How to Get to 1.5 Trillion Without Getting Warren Buffett to Chip In Very Much

Originally Published on forbes.com on September 20th,2011

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 The White House released Living Within Our Means and Investing in the Future this week. Tax provisions begin on page 45.  There is a call for comprehensive tax reform based on 5 principles including the “Buffett principle” that no family making over $1,000,000 should pay a smaller share of its income in taxes than middle-class families pay.  The next several pages are specific proposals.  Only one of them would actually cost Buffett anything and I don’t think it would bring him up to my average. I haven’t seen the legislative language except on the five items that were included in the Jobs Bill.  The plan describes the provisions and gives a dollar breakdown of their estimated contribution to deficit reduction (Pages 62 to 64).  All numbers are ten year totals. In total the tax provisions will shave 1.5 trillion off the deficit (actually 1.572,587 trillion) in the next ten years.  I figured there  would be some specific proposals that would cost Warren Buffett something, since he is the one who has been complaining about his taxes not be high enough.  Except for one item, I’m still not seeing where Buffett’s share of the 1.5 tril is coming from, but I’m sure that will become clear as time marches on.    Here is my executive summary of the tax provisions:

Well That Was Easy and Warren Will be Helping Here – $866,011 Billion

The first item is “allowing the 2001 and 2003 high income and estate taxcuts to expire”.  I think that means capital gains go to 20%, which costs Mr. Buffett a bit.  Does this also mean we are going back to $1,000,000 unified credit on estate and gift taxes ?  I’d like to see this piece of the proposal broken out a little more.  At any rate we’re more than half-way to the 1.5 tril just by standing pat on current law.  Good job, Mr. President.

Reduce The Value of Itemized Deductions to 28% for High Income Taxpayers – $410,139 Billion

This one was in the Jobs Bill.  I don’t think it will cost Mr. Buffett anything as I explained here.  My big fear is that it will end up being a tax on charity. 

And The Rest

There are 26 specific items that make up the balance of nearly 300 billion.  Nearly 113 billion comes from technical changes to bring in more money from corporations with large amounts of off-shore income.  Carried interest, which causes such excitment, at around 12 billion, is less than 1% of the total.  As I have written elsewhere, I think the big hedge funds will be able to beat it based on the language in the jobs bill.   Almost 27 billion comes not from ending special breaks for oil and gas, but rather from taking away percentage depletion and the production deduction from oil and gas, but not anybody else.

The biggest item affecting small business in this grab bag is repeal of LIFO.  That is expected to raise just over 50 billion.  I think they really have to do some serious thinking about this one.  Businesses on LIFO have a big incentive to maintain inventories.  Otherwise they get taxed as if they are selling the stuff they bought in 1957.  If they lose that incentive there might be a short term slump as inventories are drawn down.  Much more important is the fact that we really want the distribution chain to have a lot of inventory in it when the Zombie Apocalypse disrupts production.

Time to Burn More Books ?

It’s not even 10 billion so repealing lower of cost or market doesn’t seem worthwhile.  Back when dinosaurs roamed the earth, companies would write down slow moving inventory.  Then the IRS ruled you could only do that if you offered to sell the stuff at the lower price (Lower of Cost or Market).  The Supreme Court upheld the IRS in Thor Power Tool.  That decision led to book burning because publishers were among the businesses that would hold onto things for a long time, but wanted to be able to write them down.  If lower of cost of market goes, then you won’t be able to write the inventory down even when you are willing to sell it for the lower cost.  This might lead to more book burning and possibly landfills stuffed withtchotchkes.  Not to mention another blow against Zombie Apocalypse preparedness particularly if books about Zombie Apocalypse preparedness are among those burned.

Conclusion

Lest you think I am picking on Mr. Buffet, you need to go to page 46 where he is explicitly mentioned and one of the five principles for tax reform is named for him.  The only specific proposal that seems to cost him anything ,though, is letting things revert to how they were in 2001.  So even if this plan is fully implemented he will still be paying a lower percentage than his secretary.