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September 29, 2010

Why Warren Buffett is Wrong (On Taxes)

Warren Buffett is likely the greatest investor who ever lived. He has made a living investing in what he knows, sound companies with good management. These investments have paid dividends to the extent that he is now the world's wealthiest person. I am not taking exception with any investment or management decisions that Buffett has made. However, I completely disagree with the comments he has made on tax policy.

"My secretary pays more in taxes as a percentage of income than I do."

The average liberal, hearing this statement would shoot up and say that Buffett is under-taxed. However, what is not analyzed in the statement is the types of income each person is making. Buffett's secretary is paying taxes on income which come to her in a regular paycheck in exchange for being employed. Buffett's income is in the form of gains he earns from buying and selling stock as well as the dividends he receives for owning stocks.

The key difference is that a capital gain is not as guaranteed as income from employment. The investor who makes the investment is doing so with money that has already been earned and taxed. This investment could fall in value or gain nothing, leaving the investor looking for other mean's of income. Currently, capital gains are taxed at 15%, but are set to go to 27% at the end of the year.

Buffett's secretary only needs to remain employed to earn her income. Buffett made the false comparison because he is such a good investor that his capital gains and dividend related income is as safe as an average person's income from labor. To a person who has a Roth IRA, 401k, or basic investment account, capital gains are less professionally attained. These people should not have to be taxed on their earned income and then taxed twice (cap gains and dividends) on that earned income's invested returns.

If any, Buffett is making the argument as to why his secretary's taxes are too high.

In today's video, he makes another poor argument about how we are only taxed at 15% of GDP collectively. Making that pie larger is not going to stop out of control government spending or deficits. All it will do is take more wealth from the private sector in exchange for waste.

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