[wordup] Warren Buffett on Dividend Voodoo

[Adam Shand]

Via: http://blogs.osafoundation.org/chao/000202.html
From:http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A13113-2003May19&notFound=true

Dividend Voodoo
By Warren Buffett
Tuesday, May 20, 2003; Page A19

The annual Forbes 400 lists prove that -- with occasional blips -- the 
rich do indeed get richer. Nonetheless, the Senate voted last week to 
supply major aid to the rich in their pursuit of even greater wealth.

The Senate decided that the dividends an individual receives should be 
50 percent free of tax in 2003, 100 percent tax-free in 2004 through 
2006 and then again fully taxable in 2007. The mental flexibility the 
Senate demonstrated in crafting these zigzags is breathtaking. What it 
has put in motion, though, is clear: If enacted, these changes would 
further tilt the tax scales toward the rich.

Let me, as a member of that non-endangered species, give you an example 
of how the scales are currently balanced. The taxes I pay to the federal 
government, including the payroll tax that is paid for me by my 
employer, Berkshire Hathaway, are roughly the same proportion of my 
income -- about 30 percent -- as that paid by the receptionist in our 
office. My case is not atypical -- my earnings, like those of many rich 
people, are a mix of capital gains and ordinary income -- nor is it 
affected by tax shelters (I've never used any). As it works out, I pay a 
somewhat higher rate for my combination of salary, investment and 
capital gain income than our receptionist does. But she pays a far 
higher portion of her income in payroll taxes than I do.

She's not complaining: Both of us know we were lucky to be born in 
America. But I was luckier in that I came wired at birth with a talent 
for capital allocation -- a valuable ability to have had in this country 
during the past half-century. Credit America for most of this value, not 
me. If the receptionist and I had both been born in, say, Bangladesh, 
the story would have been far different. There, the market value of our 
respective talents would not have varied greatly.

Now the Senate says that dividends should be tax-free to recipients. 
Suppose this measure goes through and the directors of Berkshire 
Hathaway (which does not now pay a dividend) therefore decide to pay $1 
billion in dividends next year. Owning 31 percent of Berkshire, I would 
receive $310 million in additional income, owe not another dime in 
federal tax, and see my tax rate plunge to 3 percent.

And our receptionist? She'd still be paying about 30 percent, which 
means she would be contributing about 10 times the proportion of her 
income that I would to such government pursuits as fighting terrorism, 
waging wars and supporting the elderly. Let me repeat the point: Her 
overall federal tax rate would be 10 times what my rate would be.

When I was young, President Kennedy asked Americans to "pay any price, 
bear any burden" for our country. Against that challenge, the 3 percent 
overall federal tax rate I would pay -- if a Berkshire dividend were to 
be tax-free -- seems a bit light.

Administration officials say that the $310 million suddenly added to my 
wallet would stimulate the economy because I would invest it and thereby 
create jobs. But they conveniently forget that if Berkshire kept the 
money, it would invest that same amount, creating jobs as well.

The Senate's plan invites corporations -- indeed, virtually commands 
them -- to contort their behavior in a major way. Were the plan to be 
enacted, shareholders would logically respond by asking the corporations 
they own to pay no more dividends in 2003, when they would be partially 
taxed, but instead to pay the skipped amounts in 2004, when they'd be 
tax-free. Similarly, in 2006, the last year of the plan, companies 
should pay double their normal dividend and then avoid dividends 
altogether in 2007.

Overall, it's hard to conceive of anything sillier than the schedule the 
Senate has laid out. Indeed, the first President Bush had a name for 
such activities: "voodoo economics." The manipulation of enactment and 
sunset dates of tax changes is Enron-style accounting, and a Congress 
that has recently demanded honest corporate numbers should now look hard 
at its own practices.

Proponents of cutting tax rates on dividends argue that the move will 
stimulate the economy. A large amount of stimulus, of course, should 
already be on the way from the huge and growing deficit the government 
is now running. I have no strong views on whether more action on this 
front is warranted. But if it is, don't cut the taxes of people with 
huge portfolios of stocks held directly. (Small investors owning stock 
held through 401(k)s are already tax-favored.) Instead, give reductions 
to those who both need and will spend the money gained. Enact a Social 
Security tax "holiday" or give a flat-sum rebate to people with low 
incomes. Putting $1,000 in the pockets of 310,000 families with urgent 
needs is going to provide far more stimulus to the economy than putting 
the same $310 million in my pockets.

When you listen to tax-cut rhetoric, remember that giving one class of 
taxpayer a "break" requires -- now or down the line -- that an 
equivalent burden be imposed on other parties. In other words, if I get 
a break, someone else pays. Government can't deliver a free lunch to the 
country as a whole. It can, however, determine who pays for lunch. And 
last week the Senate handed the bill to the wrong party.

Supporters of making dividends tax-free like to paint critics as 
promoters of class warfare. The fact is, however, that their proposal 
promotes class welfare. For my class.

The writer is chief executive officer of Berkshire Hathaway Inc., a 
diversified holding company, and a director of The Washington Post Co., 
which has an investment in Berkshire Hathaway.

© 2003 The Washington Post Company