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The Sage of Omaha and the tax cuts

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Warren Buffett, the Sage of Omaha, is living the legend on Wall Street as one of the most successful investors in history. So the capitalist world paid attention when he criticized aspects of the Bush administration's new tax cuts. The Indian world should pay attention too, and applaud him, since it seems he has imbibed a great deal of Native wisdom about fairness and responsibility for each other.

Buffett and his family actually have direct connections to Indian country. (His son, Peter Buffett, was the composer for the stage production "Spirit" three years ago, a respectful attempt to introduce Indian dance and music to mainstream theater-goers.) So we felt we recognized where Buffett was coming from when he recently published a critique, "Dividend Voodoo," in The Washington Post as the U.S. Senate passed the tax cut bill.

Perhaps surprisingly for such a giant among investors, Buffett denounced the measure lifting the tax on stock dividends for individuals. The bill cut the tax by 50 percent for this year and removed it entirely from 2004 through 2006. The tax reverts to current levels in 2007. Spilling the beans, he said it "would further tilt the tax scales toward the rich." Using his own example, he said that he currently pays the same tax rate, 30 percent, as his receptionist. If his own company Berkshire Hathaway decided to pay out dividends, (although it doesn't at present) his own tax rate would plunge to three percent under the new bill, but his receptionist would still pay 30 percent.

Buffett finds it shocking, and even worse, silly that the Senate would give such a break to the richest people in the country. This sense of fairness is refreshing in a man who has made billions for himself and his co-investors (many of them ordinary people.) But it is also good economics.

Buffett ridicules the argument that this kind of tax cut will stimulate the economy. A far greater stimulus, he writes, would come from taking the tax savings granted to the rich and spreading it among families with urgent needs. As he observes, the manipulation of the dividend tax will simply produce contorted corporate behavior to maximize the benefit during the irrational timetable of the cuts.

Buffett is arguing against a common feature of tax legislation. It is blatantly twisted to favor one interest or another. At one point some Republicans protested these irrational loopholes as loudly as anyone, and offered a theory to restore tax fairness that even critics would admit was coherent. People like Jack Kemp wanted across-the-board tax cuts on the principle that government spending was too large and that money left in the hands of common people would stimulate the economy just as well as money saved for billionaire investors.

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In fact the best way to reduce the burden on business, they argued, was to cut taxes on the worker's payrolls, not to cut specific business taxes. Businesses were very skilled at passing their tax bills on to consumers in higher prices, just as workers passed their tax increases on to their employers through increased wage demands. Rather than create a tax loophole here and there, the best approach, so argued the economists who became known as "supply-siders," was to make the cuts as general and neutral as possible.

These arguments became the official ideology of the "Reagan Revolution," and Republicans still pay them lip service. But what astonishes us is how quickly politicians will drop these principles when their own interests come in play. And Indian country is the best witness to this hypocrisy.

Supply-siders like Kemp made a big push for economic development in what they called "Enterprise Zones," in which business taxes were sharply decreased. New York, as one example, still has its equivalent in the "Empire Zone" program. But they are strangely quiet about the most dramatic vindication of this policy to be found anywhere in the country, the economic surge in Indian nations that have chosen not to impose taxation.

In New York alone, Governor George Pataki's 1997 decision to not violate its government-to-government relations by attempting to collect sales taxes on reservation transactions was followed by a strengthening of private businesses on the territories that encouraged entrepreneurship. Private smoke shops on the St. Regis Mohawk reservation and the pro-business Seneca lands have created at least 2,000 jobs, say local leaders. Even the tribes that kept the business profits for government-owned stores have been able to afford social programs that benefit all their peoples, unimaginable five years earlier. These are profits derived from commerce and hard work.

Yet the first thing politicians can think of is to end the "unfair" tax advantage of the reservations. The New York legislature tried to balance its budget by mandating collection of sales taxes on reservation sales to non-Indians, overriding Pataki's veto. The State Senate Finance committee said the measure would bring in an extra $550 million. The figure is a total myth. Non-Indians shop on reservations because of the price break; without it, they have no reason to go. This tax measure, and the equally foolish drive for "price parity" on reservations, will merely kill off an economic phenomenon that was bringing the business spirit, self-reliance and a better life to Indian peoples. It's a measure of the legislature's hypocrisy that no one we know of has proposed ending the Governor's Empire Zone program. Neither have we heard of proposals to end the State's heavy-handed taxation of cigarettes and gasoline to help level the playing field for its own business owners.

The honesty of Buffett's article stands in stark, honorable contrast to the narrow self-interest of these attacks on the Indian economy. We're inclined to believe that Buffett is far more attuned to the original economic principles and values that once guided this great land than the politicians who just engineered this massive redistribution of wealth toward those who need it the least.