[Today’s run: 1 mile, then 10 x 200m]
A lot in the news these days about how Warren Buffett pays a lower tax rate than his secretary. The same issue has come up since presidential candidate Mitt Romney released his tax returns showing his rate to be 15%.
I think most people don’t understand much about capitol gains.
I am not an accountant or an economist, but here’s what I know: Sometime I have some money and I put it in the bank. If I put it in a savings account it may earn a bit of interest. Mitt Romney and Warren Buffett have lots of money and they put their money in savings and in stocks and bonds and whatever other places they want.
When I get a bit of interest on my savings account, that is capital gain. I put in $100 and over a year I earn another $1 in interest. I have to pay taxes on that dollar.
I think most working people are used to the idea that the government takes a cut from their paycheck, an “income” tax. It’s really a wage tax, since it shows up on all kinds of wages.
Warren Buffett makes some money in wages if he has a regular salary or does consulting work or writes a book. But putting his billions in the bank doesn’t earn wages it earns capital gains.
We have a tax on working and we have a tax on saving. The tax on working is higher than the tax on saving.
The transaction of working is that I give you my time and expertise (and maybe an artifact of my effort), you give me some money. The government gets a cut. So I charge you a bit more and I get to keep a bit less.
The transaction of saving/investing is that I give you my money now, and you give it back to me later with a bit more. The government gets a cut, so you have to pay a bit higher interest and I have to settle for a bit less earnings.
Mitt Romney could put his millions in a hole in the ground, no problem. He can live off of that for the rest of his life and he would never have to pay taxes. But he wants to make more money so he puts some in the savings account/mutual fund/stock investment/whatever and hopes that it comes back bigger in the end (it may not come back at all!) He pays taxes on the gain, the increase, if there was one.
Personally, I’m more likely to be on the borrower side of the ledger. Let’s say I borrow some money from Mitt Romney. He lends me a million bucks and I’m paying 10% interest. Over a period of a year I pay back his million and I end up paying him the extra $100,000 as interest. Some chunk of the $100,000 goes straight to Uncle Sam. It is a tax on borrowing as much as it is a tax on “investing”.
The tax on a loaning/borrowing transaction is lower then the tax on an employment/working transaction.
So when they say that Warren Buffett payed a lower tax rate than his secretary, that’s because his secretary makes her living by wages and Buffett makes his living by investment.