Watch What the Rich Do, Not What They Say

Watch What the Rich Do, Not What They Say

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“Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.”
– Warren Buffett, op-ed, New York Times

Mr. Buffett says the U.S. Congress should raise taxes on the rich.

He says he’s so rich he should pay more tax.

Then why doesn’t he?

According to the U.S. Treasury, during the 2010 financial year $2.8 million was donated as “Gifts to reduce debt held by the public.”

That’s right. Americans who choose to can make voluntary contributions to the U.S. Treasury to cut the national debt.

Trouble is the U.S. has a national debt over USD$14 trillion.

That meant, in 2010 the U.S. Treasury’s interest expense was a whopping USD$413.9 billion.

Put another way, the $2.8 million donated reduced the national debt for… 3.5 minutes… before interest costs wiped it out!

This financial year the donation wipe-out will take even less time. The interest expense is already at USD$412.5 billion… and will likely increase by another USD$50 billion over the next two months of the fiscal year.

It’s no wonder so little is raised through donations.

Buy an investment or pay more tax?

Certainly Mr. Buffett and his rich pals see little point. With all their wealth, they’d surely donate more than USD$2.8 million.

After all, Mr. Buffett could double the amount donated to the U.S. Treasury each year by handing over just 0.007% of his personal wealth.

Or, if he’d prefer, he could get his listed firm, Berkshire Hathaway [NYSE: BRK-A] to make the donation. It’s not as though his firm is short of a few bob. According to Bloomberg News, Berkshire Hathaway has “$47.9 billion of cash”.

Or, he could have donated to the Treasury rather than buying 1.5 million shares of U.S. listed firm, Dollar General [NYSE: DG]. A stake that would have cost his firm over USD$40 million – 14-times the sum donated each year to the U.S. Treasury.

What point are we making?

First, it gives you another example of how stuffed the U.S. economy is. And why you should be wary about getting suckered into this one-week suckers’ rally.

For all the talk overnight about markets rallying on the back of takeover activity, the U.S. economy is just as stuffed today as it was two weeks ago.

But second, it highlights how you should pay more attention to what big investors do rather than what they say.

If Buffett’s real concern was paying more money to the federal government then he’d just do it. Making a gift to the U.S. Treasury to pay down the debt is simple: write a cheque and send it off to Parkersburg, West Virginia. (Amusingly, the Treasury also accepts credit card donations!)

But helping out the federal government isn’t his real concern. Bloomberg News gives away what’s really on Mr. Buffett’s mind:

“Berkshire’s equity portfolio was valued at $67.6 billion as of June 30, with 40 percent in consumer products firms and 37 percent in financial firms such as banks and insurers. The rest of the portfolio was in a group Berkshire labels ‘commercial, industrial and other.’”

In other words, you’re looking at a portfolio of economically sensitive stocks. Stocks that rely on an economy not going into recession.

Why higher taxes won’t help

But here’s the biggest flaw in Mr. Buffett’s plan. In his op-ed for the New York Times (where else, it’s like expecting the Age to print an op-ed calling for tax and spending cuts) he makes the point that the income of “the highest 400 [wealthiest people] had soared to $90.9 billion.”

Of this – he calculates – USD$19.5 billion was paid in taxes.

But here’s the thing, Mr. Buffett doesn’t reveal how much more taxes these people should pay. Think about it, an increase in taxes to USD$30 billion would mean an extra $10.5 billion and cover just 2.3% of the interest cost of outstanding U.S. debt…

Or wipe just 0.00007% off the federal debt.

Perhaps he thinks his rich pals should be taxed at 100% of their income? But even so, it would cover just 20% of the interest expense or wipe a measly 0.0006% off the federal debt.

Now, we can’t speak for the rich, but we’re pretty sure a tax burden of 100% would cause them – in Mr. Buffett’s words – to throw a fit and refuse to invest.

If you’re taxed 100% of your salary this year, what are the odds on you bothering to earn anything next year?

The simple reason more people don’t donate money to governments is because they know it’s not an effective use of capital. Mr. Buffett and his rich pals know for a fact if they invest money rather than donate it to government, everyone’s a winner.

The rich guys hopefully get a return on their money… the people the rich guys bought the investment from make money… the people that work for the firm they bought get to keep their jobs and perhaps more people will be given jobs… and consumers who use the goods or services produced by the company continue to get the goods or services they want.

Contrast that to government services which are things people either don’t want, or want but don’t want to pay for.

The fact is – and Mr. Buffett of all people should know this – government is a handbrake on any economy. It’s not the throttle.

Creating innovation from destruction

Economies are built on innovation and individual entrepreneurial spirit. An economy isn’t built on a democratically elected dictator swiping wealth from individuals to use as bargaining chips to secure election or re-election.

If Mr. Buffett was concerned about the future of the American economy he should call for a wind-back of the state. And with it, lowering the tax burden on entrepreneurs and successful businesspeople. That’s a simple way to increase wealth for everyone.

Instead, like all people in powerful positions and influence the goal isn’t to spread the wealth – it’s to keep theirs and make sure others spread their wealth.

Because winding back the tax burden and cutting regulations is the last thing an existing businessman or woman wants. Companies that are brand leaders and market dominators (the kind of firm Mr. Buffett invests in) also happen to be the direct enemy of the entrepreneur.

Entrepreneurialism and creative destruction are the true drivers of economic progress. But they can only drive progress if given the chance. Wealthy people calling for higher taxation on other wealthy people won’t do a darn thing to help.

All that will happen is the Feds will keep spending while the wealthy find new ways of avoiding a higher tax bill… and that means a bigger burden on the middle classes, more debt, bigger government and less innovation.

But don’t expect anyone in a position of influence to figure this out anytime soon.

Cheers.

Kris Sayce
Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Port Phillip Publishing

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth, and Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

Kris is also the editor of Tactical Wealth and Microcap Trader where he reveals the best opportunities he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here or Microcap Trader here.

Official websites and financial e-letters Kris writes for:

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14 Comments on "Watch What the Rich Do, Not What They Say"

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DM
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DM
5 years 3 months ago

I think everyone has gone fishing.
Yes, Wazza is having a lend of them all. There’s no way he or BH will pay 1 ‘penny’ of tax more than they have to (nor will I for that matter). The more you give a government, the more ways they will find to waste it – insulation, school halls, solar rebates etc etc etc.
I like the handbrake and throttle analogy – it’s a shame there are so many incompetent people around the world holding the handbrake!

Philip
Guest
Philip
5 years 3 months ago

Kris

Your argument is floored. You are saying that money is better invested in commercial enterprises such as Dollar General than through government enterprise.

Society gets little value from cheap, low innovation, imported products from china. Government spending from your taxes pays for quality goods and services that we should appreciate.

The idea that entrepreneurs are going provide for our needs is false. They are seeking profit, not social utility.

What do you think?

Beauner
Guest
Beauner
5 years 3 months ago

Buffet is a dickhead.

Drood
Guest
Drood
5 years 3 months ago

So what is money for, is it just to sit on an ever bigger stash, is it just to play with on the investment roundabout?
Do any of you know what you actually want to do with your pathetic lives?

Drood
Guest
Drood
5 years 3 months ago

PF previously……..Surely you are not so daft as to presume Australian banks only operate in Australia. They are mostly multinationals that operate according to the rules of the country where they do business.

Peter Fraser
Guest
Peter Fraser
5 years 3 months ago

Drood – yes – either I am that daft or they have very little banking interests outside Australia, NZ and Oceania. They are building in Asia, and they do have some interests elsewhere, but not much.

The Wolf
Guest
The Wolf
5 years 3 months ago

Drood… Australian banks only have little “banking interests” outside of Australia… but have a HUGE appetite for funding…

M&M
Guest
M&M
5 years 3 months ago
Phillip. Perhaps because taxes are too high we can only afford cheap china imports. If I had more disposable income I’d drive a better car eat at better establishments where better clothes. The market is only meeting a need. As for government providing quality goods and services well let’s assume they do. Problem is its at a higher cost than what the private sector could do it. Or if you like they either waste money or over capitalize. As for why I make money…. Its to enjoy myself free from debt I’m sure wed all want to help the less… Read more »
bb
Guest
bb
5 years 3 months ago
Here’s the real news. http://www.smh.com.au/world/us-finds-unwilling-partner-in-china-to-avert-potential-crisis-in-region-20110816-1iwge.html This is how you commence the total elimination of your debt obligations with your biggest creditor, reasert your failing omnipotence as the global cop against evil – the war on terror is becoming stale . Its time to crush the communist once again – who are getting more arrogant and drunk on power via their mighty economic power base and influence. Millions of South Koreans, Americans, British, Australians and other UN soldiers and civilians died fighting against Chinese expansionism in southern Asia as late as the 1950’s. The expansion of China has taken on a… Read more »
Drood
Guest
Drood
5 years 3 months ago
Da Wolf…..lol, surely PF wonders where Commonwealth bank made those large profits from recently, also all the Australian banks have branches or offices in a lot of other countries. They are not bound by Australian regulations in those countries. M+M….You are right about government owned utilities being wasteful, however the same can be said for private ones, ( I have worked for both and owned my own contracting company), however i think the problem today is literally right across the board. Todays management is hopeless whether it be government or corporate. Managers used to learn business from the bottom up… Read more »
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