As we approach the end of the year, all business people should be planning for the next year. I advise all of my clients to think about the biggest challenges they will likely confront and then plan accordingly. One of these challenges for all Americans is what will be their tax rate. The potential expiration of the Bush Tax Cuts puts all of us on uncertain ground that can have some form of impact on all of us.
While the actions of the political parties are predictable, the most fascinating action to me is that two rich people – Warren Buffett and a group of 45 millionaires calling themselves Patriotic Millionaires for Fiscal Strength – are asking Pres. Obama and the Congress to let the tax cuts expire for those making $1,000,000 or more. Put simply, they want the government to take more of their earnings and those of others who are similarly high income earners.
I will refrain from expressing any political views or comments of the pros or cons of the effectiveness of this strategy to improving our economy. Rather I will provide advice to Mr. Buffett and Patriotic Millionaires to assist them in accomplishing their goal of generating more tax revenue and reducing public debt.
My first advice is simple – voluntarily pay more taxes. All Americans have the right and ability to pay as much to the government as they choose. Mr. Buffett recently claims that his marginal tax rate is less than his secretary. Assuming that this secretary is not grossly overpaid (not like Mr. Buffett could not afford it), this occurs because Mr. Buffett is claiming all his tax credits and deductions that he is entitled. Mr. Buffett can simply ask his accountant to not claim all of his credits and stop utilizing trusts and other tax entities whose sole purpose is to deflect taxable income from the individual.
My second advice is that instead of trying to convince a handful of politicians to increase the tax rate on certain Americans, go to the people directly and convince them through logical argument that a higher tax rate is best for USA. Assuming that the tax cut does expire for the high income, the immediate reaction is that those who do not want to have their tax raised will contact accountants to find more deductions. Instead, he should ask all Americans who can afford it to simply not take all their deductions and not use trusts so their tax liability will increase.
Mr. Buffett and Bill Gates have traveled the world recently to appeal to other billionaires to leave most of their estates when they die to various charities. There is an estate tax that if not adjusted as well with the Bush Tax Cuts, the rate will go from currently 0% to 45%. It would seem a consistent logic if Mr. Buffett would also argue for the full restatement of the Estate Tax (I have not heard him make a stance on this issue). For instance, George Steinbrenner of the New York Yankees recently died. Had he died next year, his family would have had a tax bill of approx. $450 million. Following the Buffett argument, that would certainly help our government.
In the letter by Patriotic Americans (www.fiscalstrength.com), they argue that our nation needs additional tax revenue to reduce the deficit and debt. This group may find greater success if they shared that those Americans also interested in reducing the debt can do so at anytime without increasing their taxes. You write a check to Bureau of the Public Debt and mail it to their office in West Virginia. Furthermore, this payment is fully tax deductible as charitable contribution so those who hate higher taxes can both reduce taxes and the national debt at the same time. Side note – I wonder how may of these 45 millionaires who if they made this payment would also not claim the deduction so they pay even more taxes and further help our country.
I have never found it a successful strategy for one group of people to force another group of people to do something like pay more taxes since it can be reasonably argued that our government has not effectively used the money that they have earned to date. If the goal of Mr. Buffett and Patriotic Americans is to reduce deficit and debt, there are strategies already in place that may be more appealing to others who do not share their belief in the effectiveness of the government to spend tax dollars.