Why Do Super Wealthy Support Higher Taxes?

Warren Buffet, Bill Gates father and about 43 other millionaires have sent a letter to President Obama in support of his attempt to repeal the Bush tax cuts for the wealthy. Some of them have also previously spoken out in support of reinstating the estate tax.

Why do some of the most wealthy people in the country want to pay more taxes?

Is it because they are genuinely patriotic or are they financial masochists? They argue that it's because the country needs the taxes on the super wealthy to help pay down the deficit.

But these are the same people whose wealth is mostly generated from owning stock in some of our largest corporations. And I suspect that all but a few of them have established a family foundation to own a large part of their stock. So if you have a billion dollars worth of stock do you sell it and pay taxes on the gain, or do you hold it and let the estate tax consume a large part of it -- or do you donate a few million each year to your foundation and claim an income tax deduction for that contribution? And by giving the stock to a charitable foundation, it isn't subject to the estate tax.

Another way that the super wealthy are able to generate tax free cash to pay for their multiple homes and planes is with borrowed money, that is secured by the appreciated stock in their corporation and/or by the assets they acquire.

From my perspective, there is nothing wrong with doing what the law permits. But let's not be deceived into thinking that the super millionaires who advocate higher taxes on the wealthy are going to incur any financial pain from their patriotic gesture.

Vern

The Inflation Tax

When I started my first newsletter on legal methods of tax avoidance, my focus was on income taxes. But a few years later, the U.S. economy was experiencing double digit inflation. Somewhere during that period I discovered what I chose to call the "inflation tax".

While I agree with those who argue that inflation is a tax, I don't agree that it is a hidden tax. When inflation rates get into the double digits, everyone is acutely aware of how inflation is hurting their purchasing power.

But there is an aspect of inflation that is hidden and few people are aware of it.

First, let me make it clear that I agree with the economists who argue that inflation is a function of an expansion of the money supply when the Federal Reserve buys government debt by issuing new money. There are other elements in the equation -- such as the so-called multiplier effect and the velocity of money -- but the driving force is new money created by the Fed.

The new money drives up the price of both assets and the price of nearly all products and services.

The assets and products and services aren't worth more. it just requires more dollars to buy something.

With respect to assets like stocks, real estate, natural resources, foreign currencies, collectibles, precious metals and most tangible assets, the increase in the dollar price of those assets is deemed to be a gain by the tax law. If the asset is sold, the increase in the price from when it was acquired and when it was sold is taxable. Under current law the tax might be 15% of the gain, plus state income taxes of up to 10%. Some types of assets like collectibles are taxed at a 28% federal rate and a state tax rate of up to 10%.

Suppose you bought some stocks in a company that produces oil. The stock cost $100 per share. With 6% inflation, it would double in about 12 years assuming that there is no change in the profitability of the company. Although the price has doubled, the original $100 will only buy half as many goods or services. This is like a 50% tax on the stock shares. Then, when the stock is sold, the tax law treats the increase in the dollar price as a gain and subjects that $100 to an income tax of up to 15% federal and up to 10% for some states.

So that's a tax on a tax. And it's what I call the "inflation tax".

Vern