received like a broken promise.
“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.”
– Russell B. Long, US Senator
Efforts to resolve the nation’s deficit problems have positioned “the rich” as a lightning rod in the political discourse on tax reform. Tax reform sounds like a good idea to everyone; the obstacle is that it means different things to different people. For conservatives, tax reform means rate reductions which incentivize investment and economic growth, while liberals define tax reform as expanding rates for the top income earners. When it comes to taxes, perhaps the only point of agreement is that when assessing what is “fair,” there can be no agreement.
“Be thankful we’re not getting all the government we’re paying for.” – Will Rogers
The point that Buffett made in his op-ed that had the most resonance with us was this: “people invest to make money, and potential taxes have never scared them off.” As entrepreneurial investors, we have long sung the refrain of investing in simple businesses with strong competitive advantage that trade at a discount to intrinsic value. We cling to this philosophy in good times and bad and have confidence that the long-term results will be rewarding. A smart investment is a smart investment.
If Buffett feels as though he is treated like an endangered species as one of the “super-rich,” it might be for good reason. A study by University of California Santa Cruz shows that the wealthiest 20% of Americans enjoy 85% of the nation’s wealth. That figure rises to 93% when home values are excluded from net worth calculations. In other words, 80% of the population is sharing just 7% of the nation’s privately held wealth. Therefore, those at the top become easy targets when the government looks for more money. Many argue that the wealthiest already assume an unfair burden of the nation’s taxes and point to a Congressional Budget Office report which shows that the top 20% of income earners pay roughly 87% of income taxes.
As previously stated, and as Buffett himself points out, taxing the ultra-rich (Buffett suggests raising taxes for only the top 0.3% of tax payers) can not solve the deficit trouble without also tackling the irresponsible spending. Buffett sites that the 400 wealthiest individuals had a combined income of $90.9 billion in 2008. If the federal government swallowed all of that income, every penny, this would cover less than 3% of its costs, or keep the government running at current spending levels for roughly 11 days. Just like teenager who gets into trouble with credit card debt, America too must learn to spend within its means instead of looking to rich moms and dads for rescue.
“This is a question too difficult for a mathematician. It should be asked of a philosopher.”
– Albert Einstein, on income taxes
Tax Old Dogs with New Tricks
Scott Adams, creator of the Dilbert Cartoon, wrote “How to Tax the Rich” in a January Wall Street Journal article and offered some refreshing ideas on how to generate new income from the upper class. He says “fairness is not so much about the actual distribution of loot as it is about the psychology of how you feel about it.” He then suggests exchanging with the rich increased tax revenue for various forms of “time, gratitude, incentives, shared pain and power.” For example, individuals in top tax brackets could get their own car pool lane, skip lines at the DMV, get an extra vote, or could direct a portion of their taxes to specified social services.
He describes these suggestions as “really bad ideas” intended only to get more creative and intellectual minds on the path to solving our problems in new ways. He says “the people who oppose taxing the rich are either rich or want to be someday…and the people who want to tax the rich are mostly the people who think Bernie Madoff is a good example of a rich person. I like any notion of adding some sense of choice to paying taxes.” We applaud this outside-the-box thinking. What if the rich had the same feeling of personal gratification paying income taxes as when giving to their favorite charity? What if they had the confidence that government institutions were managed as efficiently as their local food bank? There are many government services that we all revere and enjoy; the military, the judicial system, education, infrastructure, product safety, yet tragically paying taxes has the same level of satisfaction as giving to the bum on the corner.
“To tax and to please, no more than to love and to be wise, is not given to men.”
– Edmund Burke, 18th Century
Warren Buffett closes his op-ed with “it’s time for our government to get serious about shared sacrifice.” We take this sentiment at face value and appreciate his commitment to seeking solutions for the country’s problems. Americans are entrepreneurial, generous, and patriotic but are left with a lingering sense of injustice at tax time. However, if the sacrifice returned some level of psychological compensation in the form of fairness or efficiency, taxation would be a much less bitter pill to swallow. This newsletter is peppered with three hundred years of aggravated comments on taxation. It is unlikely the tax fairness impasse will be resolved anytime soon. However, Americans are also known for their ingenuity and creativity and it is time to apply it to fixing problems and leave the drama for the soap operas.
Link to the WCAM website: http://wcam.com/exclusive-outlook/nothing-is-fair-in-debt-and-taxes/#more-1313
