Voluntary Taxation?

Warren Buffett’s recent NY Times op-ed advocating higher taxes on the wealthy (“Stop Coddling the Super-Rich,” Aug. 15) provoked a response that was vacuous even by the Right’s recent standards.  As Jack LeMenanger of Winchester, MA, wrote in his letter to the editor, for example, “If Warren E. Buffett wants to pay more in taxes, no one is stopping him.”  Andrew Roth, VP of Government Affairs for the Club for Growth, agreed: “Nothing is stopping him from sending a larger check to the Internal Revenue Service as if higher tax rates applied to him.”  But unless these authors can point to an example of a successful society that relies on voluntary tax payments, their objection makes no sense.

Private charitable donations are of course important (as Buffett himself hardly need be reminded, since he’s already given more than $30 billion of his personal fortune to the Bill and Melinda Gates Foundation).  But no country relies on voluntary donations to provide essential public goods and services.  Any country that tried wouldn’t be able to support an army and would be quickly overrun by a country with one.  In the end, its citizens would end up paying mandatory taxes to that country’s government.

Because public services benefit all citizens, most of us accept the need to pay taxes to support them. If taxes were voluntary, many would seize the opportunity to enjoy those services for free.  And once people saw their neighbors enjoying a free ride, many more would withhold their own voluntary payments.  Some countries, such as Haiti and Somalia, have governments to weak to enforce their tax laws.  Tax compliance is low, and public services are abominable.  People are not queuing up to move to those countries.

Yet, according to the American Society of Civil Engineers’ report on the current state of American infrastructure, that’s the kind of society we’re becoming.  As a share of GDP, current federal tax levels are lower than at any point since 1950.  They’re far below what’s needed to cover even existing budgets, much less to restore our crumbling roads, bridges, dams, and sewage systems.

It’s impractical to exclude those who don’t pay for public goods from enjoying their benefits.  The only way to provide them in the quantity and quality we want is through higher mandatory taxation.  Middle- and low-income families, who are under greater economic stress than at any time since the Great Depression, can’t pay much more.  As Buffett pointed out, any plan for generating the additional revenue we need must entail higher levies on the wealthy.

And the right wing’s best response is to urge him to send voluntary tax payments to the IRS?

Comments

  1. kevo says

    Thoughtful post! We are a morbid society, and our morbidity can be seen in such TV machine programs as Hoarders where the poor, foolish, disheveled individual is highlighted in the state of mess he or she has garnered over presumedly quite a few years.

    Now, before our morbid fascinations manifest the current generation of Hoarders, a simular program about hoarding was on the air for a very long time. It’s title? Why, Lifestyles of the Rich and Famous!

    Yes, poor Jack LeMenanger and Andrew Roth are sounding more like the Hoarders being profiled today on the TV machine, than responsible and caring American citizens!

    Rich and Famous – Hoarders extraordinaire!

  2. sd says

    “And the right wing’s best response is to urge him to send voluntary tax payments to the IRS?”

    No, the right wing’s best response is to point out the shoddy economic logic in Buffett’s original piece. Namely, he makes a false comparison between income taxes on salaries and wages, which are paid out before corporate taxes (which average about 25% on an effective rate basis across all US firms) are levied, and dividneds and capital gains, which are paid out after corporate taxes are levied. If he counted the tax incidence of corporate taxes his numeric argument would be shown to be bunk.

    But to your central point: nobody that I’m aware of is suggesting that taxation be replaced by voluntary contributions to the government. But what Buffett’s critics are saying, and what is exactly right, is that the moral authority of Buffett’s argument that taxes should be raised on the wealthy is undermined by his refusal to voluntarily contribute more money to the treasury. Buffet contends that he pays ~15% of his AGI in taxes (which is the shoddy economic logic referenced above) while he and all those of similar means should pay something more like ~30%. That’s all well and good, but until he volunatrily ponies up an extra 15% of his AGI he has no moral standing to demand that other be compelled to do so. People who are not wealthy can make a moral argument that the rich can pay more. And a rich man who volunarily pays more can make a moral argument that the rich should pay more. But a rich man who does not voluntarily pay more, despite the existence of a mechanism to do so, and then truns around and suggests that the rich should pay more, is a hypocrite.

    And no – this is not a “collective action” problem. Money is fungible and there are plenty of worthy uses for it. We face a massive deficit. Its not like there’s a big “thing” we’re trying to buy that we could afford if every rich person gave more money to the government, but that we cannot afford if only one rich person gave more money to the government. If it is a good thing for every rich man to pay more to the government then it is proportionally good thing for a single rich man to pay more to the government.

  3. Marc says

    It’s almost as if sd didn’t bother to read the post at all. I guess that’s what happens when you’re invested in defending low taxes for the rich at any cost.

    See? I didn’t even have to respond to what you wrote in my post, just as you couldn’t be bothered to actually address what Robert wrote.

    “I prefer a society where rich people, like me, pay more taxes” is not the same as “I prefer to pay more taxes all by myself”.

    I hope you’re not paid for that “logic”, sd.

  4. Tony P. says

    I’m with sd. Let’s make ALL taxes voluntary. Nothing would prevent civic-minded people, poor as well as rich, from paying their “suggested tax bill” — or paying even more. Even those persons whose last name is Inc or Corp would be free to pay — or not.

    –TP

  5. Brett Bellmore says

    It’s almost as though SD realized that the post completely missed the point of the complaints about Buffet’s position, and underscored what it really was, only to to have it go right over your heads.

    Don’t force somebody else to do what you won’t do voluntarily, and expect people to admire you. It’s not a complicated moral precept, it’s merely one the left rejects.

  6. J. Michael Neal says

    Namely, he makes a false comparison between income taxes on salaries and wages, which are paid out before corporate taxes (which average about 25% on an effective rate basis across all US firms) are levied, and dividneds and capital gains, which are paid out after corporate taxes are levied. If he counted the tax incidence of corporate taxes his numeric argument would be shown to be bunk.

    Has anyone else noticed that the burden of paying corporate taxes shifts according to what rhetorical point Republicans need to emphasize?

  7. says

    And the right wing’s best response is to urge him to send voluntary tax payments to the IRS?

    Er no. There best response is to demand we tax the poor more:

    “We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.”
    - Texas Gov. Rick Perry, presidential announcement speech, Aug. 13, 2011

    Of course that absolutely stunning two part Jon Stewart piece that “did the math” on taxing the poor put the razor to the juglar on that idea (http://www.cnbc.com/id/44204233). A truly stunning piece. I guess you can even say a jaw-dropper…

    But still, it is important to realize that the right’s best defense has always been a good offense: Scream class warfare even as you wage it by being “dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.” I think that’s brilliant GOP wordplay, as apparently most Americans don’t realize or care that they are being shat on by a rich Texas. So I say: All the market can bear baby. Perry should continue to drop his pants and let fly…

  8. MikeM says

    While in graduate school in Alabama (UAB), a friend of ours was having a beer in a pub, sitting next to a guy who was bragging that he hadn’t paid taxes for twenty years. They both left at the same time, and my friend took the opportunity to tell him, “Get off my sidewalk — and don’t drive home on my roads!”

  9. Richard W. Crews says

    sd presents an immoral AND irrational argument. enough of him.

    I believe our symphony halls, museums, and hospital wings funded by private donations were largely fueled by the pressure of a 55% estate tax. Without this tax, a billionaire may weigh a legacy versus an aristocratic dynasty, and we the people suffer in many ways.

    Liberal Flat Tax – a Fair Plan
    The Republican nonsense about their so-called “fair tax” is exactly opposite of fair. The less you make, the more their plan hurts.

    A Liberal fair flat tax plan.

    First, the lower incomes must be buffered; those that already spend it all just to live. The break even and barely making it people. There will be a deduction of $15K for each earner, and $10K for each dependent. Most deductions, except a single home mortgage interest, other taxes, and charities, will be eliminated.

    Each two year Congress passes a two year budget and tax rate; whether balanced or not. These legislated rates and policies can include directed credits/deductions for desired social policy actions, like rewarding for buying American.

    Social Security, while not broken, is easily strengthened: tax ALL income with a deduction at the bottom; the opposite of current policy. A $30K taxation start point would be an immediate 7.65% (of the first $30K) pay raise to every taxpayer! There’d be so much revenue that another higher break, or a rate lowering would be possible. Or, means test; treat it like an insurance policy that some never need – just like car insurance where you pay and pray you never use.

  10. RickG says

    “Has anyone else noticed that the burden of paying corporate taxes shifts according to what rhetorical point Republicans need to emphasize?”

    Exactly! Corporations don’t pay taxes on dividends, THEY PAY DIVIDENDS…and by that logic it is a 100 percent tax paid to those pesky shareholders!

    Now for a perfect example of double and triple taxation, look at the FICA payroll tax. Not only is that tax levied AFTER TAX on the individual taxpayer, the paid benefits can be taxed yet again on payout if one exceeds total income! Yet Social Security benefits are considered entitlements, and targets for cost cutting! Am i arguing to get rid of FICA? No. It is the closest thing most folks in this country will see to a defined benefit pension.

  11. says

    It’s almost as if RF actually quoted Buffet’s critics and responded directly to those criticisms, only to have SD & BB simply pretend that some deeper point has been missed. Check your flies, boys; your ipse dixit is showing.

  12. sd says

    RickG said:

    “Exactly! Corporations don’t pay taxes on dividends, THEY PAY DIVIDENDS…”

    That is atrociously wrong. Dividends, which represent payments of the profit of a firm to its owners, are paid out after corporate taxes are paid. So of course corporations pay taxes on dividends. They are taxed on their profits before the dividends are paid.

    Mr. Buffett claims that his effective tax rate is only ~17%, which is much lower than the effective tax rate on his secretary, which is ~30%. But “his” effective tax rate is only ~17% because most of his income comes from dividends, which represents income that has already been taxed at the corporate level. The statuatory rate on corporate profits is 35%. Most coporations pay an effective rate that is lower than 35%, but the average is about 25%. Thus in the absence of a detailed analysis of the tax incidence of Mr. Buffett’s business holdings the best guess we would have is that the effective tax rate on his income is 17% + 25% = 42%.

    His secretary’s income on the other hand is paid out as a business expense before corporate taxes are levied.

    His argument is dishonest.

  13. Tim says

    I am probably one of few people on the left who finds Buffet’s op-ed somewhat disingenuous. He makes a good point but it’s cheap talk as far as I’m concerned. Not that voluntary taxation would be an answer. But he has the means and influence to make a bigger impact on the issue and all he does is bemoan his low tax bill.

    I would have more respect for his statement if he persuaded, say, a dozen other billionaires to sign the op-ed with him. Or if he formed a coalition with others to advocate for this kind of tax reform. Short of that, it’s just a cookie for the left and an ego trip for him.

    Sd has intimated that corporate taxes should be shifted from the corporation to the shareholders directly. This is ludicrous. Corporations are distinct legal entities with distinct privileges — most prominently, limited liability. And for these privileges they are taxed. I think that smacks of justice. Shareholders can’t go to jail for the criminal actions of a corporation and they can’t be held liable for more than their investment. Now if sd wants to entertain the notion that shareholders could face these liabilities then, sure, let’s talk about ending the corporate tax. But he concocts a twisted scenario which views the pre-tax dollars as belonging to the shareholders. They do not, they belong to the corporation. Corporations can be owned by people but they are not identical to the people who own them. Therefore, it’s incorrect to say that Buffet’s “true” tax bill should also reflect “his share” of the corporate tax bill.

  14. Tim says

    Buffet doesn’t have a share of the corporate tax bill anymore than I have a share of your tax bill.

  15. Freeman says

    The point of these baseless complaints aren’t going over anyone’s head, Brett. The point of Democracy seems to be, though.

    It is common to publicly advocate for raising a tax on one’s peer group for the common good. I see it often, such as TV ads in favor of a local proposition on an upcoming ballot. It is beyond obtuse to suggest that it should be assumed that someone advocating a tax increase should voluntarily pay the tax before taking a position in favor, lest they be guilty of hypocrisy.

    One shouldn’t have to point this out to someone as intelligent as yourself, but this is how Democracy works. The consent of the governed is required to raise a tax. Buffet is appealing to his peer group to consent to a tax increase, that he agrees to consent to as well. Buffet is a lot smarter than me on the issue, and probably even you too, so I assume he expects they would all benefit in the long run. Remember the story about the goose and the golden eggs? If one wishes to continue harvesting golden eggs, one must take good care of the goose. I don’t suppose the outlook of the future egg harvest from the perspective of Buffet and his peers looks all that great at the moment with the middle-class economy dipping deeply into recessions and double-digit unemployment while the national debt balloons and much of the rest of the world in at least as much trouble.

  16. says

    @koreyel. Yeah, I’ve thought before that maybe we should just take all of the poor’s money and give it to the rich, who will use it to create more jobs, and there will be more growth and prosperity for all.

    When are people going to wake up and stop bending over for these people?

  17. Tony P. says

    sd,

    Warren Buffet is smarter than you are. I know this, because he’s richer than you are. And so I’m pretty sure he knows perfectly well that corporations pay people like himself dividends out of after-tax profits. And he STILL says the tax rate on people like himself is unfairly low.

    But maybe I’m wrong. Maybe Buffet, despite his wealth, never had the brilliant insight you keep peddling here. Maybe, if you explained it to him in small words, the scales would fall from his eyes and he would renounce, detest and abjure his heresy. Maybe.

    –TP

  18. Tom S says

    SD has slipped a red herring by and no one noticed. Most of Buffet’s income is not dividends, it is capitol gains. The argument that capitol gains should be taxed at a lower rate eo encourage investment has merit, but I doubt there would really be significant reduction in investment of the rate were at 19% or 23%. There are few tax free investments and the money has to go somewhere.

  19. sd says

    Tom S says:

    “SD has slipped a red herring by and no one noticed. Most of Buffet’s income is not dividends, it is capitol gains.”

    Buffett doesn’t specify whether the income he quotes in his piece is mostly derived from dividends or capital gains but its no matter – both are taxed at 15% currently and both are sources of economic benefit that accrue to shareholders AFTER corporate taxes are paid. In other words, both dividends and capital gains are hit with a corporate tax burden before they end up in the hands of investors, which is why the tax code applies a lower tax rate to the investor than the rate on ordinary income which is paid out of corporate pre-tax funds.

    In any event it seems unlikely that Buffett’s income for the year that he quotes his efferctive tax rate on was mostly from capital gains vs. dividends. He says he paid ~$7M in taxes at a rate of ~17%, which translate into taxable income of ~$40M. For this to be mostly from capital gains, then Buffett, who often quips that his preferred holding period on investments is “forever,” would have had to have sold off assets that had appreciated $40M. Given that his net worth is approximately 1000X that, and given that his wealth is remarkably concentrated in a handful of companies, it would be very odd for him to have sold off any shares that had experienced so little appreciation. Maybe he did, but its far more likely that a subset of his holdings (which again, are worth tens of billiosn of dollars) kicked off $40M in dividend income.

    But again – this is an irrelevant argument. The tax rates on dividends and capital gains are the same, and both are revenue streams that flow to the shareholder after corporate taxes are paid. So the 17% number he quotes for his effective tax rate is simply wrong.

  20. sd says

    Tony P said:

    “Warren Buffet is smarter than you are. I know this, because he’s richer than you are. And so I’m pretty sure he knows perfectly well that corporations pay people like himself dividends out of after-tax profits. And he STILL says the tax rate on people like himself is unfairly low.

    But maybe I’m wrong. Maybe Buffet, despite his wealth, never had the brilliant insight you keep peddling here. Maybe, if you explained it to him in small words, the scales would fall from his eyes and he would renounce, detest and abjure his heresy. Maybe.”

    Warren Buffett may well be smarter than I am but his argument about the tax rate he pays vs. the tax rate paid by his middle class employees is wrong*. He has made this argument many times over the years and every time he does scores of economists point out that he’s doing the math wrong but he persists in repeating the fallacy again and again. Either he remains unable to see why he is wrong or, more likely, he has a personal preference for higher tax rates and he knows that its rhetorically effective to back up his preference with the “argument” that he pays a lower tax rate than his employees. Lots of otherwise rich and otherwise smart people say things that are wrong or misleading.

    *This is why, BTW, that if you look at other developed countries you’ll see many that have effective corporate tax rates that are higher than US rates, but that those countries tend to treat dividends as tax-free income. And you’ll see many that have effective corporate tax rates that are much lower than US rates (Indeed, along with Japan the US has the highest stauatory corporate tax rate among leading economies) but that treat dividends as ordinary income. In the US we have a mixed system. Which is fine as far as that goes, but it does leave the tax code open to rhetorical distortion by those with an ideology they are trying to sell.

  21. sd says

    Tim said:

    “Corporations are distinct legal entities with distinct privileges — most prominently, limited liability. And for these privileges they are taxed.”

    Nonsense. Governments tax corporations because they can. Corporate taxes aren’t a “fee” for corporate privledges. Corporate taxes have varied widely over time, and they vary widely between states. Yet the “privledges” of corporations due not vary similarly.

    Non-profit corporations which also enjoy limited liability do not pay corporate taxes.

    Corporate taxes are taxes on the owners of the corporation because those owners, in the absence of corporate taxes, would collect the full economic benefits of the profits generated by the firm. So any levy of taxes between the time when the coporation generates a profit and the time that the coporation distributes that profit to its shareholders is a tax on those shareholders.

    Again, this is all well and good. I myself think the US system is overly complex – I’d prefer to eliminate the corporate tax and then to tax dividends and capital gains as ordinary income. But if Uncle Sam wants to collect a chunk of the taxes on ownership income at the corporate (entity) level and a portion of the taxes on ownership income at the individual level then he can do so. But what is dishonest if for those who want taxes in general to be higher (which is a perfectly respectable political preference by the way) to claim that the present system is a great injustice because the wealthy are taxed “less” than the middle class. That’s simply false.

  22. bobbyp says

    “Scores of (un-named)economists”!!!!!!!!!!!!! I am so impressed. Presumably the tens of thousands of other professional economists out there feel otherwise. What part of effective tax rate don’t you understand?

  23. me says

    I dunno, SD, but it seems that Warren’s not paying voluntary taxes to the government may be the reason to mandate that he pays ‘em.

  24. Tim says

    Shorter sd: Even though the world doesn’t work the I think it ought to, I nevertheless get to compute taxes the way I see fit.

  25. Finn says

    SD, the secretary’s wages do get paid before corporate taxes but they get paid after sales taxes (presumably the corporation sells something), import taxes, vice taxes, tariffs and so on, so her income tax is being calculated disingenuously, for without sales tax (and potentially all the others) the price of the product would be lower and corporate revenue higher and thus her salary would be a smaller share. Imagining every dollar as a single entity that can only be taxed once is silly, dollars are fungible.

  26. sd says

    Finn,

    That is technically true as far as it goes, but I would point out two things:

    1) There is no federal sales tax. The discussion initiated by Mr. Buffett was about the appropriate level of federal taxation given the current level of federal spending and the current federal debt. State level taxes are substantially less progressive than federal taxes, but its at the fedreal level that we have a massive public debt problem that needs to be solved*. Import taxes, vice taxes, tarriffs, etc. are simply immaterial. Very little government revenue comes from these sources. They don’t change the analysis by more than a point or two in any direction.

    2) If your point is that the complexity of government taxes makes it impossible to determine the true tax incidence vs. any given individual then I suppose that’s fine as a philosophical position, but that would in turn undermine, not support, Buffett’s argument that the rich pay too little because their personal income tax rates are lower than the personal income tax rates of people whose income derives primarily or exclusively from wages and benefits.

    *I realize that many people, mostly but not exclusively on the political left, assert that we do not in fact have a massive public debt problem. Again, that’s fine as a philosophical position but its not Warren Buffett’s position. His article starts from the premise that we have an urgent public debt issue that requires serious attention. And those of a generally liberal political orientation who have been fawning over Mr. Buffett’s op-ed for the last couple of weeks would do well to note that he explicitly states that the FIRST thing congress should do, before raising taxes on anyone, is to pare back government spending. Indeed his reference to “some future promises that even a rich America can’t fulfill. Big money must be saved here.” is a pretty clear signal that he thinks entitlements should be slashed. I doubt that many political liberals would be especially happy with the outcome were Warren Buffett’s political preferences written into law tomorrow.

  27. Bard the Somewhat Grim says

    Richard W. Crews: “Social Security, while not broken, is easily strengthened: tax ALL income with a deduction at the bottom; the opposite of current policy. A $30K taxation start point would be an immediate 7.65% (of the first $30K) pay raise to every taxpayer!”

    Amen. It’s always mystified me why people tolerate the incredibly regressive nature of FICA tax that Richard is pointing to. I can only conclude that they don’t know that only the first $106,800 of earnings is subject (http://www.ssa.gov/oact/cola/cbb.html). Ignoring the current temporary decrease in the rate, Joline Sixpack pays 7.65% of her $30k income while Smithington Fatcat pays 0.82% of his $1M and CEO Slimebucket has to cough up all of 0.08% of his $10M salary (while his many stock options and other perks are completely free of FICA). Surely fixing this injustice fits with the Republican meme of increasing incentives for employers to create new jobs and making work pay, eh? But no, instead we have to maintain the Bush tax cuts or the rich will suffer horribly.

  28. says

    Bard, whether the current Social Security taxation scheme is unjust is a matter of opinion, I guess. I agree that it is regressive and that fact has always been a matter of public awareness. Shoot, we were taught that in grade school. On the other hand, the program would never have come into being had it been proposed as you would have it. FDR was only able to obtain consensus support by making it a very limited program, and though the public has supported its considerable expansion, they have never supported the elimination of the cap on SS taxable income (though the cap has been raised many times). Elimination of the cap has been floated in Congress off and on by the left but never gained any traction. So complaining that a scheme is unfair when it’s the only way to obtain support for the program at all (and you certainly don’t favor eliminating the program, or phasing it out, do you?) seems like a waste of breath to me.

    Economically, eliminating the cap would also be a loser in my opinion. Is the cap eliminated for employer matching purposes? For self employment income? Pandora’s box, if you ask me, though the left will be in favor of anything that Dems can use in their campaigns to get elected, and they think this is a political winner. But it’s not.

    As for Warren, the really effective rejoinder was the op ed written by Harvey Golub, published in WSJ. Suggest you all chew on that one for a while. By the way, what’s so noble about Warren giving his money to a charitable trust in pursuit of his buddy Bill Gates’ favorite issues in order to sidestep estate and gift taxes? Warren has done just the opposite of what he’s suggesting – utilize all of the tax avoidance gimmicks available while advocating higher tax rates for high income earners, including those with only a fraction of his wealth (if they are wealthy at all). It’s his right to do so, but the hypocrisy is breathtaking.

  29. Marc says

    Let’s say I advocate in support of a school levy, even though my kids are no longer in school? Is it logical to demand of me that I instead make a voluntary contribution to the schools if I feel so strongly? Am I a hypocrite for not doing so?

    BS.

    Libertarians can make believe that there is no social contract, and that advocating for taxes is somehow immoral. Adults feel differently. Some live by the motto “I’ve got mine, Jack, and I want to keep it all”, and they’re free to do so. But we’re also free to decide that a civilized society needs taxes, thankfully.

    And linking to an obscenely wealthy CEO whining about his tax burden in the Wall Street Journal as an “effective” rebuttal? It’s hilarious in the pathetic nature. I’ve worked so hard, wah wah, those meanies are making me pay taxes, wah wah, spend your money better, I did it myself, wah wah.

    See http://www.huffingtonpost.com/jeffrey-sachs/ceo-follies_b_933344.html for a more straightforward dissection of this clueless and out-of-touch rightwing piece.