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Richest soon may assume larger share of tax burden: BULLS & BEARS

July 16, 2007

The rise in property taxes and a doubling of the Marion County income tax have residents steaming. Yet as IBJ columnist Ron Gifford noted in his column last week, you can argue about which taxes legislators should increase-whether on property, income or sales-but the fact is that governments need more revenue, and, therefore, a variety of taxes are rising.

Paying tax is not the most pleasant of human endeavors. However, in a capitalistic society, taxes are necessary and, when applied equitably, are a means for citizens to return back to society a portion of the wealth created from an economy that enables them to earn a living. In theory, the government reinvests the tax revenue to keep our society in sound shape.

To make the system work well, you need the fiduciary of those tax collections-the government-to behave in a rational manner. The problem we are beginning to wake up to is that health care and retirement benefits-inadequately funded, but promised over the years by governments at all levels-will hit the books hard soon. To meet these contractual obligations, the citizenry will feel the stress of higher taxes.

One can argue about the fairness of the tax code. As the middle class complains louder of the increasing burden it is shouldering, lawmakers will turn their attention to a couple of other constituencies for revenue-the ultra-wealthy and corporations.

At a recent Democratic political gathering, Warren Buffett expressed puzzlement that he was taxed at a lower rate than many of the lesser-paid individuals working for his company, Berkshire Hathaway.

Buffett said he makes $46 million a year in income and is taxed at only a 17.7-percent rate on his federal income taxes. By contrast, those who work for him, and make considerably less, pay on average 32.9 percent in taxes. To emphasize his point, Buffett offered $1 million to the audience member who could show that one of the nation's wealthiest individuals pays a higher tax rate than one of his or her subordinates.

Today, the hot topic on Capitol Hill is the tax rate paid by the chieftains of private equity and hedge funds. The majority of the billions earned by these moguls is classified under the tax code as "carried interest" and taxed at a rate of 15 percent. Lawmakers are debating whether these earnings should be reclassified and taxed as high as the 35-percent corporate tax rate. Likewise, it wouldn't be surprising if the next presidential administration were to find a way to increase the current 15-percent tax rate on long-term capital gains.

Corporate taxes are also a target for increase. American business has been feasting on historically high profit margins. And with companies earning a larger slice of the country's gross domestic product, politicians likely will find ways to assess higher tax rates.

Of course, we will hear from the antitax advocates who provide well-reasoned arguments that higher taxes will hurt the economy. And in the coming showdown, Washington likely will do what it does best-compromise, with a tilt toward higher taxation.

Next time, in two weeks, we will discuss one of the best ways investors can build wealth and put off the tax man-compound growth.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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