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Oracle of Omaha Sees Big Picture, Misses Loopholes

August 19th, 2011

Warren Buffett

Javier/Flickr*

Earlier this week, Facebook, and other sites, were buzzing with talk about Warren Buffett’s op-ed in The New York Times, where the American billionaire called on U.S. policymakers to raise the income tax rate for the richest Americans. Indeed, The Washington Post even posted a link on its Facebook page to an AP article about the op-ed with this apt description: “In case you missed it — and there’s only a slim chance you did — Warren Buffett is calling on the so-called ‘mega-rich‘ to pay more in taxes.” Most of the reactions I saw were supportive of Mr. Buffett’s message, while others supported part of it but argued that the solution is a flat tax rate. But one post stood out for me – while commenting on Mr. Buffett’s op-ed, a friend of mine drew the connection to the uproar only a few months back about the effective tax rate G.E. pays. Mr. Buffett’s populist message sounds nice, but what is he really calling for, and how would it affect the budget and inequality issues plaguing the U.S. economy?

The op-ed begins with a title, which captures the mood of many Americans, “Stop Coddling the Super-Rich.” President Obama reportedly received laughter and praise when he later used Mr. Buffett’s phrase at an event in Minnesota. The Times piece draws us in by talking about the personal and financial sacrifices the middle and lower class make for the good of the country, while the rich and super-rich seemingly make no such sacrifices. At the end of the op-ed, Mr. Buffett calls on the recently formed debt “super committee” in Congress to raise rates for those with a taxable income exceeding $1 million, and an even larger increase for those with a  taxable income greater than $10 million. He argues that higher tax rates will not, and have not, led to reduced investment and job creation by business owners such as himself—perhaps the most common argument I hear urging middle and lower class Americans to oppose tax increases on their far richer countrymen. One comes away from the piece, if you agree with his logic, understanding that raising the tax rates on wealthy Americans would solve our fiscal problems and (partially) correct the growing inequality between the richest Americans and the rest.

Unfortunately, Mr. Buffett largely ignores the flaws, loopholes and complexity of the U.S. tax code, all of which are far more responsible for the imbalances he seeks to correct. This brings me back to the connection my (astute) friend drew to the story about G.E.’s taxes. Even though the corporate tax rate is an infamous 35%, G.E. paid far less than that last year to the IRS (the exact amount was still being debated the last time I checked, but most estimates still put it well below even 20%). The problem is not necessarily that the U.S. government needs to raise tax rates, it’s that it needs to raise taxes. We need to close the loopholes that allow companies, and individuals, to avoid paying for their fair share of the government services and security that are vital to the health of our nation. There are, essentially, two tracks to take here: addressing the methods (secrecy) and addressing the motivations (big rewards, low to no consequences).

On the methods side, policy makers should enact legislation that would require banks to collect the beneficial ownership information for all account holders. Tax information should also be exchanged automatically between all countries on each other’s citizens. Both of these strategies would significantly inhibit the ability of individuals and corporations to hide the true nature of their tax obligations to the U.S.—and to other governments.

Another set of changes to the rules should focus on the motivations, or cost-benefit ratio, of evading taxes. Making tax evasion a predicate crime for anti-money laundering would subject those prosecuted to much steeper (jail) sentences, which raises the risk to their reputation and their lifestyle for engaging in such behavior. Requiring reporting by MNCs of all profits and taxes paid on a country-by-country basis would also raise the reputational risk for using overly aggressive tax planning. (Investors would also benefit from knowing exactly where a company is making money and where it is losing money—helping them gauge the strategic risks the company faces.) Finally, international commerce laws should be updated to require personal signatures that the prices of goods and services have not been altered for the purpose of evading taxes or customs duties in a given cross border transaction. No rational employee is going to want to risk jail time for herself or himself in order to save the company some money.

The United States, as the world’s leading economy and state, should take the first steps towards addressing this global system of financial opacity, while at the same time putting pressure on other governments to do their part. Might I suggest it be taken up in Cannes this November during the G20 Summit?

Feel free to join my call at www.EndTaxHavenSecrecy.org.

*Image license: Some rights reserved by trackrecord

Written by Christine Clough

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