Thursday, July 07, 2011

Buffett Won't Pay More Taxes Until He Must

Warren Buffett appears on CNBC so often, you would be forgiven for thinking he was part of the staff. He was on the tube again this morning defending his view that the rich should pay more taxes. The media has always handled Buffett with kid gloves, rarely putting him on the spot or pushing a point. Therefore, I give kudos to Joe Kernen who this morning tried hard to question Buffett about taxes.

Kernen asked Buffett why he gives so much money to charity instead of voluntarily paying more taxes. Kernen asked if it was because he thought charities would spend the money more wisely than the government would. This is no doubt true. Buffett acknowledged that charities do some things better than the government does, but for the most part he dodged the question. Instead of addressing the issue, he opined that a voluntary tax would not be effective and cited statistics showing that very little money is voluntarily donated to the government by individuals willing to pay more taxes. He argued that, as a result, we have to tax the rich more in order to force them to pay more.

As they said when I was a kid, "What does this have to do with the price of tea in China?" There are really only two reasons why the rich don't voluntarily pay more taxes: 1) They believe they are already taxed too much, and 2) they believe the government does not do a good job of handling their money. In any case, no one is suggesting that taxes be voluntary. We're only wondering why Buffett dodges taxes (albeit legally) if he really believes the rich should pay more.

Perhaps Kernen could have phrased the question differently, or maybe he should have followed up. Buffett's argument that voluntary taxes won't work is entirely irrelevant. Besides, it overlooks the fact that charitable contributions are also voluntary. Yet Americans keep on giving generously to charity. In fact, Americans donate about $300 billion annually to charity--all of it voluntarily.

Some people argue that the rich donate to charity only to take advantage of a tax deduction. In fact, Bill Gates' dad once made this argument in Congress. He argued that lower tax rates would reduce the value of the tax deduction and, as a result, would reduce the amount of money contributed to charity. This is bunk. As I explain in Chapter 9 of Even Buffett Isn't Perfect charitable contributions actually increased during periods when tax rates were reduced. Why? Because lower tax rates leave people with more money to donate to charity.

Buffett is in an untenable position. He says the rich should be taxed more, yet he keeps his own money out of the hands of government. Not only does he take full advantage of the tax breaks he is entitled to, but he will also avoid much of the estate tax by giving away the bulk of his fortune before he passes on.

In short, Buffett's argument can be paraphrased as follows. "The rich should pay more taxes. Because I'm rich, I also should pay more taxes. However, I refuse to lead by example. I won't pay more taxes until the government forces all rich folks to pay more taxes."