Widow Martha Pays More Than Warren Buffett and His Secretary Combined

Scene: Senate Committee on Finance Hearing Room. Date: Sometime in 2012. Martha, a stylish attractive woman in her 70s, raises a shaking right hand as she is sworn in. The network cameras are notably absent. They have been told by their management to stay away.  CSpan is covering another hearing and Fox News has been delayed.

Senator John Coburn (R Oklahoma) begins the questioning:

Coburn: We are meeting here to discuss the President’s proposal to raise the rate of taxation on capital gains from 15 to 23.8 percent. We understand that you have particular views on this subject.
Martha: Yes sir. I am a widow. I live in a nice retirement community in Houston, Texas. My social security check pays for most of my living expenses, and I do some part time work. But I have to cover the rest by selling off the stock I own.

Coburn: So you are one of the millions of ordinary Americans who own stock?
Martha: Yes, my late husband Sam was pretty good when it came to investments. Before he died ten years ago, he told me to hold on to my stocks as long as I could. He was particularly high on Massachusetts Investors Trust. Barron’s lists it in its “Best Mutual Fund Family,” I am told. All I can say is that Sam trusted this company. He had a big share of his assets in Massachusetts Investor’s Trust.

Coburn: How have these stocks been doing? We all know the market has been down.
Martha: My stocks have not done well since Sam died, especially the last five years. But I need more money to pay my bills, so I finally sold my Massachusetts Investor Trusts. In December, I sold $20,000 worth of shares and my broker told me that my capital gain was $2,600, and that I would have to pay a tax of $390.
Senator Schumer (D of New York) asks Coburn to yield time to him.

Schumer: Well, it seems things worked out for you. You only have to pay a small tax of 15 percent on the $20,000 sale. Hard working folks have to pay more than that on their income taxes.
Martha: Senator, it is hard for me to understand, but my broker told me that my real gain after inflation was only $30. He explained that the annual return on Massachusetts Investor Trust shares over the past ten years was 2.97 percent but inflation was 2.95. He said that everyone knows that what counts is the capital gain after inflation. He then had a shocker for me. He told me that the tax rate on my $2,600 capital gain after inflation is 1,200 percent.

Schumer: Stammers.

to read the rest

Data on Tax Rates of Real Capital Gains (Nominal capital gains adjusted for inflation)

I am publishing a piece on inflation and capital gains taxation this Sunday in my Forbes Econworld blog. It is tentatively titled “Widow Martha Pays More Than Buffet and His Secretary Combined.”  In this piece, I use a Standard and Poor’s  calculator to show nominal and real gains from investments in the S&P 500 over five year intervals from 1971 to 2011 and for the whole period at the current 15 percent capital-gains rate. (I also show the same results with Obama’s proposed 23.8 percent capital gains rate).

I find that, for the entire 40 years, the effective tax rate on real capital gains was 47 percent. In three periods, real gains were negative (for an infinite tax rate). During the three five-year periods of booming markets, the real tax rate was 20 percent. In the period 1986-1990, the real tax rate equaled that of Buffet’s secretary at 30 percent. If we use Obama’s proposed 23 percent capital gains tax rate, the lowest effective tax rate on real gains is 30 percent.

period	Annual percentage S&P 500  nominal gain (loss)	Annual percentage S&P real gain (loss)	Tax rate on real gains with a 15% tax on nominal gains	Tax rate on real gains with a 23% tax on nominal gains
1971-2011	6.53	2.09	46.9	71.9
1971-1976	1.09	-5.7	Infinitely large	infinitely large
1976-1981	3.41	-6.05	Infinitely large	infinitely large
1981-1986	14.96	11.3	19.9	30.4
1986-1991	9.34	4.6	30.4	46.7
1991-1996	13.85	10.71	19.4	29.7
1996-2001	9.03	6.69	20.3	31.0
2001-2006	4.35	1.61	40.5	62.1
2006-2011	-2.57	-4.73	Infinitely large	infinitely large

The NYT Says What Obama Cannot Say: Raise Everyone’s Taxes

The New York Times Sunday editorial reveals point blank the liberal agenda. According its the editorial writers, we cannot cut spending in any significant way without curtailing core liberal programs. Hence, “there is no economically sensible or politically honest way to address the deficit without also increasing revenues and reforming the tax code.”

Even more remarkable is their candor with respect to taxes. Contrary to Obama’s promise not to raise taxes on the middle class, the NYT calls for raising taxes on just about everyone. 

I supply their blueprint for taxation during the second Obama administration without comments:

1). Let the Bush tax cuts expire at the end of 2012 for those making $250,000 and above.  The other tax cuts could expire at the end of 2013. The middle class should keep their tax cuts for a year to prop up consumer demand. The expiration of all the tax cuts would “save” $3.8 trillion over the next decade.

2) Tax reform should not touch breaks for home ownership and retirement saving, but they should be targeted only to help low and middle-income tax payers. Capital gains should be taxed at 35 percent. Tax breaks that subsidize profitable industries like oil must be ended. If the ending of tax breaks permits, tax rates could be lowered generally.

3) We should use a value-added tax or carbon taxes to raise “needed revenue for deficit reduction, and for what government provides” so that all additional tax revenue need not be squeezed from income taxes.

The NYT ends with its reading of public sentiment: “The public is open to new taxes, and the economic facts are clear. Until tax increases are considered in equal measure to spending cuts, there will be no budget fix.”

I imagine this editorial is not being greeted with enthusiasm in the White House. It lays bare the fact that Obama’s core supporters do not want to cut spending. Instead, they propose massive tax increases on middle- and low-income families.

If Obama were to publicly embrace these proposals in his upcoming campaign, his chances of reelection would shrink virtually to zero. Republican candidates should keep this editorial ready for use.