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Dave Sather's Money Matters: What is fair taxation?

Aug. 24, 2011 at 3:24 a.m.


BY DAVE SATHER

On Aug. 14 Warren Buffett penned an article in the New York Times stating it was time for the rich to pay more in taxes. As you can imagine, this set off a fire storm of comments both pro and con.

Buffett's comments come at a time when the U.S. debt surpassed 100 percent of gross domestic product - more than $14.5 trillion. Making matters worse, David Walker, the former U.S. Comptroller General, has stated that if our nation does not reform its profligate ways we will look like Greece in a mere three years with debt in excess of 150 percent of GDP.

Additionally, Walker said the 100 percent threshold historically shaves about one percentage point off GDP, which was a meager 1.3 percent for the second quarter and 0.4 percent for the first quarter.

Currently, the top marginal income tax rate is 35 percent. However, as Buffett pointed out, his average tax rate worked out to be only 17 percent - even though he made nearly $40 million in income. This is because the vast majority of Buffett's earnings are from qualified dividends, which no matter your income level are taxed at a maximum of 15 percent.

Buffett further states that about 80 percent of governmental revenues came from personal income taxes and payroll taxes. Analyzing tax returns of the mega-rich reveals that they pay income taxes at a rate of 15 percent on most of their earnings, but almost nothing in payroll taxes.

Buffett stated "It's a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot."

Despite the fact that I do not want to pay any more in taxes than I have to, it is not hard to see Buffett's point.

Buffett's take on the rich is quite different than that of the Obama Administration. The administration characterizes those who make $200,000 to $250,000 as "rich."

If you live in Texas, that's not a bad living - but it's still not rich. If you live in many other parts of the country $200,000 makes you squarely middle class. Furthermore, no matter where you live, there is a vast difference in raising a family on $200,000 versus $10 million.

History provides an interesting perspective too. During much of the 1960's and 1970's the top tax rate was 70 percent or more. In the 1940's it was actually 94 percent.

I am by no means suggesting that top tax rates should go to that level but by historical metrics the current tax structure is quite advantageous.

The trick then is to generate enough revenues while not killing growth. So far, we are struggling with both.

Additionally, our nation faces tremendous obligations with rapidly expanding expenses for Social Security, Medicare and Medicaid. Furthermore, consider the fact that currently 51 percent of Americans pay zero federal income tax.

Given this, you have more than half of our nation paying no income taxes and the very wealthy paying barely above 15 percent. It does not take a rocket scientist to figure out that the average middle class family is getting the short end of this stick.

As a nation we cannot expect to have good credit in the international markets while continuing to expand entitlements to stifling levels when we don't have the cash to pay for it. The unfunded liabilities to Social Security and Medicare/Medicaid are truly overwhelming.

Back to Buffett's point: Can those making $10 million spare to pay more in taxes? Sure. However, the real question is whether those revenues will be used wisely by our elected leaders. So far there is little to indicate that anything progressive will occur.

Dave Sather is a Victoria Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

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