My "Buffett Rule" day in Washington
I had one of the most interesting days of my life on Wednesday: I flew to Washington DC at 6am, shook President Obama's hand and chatted briefly with him about education reform, stood behind him at a press conference, was interviewed on national TV three times, published an op ed in theWashington Post and, in a particularly surreal exclamation point at the end of the day, yukked it up with the Hermanator – all on less than 24 hours' notice. If you have a minute, pull up a chair and let me tell you the story…
On Wednesday morning, President Obama hosted a press conference to call on Congress to pass the Buffett Rule, a proposal inspired by Warren Buffett that would require anybody (like me) whose income exceeds $1 million a year to pay a minimum federal tax rate of 30%. You may recall that Buffett's secretary was in the audience during Obama's State of the Union speech in January, highlighting the absurdity that one of the world's richest people pays a much lower tax rate than his secretary.
To make the same point at yesterday's press conference, the White House asked members of a group I'm part of called the Patriotic Millionaires to participate in the press conference, and about 30 of us were able to make it down on short notice. Four of us with our assistants provided the backdrop, as you can see in this picture:
(That's me in the back left and Kelli next to me with the flag behind her; the other three Patriotic Millionaires on stage were filmmaker Abigail Disney (Pray the Devil Back to Hell), former Google engineer Frank Jernigan, and real estate investor Lawrence Benenson; to see the video and transcript from the press conference, seewww.whitehouse.gov/photos-and-video/video/2012/04/11/president-obama-speaks-buffett-rule, and for more background on the Buffett Rule, see the document I posted at: http://bit.ly/IRTe6P, which also includes this email in case you want to link to it.)
Just before the press conference started, he stopped by the nearby room where we were all waiting and shook hands with everyone. When it was my turn, I said, "Hi Mr. President, I'm Whitney Tilson of Democrats for Education Reform. We were early supporters of yours, and I just want to thank you and [Secretary of Education] Arne Duncan for the incredible work you're doing."
His eyes lit up and he said (as best I can recall), "I remember your early support. We're making progress, but we still have a lot of work to do."
I said, "We'll keep fighting for you," and then he was hustled out of the room to start the press conference.
My Washington Post Op Ed
In going public with my views on such a controversial topic, I knew that I was going to catch a lot of flak, so I wanted to write down my thoughts in an email that I could send to anybody who contacted me. My hope was that people who disagreed with me might say, "Well, I'm certainly not convinced, but I respect the fact that you make a calm, rational argument – a rare thing in today's poisonous atmosphere."
As I kept writing and writing on Tuesday afternoon, the idea occurred to me that this might make a good op ed in the Washington Post, so I contacted a friend there. He liked it and, to make a long story short, my column ran on the Post's web site just as the press conference was getting under way Wednesday morning. Obama pushing for the Buffett Rule was a big news story, so my column generated lots of hits and comments (775 at last count) – so many, in fact, that the Post ran it in the paper yesterday. Here's the beginning and the full text is included at the end of this email:
I am part of the 1 percent of the 1 percent. By that I mean that I am fortunate to be a wealthy American, and I say, "It's okay to raise my taxes."
This morning I was at the White House supporting President Obama in his call for Congress to pass the "Buffett rule." The rule — inspired in part by Warren Buffett's exasperation in learning that his assistant was paying a greater percentage of her income in taxes than he was — would require anyone whose income exceeds $1 million a year to pay a minimum 30 percent in taxes. It would hit me hard. I haven't finished my taxes for 2011, but in 2010, my federal tax rate was 21.4 percent; if the Buffett rule had been in effect, my federal tax bill would have been 40 percent higher. Some years, my taxes would likely be more than 50 percent higher.
Why am I okay with this? The answer has to do with simple math and basic fairness…
Why I Did It
So why'd I do it, especially when the Buffett Rule – and me supporting it so publicly – is directly contrary to my self-interest? There are a lot of reasons, but it really just boiled down to: it's an obviously good idea whose time has come, and I felt that publicly saying so was the right thing to do.
I don't like the idea of my taxes going up any more than the next guy, of course, but there are certain basic things that make this country a better place to live than other countries and those things need to be paid for. In addition, I believe that our federal budget deficit has reached dangerous levels ($1.3 trillion this fiscal year, with spending of $3.796 trillion 54% higher than receipts of $2.469 trillion). Other than improving our public schools, I think getting our deficit under control is the most important long-term challenge facing this country.
Spending cuts alone aren't going to do it. Every well-informed person capable of doing basic math, if they were being honest (I realize that these three criteria exclude most of Congress), recognizes that the solution is a grand bargain along the lines of Simpson-Bowles that both cuts spending and raises taxes – say, $2-$3 of cuts for every $1 of tax increases. Make no mistake: this is going to be painful and most Americans will have to make sacrifices, with tens of millions of people getting smaller entitlement benefits, for example, and tens of millions of people paying higher taxes.
But somebody has to go first – raise his hand and say, "I'm willing to do my fair share – in fact, more than my fair share – to help rein in our deficits and put this country on a more sustainable path." It's not class warfare to say that people like me – who aren't suffering at all in these tough economic times, who are in many cases doing the best we've ever done, and who can easily afford to pay more in taxes with no impact whatsoever on our lifestyles – should be the first to step up.
My Assistant and I Compare Our Tax Returns
In preparation for Wednesday, Kelli and I compared our 2010 federal tax returns (I haven't finished my 2011 one yet) and we discovered two things:
1) My adjusted gross income was 39x hers – not 39%, but 39 times higher; and
2) My federal tax rate was 24.6% and hers was 33.4%, so hers was 36% higher than mine despite the fact that she made an order of magnitude less than I did.
We were both shocked. How can it be that I made 39x what she did, yet she paid a much higher tax rate??? It struck both of us as so obviously unfair.
Nor are we alone. Most famously, Mitt Romney paid a mere 13.9% in federal taxes on $21.6 million of income in 2010. Or consider the 400 Americans with the highest adjusted gross income. Not only have they been doing astonishingly well in recent decades (their average taxable income soared more than five times from 1992-2008, from $42.2 million to $227.4 million), but their tax rate also fell dramatically over this period, from 26.4% to 18.1%. A third of them paid less than 15% in 2008. (Here's the data:www.irs.gov/pub/irs-soi/08intop400.pdf.)
This is madness. Every single one of these people – and many more not-as-wealthy-but-still-doing-well folks like me – could easily afford to pay 30% without any impact on their lifestyles.
TV Interviews
Kelli and I did two interviews on Wednesday at the White House with CNBC and ABC World News With Diane Sawyer and, after I flew back to NYC, I was a guest on CNBC's Kudlow Report. Here are the links:
• CNBC: http://video.cnbc.com/gallery/?video=3000083600&play=1(7:47)
• ABC World News With Diane Sawyer: http://abcnews.go.com/WNT/video/obama-revisits-buffet-rule-digs-romney-16120411 (2:53)
• CNBC's Kudlow Report: http://video.cnbc.com/gallery/?video=3000083649&play=1 (8:04) (I engaged in a spirited debate with both Kudlow and the Wall Street Journal's Stephen Moore; I think Kudlow almost fell out of his chair when I admitted that what I was advocating for would cause taxes to go up for people in my industry – and my own to go up as much as 40%.)
Meeting Herman Cain
Last but not least, things went from wild to surreal Wednesday when I showed up at the CNBC studios for the Kudlow Report and who should be in the green room but Herman 'the Hermanator' Cain! While I don't think he's Presidential material (to say the least), he's a really funny and easygoing guy so we chatted up a storm. Here's a funny thought: I think I might be the only person to ever shake his hand and Obama's on the same day! Here is a picture of us:
Below are five of my pictures from Wednesday, followed by my answers to 14 questions I've received, including: isn't this just a political carnival around a gimmick; why don't I just shut up and write a check; isn't this just class warfare; and what did you and Kelli say to the President?
Whitney
PS—I've discovered that a lot of people want to debate these issues. If so, I ask that you first carefully read my column in the Post and the Q&A section (both below), and please forgive me if I'm too swamped to reply personally.
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My Photos
This is the room in the Executive Office Building where the press conference took place.
Maybe 30 of us – all Patriotic Millionaires for Fiscal Strength – waited in a nearby room for President Obama to stop by before the press conference.
He shook hands and chatted briefly with each of us.
After the press conference, Kelli and I were interviewed by the White House press team.
Kelli and I about to go in a side door of the White House.
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Q&A
Here are my replies to many of the questions I've been asked:
1) If you think you should pay more taxes, why don't you just do so (and shut up)?
I continue to be stunned at how many otherwise intelligent people make this argument, as if the solution to our budget crisis is a handful of people voluntarily writing checks. As I wrote in my Washington Post column, I'm not interested in paying higher taxes solo but rather "as part of a comprehensive budget deal along the lines of Simpson-Bowles, with tens of millions of people getting smaller entitlement benefits, for example, and tens of millions of people paying higher taxes." I discussed this further in the opening question of the CNBC interview: http://video.cnbc.com/gallery/?video=3000083600&play=1.
2) The Buffett Rule raises so little money, so why bother?
I addressed this in my Post column:
Some critics of the Buffett rule legislation point out that it would raise only an estimated $47 billion over 10 years, which is a mere sliver of the 2011 deficit of $1.3 trillion, let alone the national debt of $15.6 trillion. They're right that the Buffett rule, by itself, won't be enough. But we have to start raising money somewhere, and if it isn't raised from people like me, it will have to be raised from people less fortunate than me. Think of it this way: For every billion dollars not raised from millionaires, that's equal to a million average American families each paying an extra $1,000 in taxes. That would be real hardship for a lot of families that, unlike mine, are struggling to make ends meet.
I'm taken aback at how easily some people dismiss $47 billion. I don't know what planet they live on, but here on Earth that's real money! $47 billion is equal to 47 million families – that's nearly half of the 114 million households in America! – paying an extra $1,000 in taxes (or suffering from a $1,000 cut to their benefits like Social Security).
That said, even more important than the money is the psychology and symbolism. As I noted earlier, to get a comprehensive budget deal done, tens of millions of people are going to have to make sacrifices – and it's not fair or politically feasible to ask them to do this unless the very wealthiest people in our society make real financial contributions.
3) There's no chance that Congress passes the Buffett Rule next week, so isn't this just a political carnival? Why waste political capital on a sideshow?
It is indeed political theater in the short term, but I think it's critical to make the case for it and generate political pressure, as I can't see a grand bargain getting done without some sort of change like the Buffett Rule that ends some of the most perverse and unfair elements of our tax code.
To get such a deal done, hundreds of members of Congress are going to have to show serious political courage and agree to very difficult compromises. What Democrat would agree to vote for painful spending cuts that hit Democratic constituencies particularly hard unless the Republicans agree to tax increases on their benefactors?
That said, no matter how much you tax the rich (regardless of how you define it: $200,000+, $1+ million, etc.), it won't be enough. Tens of millions more people will have to pay at least somewhat more in taxes – but for this to happen, the wealthiest people have to go first and sacrifice the most.
4) Isn't there a better way to fix the perverse outcomes that the Buffett Rule is designed to address?
Probably. The Buffett Rule is a brilliant political tool but I would agree that it's a crude tax tool – minimum taxes tend to be – that could lead to some distortions and unintended consequences. Thus, I would be pleased if, as part of the grand bargain, the tax law were changed to address the underlying reasons for the perverse tax outcomes, namely that capital gains and dividends are taxed at 15%, while ordinary income is taxed at a much higher rate and, to a lesser extent, the performance allocations (the 20% of the profits earned) by private equity and hedge fund managers were taxed as ordinary income. Equalizing taxes on capital gains, dividends and salaries is not some kooky leftist scheme. It was embraced by Ronald Reagan.
5) Why are you, Obama, and Buffett engaging in class warfare?
Pointing out absurdities in the tax code that result in many of the wealthiest people paying much lower tax rates than average Americans isn't class warfare. Class warfare means fomenting hatred toward rich people just because they're rich. Well, I'm rich, as are most of my friends and family, and I certainly don't hate them. To the contrary, I, like virtually all Americans, regardless of political persuasion, celebrate people who work hard, build successful careers/businesses, and consequently do well for themselves.
Meanwhile, Republicans have shown that they are willing to fight to the death – to the point of being willing to have the U.S. default on its debts – to prevent the taxes of millionaires (and billionaires!) from going up by even a penny. Yet at the same time – this is the very definition of chutzpah! – they are also calling for even the poorest Americans to have to pay federal income taxes (in addition to payroll, sales, and other taxes the poor already pay). And they accuse Obama of engaging in class warfare?!
6) Don't you understand that a country can never tax its way to prosperity and that taxing job creators will hurt our economic recovery?
Getting tax policy and rates right is really hard. I certainly don't claim to be an expert, but I'm smart enough to understand that something is seriously wrong when my assistant is paying a much higher tax rate than I am (and we're not a rare exception).
I don't think raising taxes is always the right answer – Reagan was right to cut the marginal tax rate from its peak of 70%, for example. My first preference is always for government to find ways to operate more efficiently, but I'm quite certain that we won't be able to get our budget deficit under control solely with spending cuts, so increased taxes will have to be part of the solution. So spare me the tired clichés and let's have an honest conversation about how best to do this so that it doesn't hurt our economy.
7) If you think our government can operate more efficiently, then why did you write "our government is actually quite effective and efficient" in your Post column?
I don't think the two beliefs are inconsistent – it all depends on what your point of comparison is. I've visited Hong Kong, Norway and Switzerland in recent years and am very impressed with how well their governments operate – we could learn a lot from them. But over the same period I've also been to Kenya, Peru, Mexico, Spain, South Africa, Saudi Arabia, Cambodia and Italy – visits that make me thankful for our government.
8) Doesn't the criticism bother you?
No, though to protect my brain from too much damage, I make it a point never to read postings on message boards – too often, they are the rants of crazy people saying vicious things, hiding like cowards behind the anonymity of the internet.
I'm a value investor, so my business involves taking unpopular positions (think buying BP stock during the Deepwater Horizon crisis). We frequently choose to publicly disclose our positions, which of course often subjects us to criticism and mockery (it's hard for me to remember the last stock we bought in which this wasn't the case), but because we're quite sure that we're right (otherwise we wouldn't own it), we just smile, confident that he who laughs last, laughs best.
Too many good people (including myself at times) are too cautious about speaking out about the great issues of the day because they're afraid of offending somebody. Well, that's not for me. I agree with John F. Kennedy, who said: "The hottest places in hell are reserved for those who in times of great moral crisis maintain their neutrality."
9) Aren't you just being a pawn of Buffett's?
Warren Buffett is one of my heroes, both as an investor and as an incredibly high-grade, principled person, so he has certainly influenced my thinking in this area (as he has in so many others), but any of the thousands of readers of my value investing email blasts will know that I held the views I expressed on Wednesday long before Buffett started speaking out on this issue.
10) Aren't you just being a pawn of Obama's?
I've been a strong supporter of President Obama's since the day I met him in 2004, so I was happy to participate in the events on Wednesday. I think he's done a good job as President and am actively supporting his reelection campaign. He was dealt one of the worst hands any incoming President has ever had, and I think he's played it well – not perfectly, to be sure, but well.
Another reason I support his reelection is because I believe that only a President who doesn't have to think about getting reelected will be able to make the tough, politically unpopular decisions that must be made in the coming years.
11) Don't you understand that Obama hates private businesses, Israel, and/or wealthy people, and is the worst President ever?
No. And if you believe any of these things, then you are an ignoramus, most likely due to your brain turning to mush from too many hours of watching Fox "News" and/or listening to Rush Limbaugh.
There are many fair critiques that can be made about Obama and I have no quarrel with people who choose not to support him, but extremist views like this are nuts. You may disagree with his politics and decisions, but Obama is an incredibly intelligent, good-hearted person who's doing his absolute best to lead our country during extremely difficult times. His job has been made much more difficult by the toxic political environment in which, from the day he took office, the Republican party's highest priority has been to tear him down and reduce the chances of his reelection, regardless of the consequences for the country.
12) What did you and Kelli say to the President?
Kelli said, "Mr. President, I'm Kelli Alires, and I work for Whitney. I want to thank you for making it easier for me to ask for a big raise at the end of this year."
He laughed and said, "I'm sure you're worth it."
Then he turned to me and, as I shook his hand, I said, "Hi Mr. President, I'm Whitney Tilson of Democrats for Education Reform. We were early supporters of yours, and I just want to thank you and [Secretary of Education] Arne Duncan for the incredible work you're doing."
His eyes lit up and he said (as best I can recall), "I remember your early support. We're making progress, but we still have a lot of work to do."
I said, "We'll keep fighting for you," and then he was hustled out of the room to start the press conference.
13) Who are the Patriotic Millionaires?
A lot of people as it turns out. This effort to bring some leadership to the tax issues started 18 months ago during the lame duck session of Congress. A Google software engineer and a lawyer got together with my friend Erica Payne, the President of a public policy organization called the Agenda Project, and they recruited several dozen people who make more than $1 million a year to sign a letter asking the President to insist that the Bush tax cuts expire for millionaires. The group of signers, which I soon joined, became known as the Patriotic Millionaires for Fiscal Strength. Since the website with the letter went up, the group has garnered more than 50 million media impressions (not including yesterday).
The members are a very impressive group of business leaders and philanthropists from a variety of backgrounds and industries including: more than a dozen current and former Google employees, actress Edie Falco (Sopranos and Nurse Jackie); Susie Buell, founder of Esprit; my friend John Katzman, founder of Princeton Review; legendary hedge fund manager and philanthropist Michael Steinhardt; famed economist Nouriel Roubini; financial guru Andrew Tobias; top executives from Warburg, Pincus and other major financial firms; filmmaker Abigail Disney; and Leo Hindery of InterMedia Partners, among others.
For more information about the Patriotic Millionaires, please visit www.patrioticmillionaires.org.
14) How did you calculate your tax rates, and why is yours lower than Kelli's?
For both of us, the calculation was total tax (line 60) plus payroll taxes (both employee contribution and employer match, totaling 15.3% in 2010), divided by adjusted gross income (line 37).
It's critical to add in payroll taxes when doing this calculation – they're federal taxes too! Without them, Kelli's tax rate was 18.1% and mine was 21.4%.
But since the Social Security tax (12.4% in 2010) only applied to income up to $106,800, Kelli paid it on all of her income, whereas it only applied to a tiny fraction of mine. Thus, when payroll taxes are added in, her total federal tax rate jumped to 33.4% (18.1% + 15.3%), whereas mine only jumped from 21.4% to 24.6%. This perfectly illustrates how highly regressive the Social Security tax is, and why I favor ending the income cap on it.
Note that I used the 21.4% tax rate (which excludes payroll taxes) in my column in the Post, because my understanding is that this is the amount that would rise to 30% under the Buffett Rule), whereas I use the 24.6% figure when comparing my rate to Kelli's, so there's an apples-to-apples comparison.
(Some might ask why I'm including the employer match, so think of it this way: if Kelli's salary were $100,000 (to keep the math easy), I, her employer, would have to match the 6.2% Social Security tax plus the 1.45% Medicare tax she paid, making her total cost to us $107,650 (of which, she would receive $92,350 before other taxes). It makes no difference to us (or any other employer) how much of her total cost of $107,650 goes to the government or to Kelli, so if there were no employer match, we would be happy to pay her the entire $107,650. This is why the employer match must be counted when calculating Kelli's total federal tax rate.)
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A millionaire for higher taxes
By Whitney Tilson, Wednesday, April 11, 9:31 AM
Whitney Tilson is a hedge fund manager and a member of Patriotic Millionaires for Fiscal Strength.
I am part of the 1 percent of the 1 percent. By that I mean that I am fortunate to be a wealthy American, and I say, "It's okay to raise my taxes."
This morning I was at the White House supporting President Obama in his call for Congress to pass the "Buffett rule." The rule — inspired in part by Warren Buffett's exasperation in learning that his assistant was paying a greater percentage of her income in taxes than he was — would require anyone whose income exceeds $1 million a year to pay a minimum 30 percent in taxes. It would hit me hard. I haven't finished my taxes for 2011, but in 2010, my federal tax rate was 21.4 percent; if the Buffett rule had been in effect, my federal tax bill would have been 40 percent higher. Some years, my taxes would likely be more than 50 percent higher.
Why am I okay with this? The answer has to do with simple math and basic fairness.
This country is running enormous and unsustainable budget deficits that will bankrupt us all if they are not narrowed — and there is no way to do that without both cutting spending and raising revenues. (Grover Norquist's anti-tax pledge is pie-in-the-sky fantasy and dangerous demagoguery.) Everyone is going to have to make sacrifices as part of a comprehensive budget deal along the lines of Simpson-Bowles, with tens of millions of people getting smaller entitlement benefits, for example, and tens of millions of people paying higher taxes.
It's not class warfare to say that people like me — who aren't suffering at all in these tough economic times, who are in many cases doing the best we've ever done and who can easily afford to pay more in taxes with no impact whatsoever on our lifestyles — should be the first to step up and make a small sacrifice.
I think most people agree with the idea of shared sacrifice, but for many, when push comes to shove, that principle goes out the window. I don't kid myself that I'm making any real sacrifices. The men and women who have been fighting for the past decade in Iraq and Afghanistan — thousands of them coming home in coffins or with missing limbs — are making true sacrifices. And when they enter the domestic workforce, they shouldn't have to pay taxes at a significantly higher rate than the vast majority of millionaires.
Some critics of the Buffett rule legislation point out that it would raise only an estimated $47 billion over 10 years, which is a mere sliver of the 2011 deficit of $1.3 trillion, let alone the national debt of $15.6 trillion. They're right that the Buffett rule, by itself, won't be enough. But we have to start raising money somewhere, and if it isn't raised from people like me, it will have to be raised from people less fortunate than me. Think of it this way: For every billion dollars not raised from millionaires, that's equal to a million average American families each paying an extra $1,000 in taxes. That would be real hardship for a lot of families that, unlike mine, are struggling to make ends meet.
Other critics argue that there's no need for anyone to pay more taxes, because our government is so ineffective and wasteful that we can generate the savings we need just by running it better. I disagree. While there's always plenty of room for improvement, our government is actually quite effective and efficient. Our military and judicial system and national parks are the best in the world. Unlike in countries where government corruption is rampant, I've never once been solicited for a bribe. And our police departments generally do a good job protecting citizens. My wife and I walk our dog in Central Park every night after 10 p.m. and have never feared for our safety.
I think that most people who complain about our government have no idea what they're talking about because they've never been to a country with a bad government. I regularly visit Kenya (my parents retired there and my sister works there), I visited Ethiopia many times when my parents lived there, and growing up I lived for three years each in Tanzania and Nicaragua. So I've seen what life is like under corrupt, dysfunctional, underfunded governments. To quote Hobbes, it can be "solitary, poor, nasty, brutish and short."
I am grateful for the effective government we have in this country, which is the absolutely necessary foundation for our wonderful capitalistic economic system that has benefitted me so greatly. And I'm willing to do my fair share — in fact, more than my fair share — to help rein in our deficits and put this country on a more sustainable path.
posted by Whitney Tilson at 5:05 PM
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