The rich benefit from tax cuts

Warren Buffett, the third richest man in the world and a business magnate has revealed to investors that his conglomerate, the Berkshire Hathaway received a profit boost of $29 billion for the year 2018.

He noted that this was due to the tax cuts that were introduced by the current administration in the US. The tax cuts have been criticized in the past for catering to the ultra rich in the country.

Background

The United States is the largest economy in the world in terms of nominal GDP. The U.S. GDP was estimated to be $18.46 trillion in 2016. The U.S. dollar is the currency most used in international transactions and is the world's foremost reserve currency.

US President Donald Trump has long promised a comprehensive overhaul of the current tax structure. He has stated that a tax reform will rejuvenate the US economy. The administration had also promised a significant tax cuts to corporates. The administration as well as the Congress (Republican majority) aimed to slash the corporate tax to 20 per cent and largely end the taxation of non-US earnings.

In an earlier statement the White House criticized the tax code and note, “For far too long, the tax code has been rigged in favor of well-connected special interests.  This legislation cuts taxes for middle-income families and empowers American businesses to create more jobs, increase wages, and propel our economy toward a brighter future.  This Administration looks forward to working with Congress to make tax reform a reality by the end of the year.”

In 2017, the United States Senate, with a Republican majority passed a sweeping overhaul of the US tax code. According to this new agreement, there will be a 37% top tax rate for individuals. In addition, the corporate tax rate would be 21% which is higher than what was initially proposed. This would begin from 2018. Earlier there was a proposal from the US Senate that this will be delayed until 2019. Currently the corporate tax rate has been kept at 37%. Additionally, "Pass-through" businesses that pay taxes through the individual side of the tax code would get a 20 percent deduction.

At the time, Bernie Sanders, called the bill “a moral and economic obscenity.” He said, “It is a gift to wealthy Republican campaign contributors and an insult to the working families of our country.”

Warren Buffett

Warren Edward Buffett is considered one of the most successful entrepreneurs in America and the world. He serves as the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of $87.5 billion as of February 17, 2018, making him the third wealthiest person.

Berkshire Hathaway has holdings in freight rail, major insurance companies, real estate, newspapers and utilities.

Analysis

Every year Warren Buffet sends a letter to the investors that attracts public attention as well. This year he revealed that due to the Republican tax reform, his conglomerate received a profit boost of $29 billion. In fact, he stated that the tax cut was responsible for nearly half of the conglomerate’s gain in net worth for the year 2017.

"A large portion of our gain did not come from anything we accomplished at Berkshire," he wrote. "Only $36 billion came from Berkshire's operations. The remaining $29 billion was delivered to us in December when Congress rewrote the US Tax Code."

Buffett, a well-known philanthropist was highly critical of US President Donald Trump during the campaign in 2016 and also expressed his concerns regarding the proposed tax plans. In October 2017 during an interview with CNBC he stated, “We have a lot of businesses... I don’t think any of them are non-competitive in the world because of the corporate tax rate.” He also said that as someone who is already wealthy he did not personally need more taxes.

An analysis by Tax Policy Center’s on the tax bill revealed that the top 0.01 percent of earners would see an average tax reduction of $193,380 in tax savings in 2018 alone. As the third richest man in the world, Buffet will be able to benefit from the tax cuts the most.

Bipartisan analysts have noted that the biggest beneficiaries for the tax cuts that have been introduced will be large corporates like Berkshire Hathaway.

Assessment

Our assessment is that the tax cuts cater more to the ultra-wealthy and the conglomerates in America. It is possible that with additional windfall, corporates will increase wages for their employees and in turn boost economy of the nation. However, there are likely to be bigger problems in the near future. According to an analysis by Deutsche Bank, these cuts will directly cause the federal deficit to rise from the current estimated 3.2 percent of GDP to 3.5 percent within a few years. That would represent a $100 billion revenue reduction to the U.S. Treasury. Meanwhile, the top 1 percent wage earners in the nation, (President Trump is one of them), get a substantial increase in their income.