Buffett’s Budget Thoughts For The Deficit

Every once in a while, something is important because of who said it, and not just what they happen to have said. That’s the way it goes with Warren Buffett’s op-ed piece in which he discusses taxes and our current fiscal reality. It was published in the New York Times last week.

You know this information is valid because it’s coming from the Oracle of Omaha, who the world has acknowledged as the greatest investor in the last 50 years. He is a wise man when it comes to finance, and he’s on the outskirts of the ideological and political battles that take place in Washington. The things that Warren Buffett says in regards to the tax deficit are both obvious and straightforward:

First, he mentions that raising the marginal tax rate to the levels of the Clinton era will not have a negative impact on investment decisions. As a matter of fact, during that period, economic growth was vigorous – and this not only benefited the wealthy, but it also benefits the middle class. Please recognize that the same conclusion was reached by the Congressional Research Service and the Republicans tried to suppress this report.

Second, the tax rate cuts have provided, as Warren Buffett puts it, “a huge tail wind” to the super powerful and rich. These people used to pay an average of 26.4% in taxes during 1992, but as of 1999, the average dropped to 19.9%. This is with an income of $202 million or more. According to Warren Buffett, the situation is an “outrage.”

Third, according to Warren Buffett, there should be a 30% mandatory minimum tax on all incomes between the amount of $1 million and $10 million. Anything above that should have a mandatory minimum tax of 35%. It should be kept simple, with no loopholes and no hidden strategies around paying this tax.

Finally, the most important point of all is that government should have a long-term plan to set its spending goals at 21% of GDP, while raising 18.5% in revenue, which leaves a gap – an annual deficit – of roughly 2.5% of GDP. This can very well be manageable in a growing economy. And the figures presented are close to their historical norms. The crisis we’ve been experiencing the past few years is due to revenue falling to 15.5% of GDP, and spending rising above 22.4%.

A 7% annual deficit of GDP just isn’t manageable.

But please take notice, the significant thing to realize is that revenue has declined, and spending really hasn’t increased too much.

Although we should spend about 21% of GDP, we have reached the level of 22.4%. And in contrast, we need to collect 18.5% in revenue, but we’re only collecting 15.5%.

So please pay attention to the smartest investor that America has ever seen: raise the marginal rates, have a manageable deficit that is consistent, and stop worrying about the people at the top of the income scale.

This is a very simple and reasonable request, and it’s especially so when coming from billionaire investor Warren Buffett.

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