Reducing the Deficit Through Taxation and the Law of Unintended Consequences

Taxes are collected by states and the Federal government for owning real estate, owning stocks, owning cars, buying goods, buying gas, working and dying, to name a few of the sources of taxation.

For another take on the Buffett tax see:http://www.cnbc.com/id/44584116




If you earn too little, you pay no tax on income. If you buy stocks and sell them quickly, you pay tax on the gain like the gain was ordinary income. If you buy stocks and hold them for a longer time, you pay a tax only on the gain that you have made and it is lower than the tax on ordinary income. So if you are one of the very successful business people who have climbed the corporate ladder and you are now a vice president or CEO of a large company, you don't get paid as much in ordinary income as you do in stock. If your administration is successful and the stock of your company goes up, then you are paid for that success with capital gains, taxed at the lower capital gains rate. That is why Warren Buffett pays a lower percentage of his total income in taxes than his secretary. Most of Buffett's income is in capital gains, not ordinary income. If his company is not successful (Bershire Hathaway ticker symbol BRK) then Buffet has no capital gains and he is not able to sell his stock at a long term profit to take advantage of this rate.

However, Buffett got most of his stock when he STARTED the company. He was the founder and the risk taker. So he would pay 15% of the huge gain on every share he sells (basically he would pay $15,000 Federal tax on each share so because each share is worth something over $100,000.) So what did Buffett do with the money? He gave it away instead to a charity - run by Bill Gates....... Great for charity and great for the people who receive the benefits of the charity. What did the government lose in taxes? Around $4.5 billion on the $30,000,000,000 or so Buffett gave away. Would that make much of a dent in the deficit? Yup, a little one. The deficit needs to be reduced by $1,000,000,000,000 this year or so. Maybe the same next year and for some more years to come. Would paying the tax on all this wealth at ordinary income rates help out? Sure would? Instead of a measly $4.5 billion, the tax at ordinary income might be $14,000,000,000. A little bit bigger portion of the $1,000,000,000,000 needed this year and next. And if we did this to all the capital gains of all the fat cats like Buffett, then maybe we could pay off the deficit. Hmmmmm...... is this why Buffett already decided to give it away?

This now focuses us on the law of unintended consequences. Which is, basically, for every action there is an equal and opposite reaction and maybe not the one that was intended.

If someone magically seduced the congress to join hands and pass the fat cats tax, effective for all sales of long term assets effective tomorrow, what would happen today? All the stocks owned by U.S. citizens long term would be sold to get the lower capital gains tax, the market would crash and we would all be in a depression.

Maybe someone ought to think this all through before we get wrapped up in making sure Buffett's brethern (remember he already gave his away) pay their fair share. Sphere: Related Content