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Jan 03 2013
Why Warren Buffett and Mitt Romney have lower tax rates than their secretaries.

Posted in tax

Much was written and discussed during the last election about the inequality of tax rates on different types of income.  Here is an attempt at an explanation, in the form of a parable, from your Mesa CPA, Chaffee Traasdahl Company, CPA's.


Sometime after the approval of the first Form 1040 income tax return on October 3, 1913, business owners began reporting their income and paying taxes on that income.  They struggled and worked long hard hours.  Many were very successful and set aside their excess earnings for a rainy day, retirement, and other future needs.  They moved along successfully in life and a new generation of business owners moved onto the scene.  They struggled and worked hard, as had their predecessors, and soon approached those who had already accumulated their wealth with a proposition. 


"If you will loan us some of your excess earnings, so that our journey will be easier, we will pay you interest on these loans and your excess will continue to grow."


"Why would we want to do that?" countered the prior generation.  "We have sufficient for our needs.  If we loan you of our excess, you may not be successful and we may lose what we have accumulated."


Then the government entered into the conversation.  "The economy is growing and there is great need for new businesses, goods, and services.  We recognize that there is risk in these requested loans.  However, if you who have accumulated great wealth and already paid income tax on that wealth will loan of your excess to the new generation, we will tax the interest that your money earns at a lower rate to compensate you for your risk.  You have already paid the required tax on the money you worked so hard to accumulate.  The money that your money earns will be taxed at a preferred rate."


The prior generation considered the proposition with its inherent risk and rewards and loaned the money to the next generation to insure the continued expansion of the economy.


And so it has continued from generation to generation under the same logic.  Lower tax rates for investment earnings provides for the common good of our country and the economy. 


Now we have an administration that is imposing a higher tax on interest and dividends.  Very soon, we may well see that those who have accumulated wealth through hard work and long hours may say to the next generation "We have sufficient for our needs.  The additional income you pay us is not worth the risk if we have to pay the same rate for investing our funds as we did when we earned them.  We have paid the required taxes on our wealth; now you build your own accumulations without our help."


"But you are paying a lower rate than your secretary who is working hard and has accumulated less than you." comes the cry from the masses.


The reply from the previous generation makes no apologies.  "We paid the same tax on what we earned as our secretary is paying on what she earns.  Perhaps it would be better if we kept our wealth safe and had no investment income; then we would not need a secretary."


Last Updated by David L. Chaffee on 2013-01-07 11:20:31 AM

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