The Rittenhouse Review

A Philadelphia Journal of Politics, Finance, Ethics, and Culture

Wednesday, May 21, 2003  

Warren Buffett Takes on the Dividend Tax Cut

I'm a day late and a few hundred million dollars short with this one, but yesterday's Washington Post op-ed by Warren Buffett -- "Dividend Voodoo" -- deserves close attention.

It appears Buffett, chairman and chief executive officer of Berkshire-Hathaway Inc. and long one of the richest people in America, isn't too wild about the crazy notion, aggressively pushed by a wide range of Republicans and a small handful of Democrats, of cutting and then eliminating (and then restoring) taxes individuals now pay on dividend income.

Writes Buffett:

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. [...]

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. [...]

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.

I've always found the appellation "The Oracle of Omaha" an irritating hyperbole. But this time, Buffett is right on target. I think he's earned it.

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