Warren Buffett Speaks the Unspeakable
For years, Warren Buffett has been called the "Oracle of Omaha," not only because of his business -- he built Berkshire Hathaway into one of America's most successful companies -- but also because of his sage investment advice. He was named the third wealthiest person in the world this year, yet still lives modestly. The accolades could go on and on.
He's like the uncle every family wishes it had; kind, unassuming, thoughtful, soft-spoken, tight with a penny, yet also generous with his advice and time. He also recognizes that not everyone is as fortunate as him and he's pledged to give 99 percent of his money to charity. But last week, he did the unspeakable: He called for a tax increase on the super wealthy. "My friends and I have been coddled long enough by a billionaire-friendly Congress," he wrote in a recent New York Times column. "It's time for our government to get serious about shared sacrifice."
His words produced an explosive reaction on Fox News. He suddenly became creepy, old, eccentric Uncle Warren, the kind of moocher who always shows up at your home uninvited and always overstays his welcome. He was accused of inciting "class warfare." (Wait, isn't he part of that class?) One Fox commentator even branded him a "socialist." The Daily Show's Jon Stewart had a field day with that.
The conservative Heritage Foundation was quick to jump into the fray. On its blog, The Foundry, Mike Brownfield reminded us that daffy, old Uncle Warren really doesn't know what he is talking about when it comes to investing. (Say what?). Among other things, he took issue Buffett's biggest blaspheme -- that tax rates don't affect investment decisions.
"I have worked with investors for 60 years and I have yet to see anyone -- not even when capital gains rates were 39.9 percent in 1976-77 -- shy away from a sensible investment because of the tax rate on the potential gain," Buffett wrote in his column. "People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what's happened since then: lower tax rates and far lower job creation."
But Brownfield was quick to counter: "We'll take Buffett at his word that he doesn't consider the tax implications for his investments (even though it is well documented in several books that he does consider them -- one of the major tenets of the value investing practice Buffett follows is to hold equities as long as possible to minimize the impact of taxes and therefore maximize internal returns), but the rest of the investing world is solely concerned with after-tax returns to their investments. Tax rates including the capital gains rate, dividends rate, corporate income tax rate, and individual tax rate are major determinants of after-tax returns."
Brownfield clearly missed the point. Buffett never said he doesn't "consider" taxes; he said tax rates never stopped him from making a sensible investment -- two different things. But what I find insightful about this exchange is about how circular, meaningless, and politically driven the debate over the economy has become in Washington.
The anti-tax lobby is so hardened and uncompromising, it's become ridiculously self-destructive in these hard times, as the recent debate over the debt ceiling showed. To dismiss Buffett as a socialist or a crackpot, or to claim he doesn't understand investing only illustrates the point. What I like about Buffett is he began his career on Main Street as a small businessman, and, in a sense, he's never really left, despite all of his success.
Buffett isn't minimizing the debt problem or the need to control government spending, but he realizes that it will take both spending cuts and revenue increases to keep the economy moving forward. "For those making more than $1 million -- there were 236,883 such households in 2009 -- I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains," Buffett wrote in his Times article. "And for those who make $10 million or more -- there were 8,274 in 2009 -- I would suggest an additional increase in rate," he added.
Any increase in revenues, however, should be directed into a jobs program to put Americans back to work. Right now, ask any small business owner what they want the most, and it won't be lower taxes or less regulation; it will be more customers coming through the door. And those customers need salaries in order to spend. But where are their jobs going to come from? Business won't create them, and rightly so. Unless firms see rising sales, no business will hire, no matter how many tax incentives they receive. So where do you start?
President Franklin Roosevelt hired 3 million people through the Works Progress Administration and other programs during the Great Depression. The WPA budget in 1935 was $1.4 billion a year (about 6.7 percent of the 1935 GDP), and it spent $13.4 billion over its existence. At its peak in 1938, it provided jobs for three million workers, from the unskilled to writers and artists. In all, more than 8 million jobs were created by the time the program expired in 1943.
That would be the equivalent of 22 million jobs, adjusted for population growth. Today, some 25 million Americans -- 16.1 percent of the work force -- are jobless, work part-time, or are under-employed. Put these people back to work and watch the economy blossom.
