Buffett: tax me!

Once upon a time, a fair number of very rich people had a sense of obligation to the society in which they did so well, including both children of wealth who learned about philanthropy and maybe a duty to stand for office along with the difference between a sheet and a sail and which side of a horse to mount from, and people who made their own fortunes: Andrew Carnegie famously said it was sinful to die rich (you can read about him in your local Carnegie Library).

Mostly this decency was expressed in philanthropy, endowing and supporting America’s distinctive great foundations, charities, universities, and arts institutions; sometimes getting into politics directly (the Roosevelts, Rockefellers, etc.) and not just to tilt the financial pinball machine in their direction. Warren Buffett, who wasn’t born with a silver trust fund in his cradle (but whose father was a congressman) gets it, and calls out his fellow zillionaires in a piece that deserves a lot more attention, and gratitude.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

29 thoughts on “Buffett: tax me!”

  1. What Buffett doesn’t bother to tell you is how much his various business benefit from the existence of estate taxes and government spending.

  2. CharlesWT:
    You accuse Warren Buffett of benefiting from the existence of government spending. You don’t? Who do you think you are: pre-incarceration Ted Kaczynski? No, don’t answer that.

  3. I wholeheartedly agree that the wealthy have an obligation to society, and that the accumulation of vast familial fortunes is to be discouraged, culturally and (in some ways) legally.

    But one can believe that and still see problems with Buffett’s piece. First of all, as you point out, “Once upon a time…” the means by which the super-rich gave back to society was through private philanthropy. But Buffett is arguing that the current income tax burden on the wealthy should be higher. Now, that’s a perfectly defensible position – after all tax rates need to be set somewhere and everyone presumably has an opinion on what the number should be. But its by no means the only means by which the wealthy can give back to society. And, if you believe that the government is a relatively inefficient provider of certain societal benefits (as many people, including in all likelihood a majority of those who have accumulated fortunes in private enterprise do) then its a relatively bad way for the rich to give back.

    Take the example of Bill Gates. Mr. Gates and his wife have given billions of dollars to their private foundation in their lifetime, and have pledged to give almost all of their remaining fortune upon their deaths. And in addition to giving lots of money, they have brought to bear outstanding manegerial talent and a clear focus on a handful of issues that tend to get very little governmental support (given that taxpayers in Ohio and Rhode Island and Florida don’t tend to be all that enthusiastic about funding Malaria prevention in central Africa). So great good is being done.

    But if Mr. Buffett’s stated policy preferences had been law for the last 30 years, then Mr. Gate and his wife would have far less money, and the Gates Foundation would be much smaller. And the incremental tax revenues collected would have gone to fund the war in Iraq and various pork barrel projects of dubious value and the bidding up of certain goods, services and financial instruments that the government buys. In other words, the money would have gone to support exactly the things that the democratically elected Congresses of the past few decades have decided to spend it on. There is no reason to believe that if tax revenue had been higher that the variance would have been spent on whatever you yourself think are “worthy” uses of the money, nor is there any reason to believe that the Congresses that have been perfectly willing to spend until the federal debt was a very large number would not have been willing to spend every last cent of the variance.

    Now, there are certainly lots of wealthy people who have not pledged to give away all of their money. So if you (or Mr. Buffett) are suggesting that we should have a very high, indeed punitively high, estate tax, then I would agree. If those with lots of money will not give back to society by their own volition then the government taking control of their fortunes upon their deaths seems like a reasonable second best alternative.

    P.S. Mr. Buffett’s comparison of his own effective tax rate with the effective tax rate of his secretary is an intellectual sham. His secretary’s income from salary, wages and benefits is a business cost that is paid out before corporate taxes are levied. Mr. Buffet’s income from dividends and capital gains taxes is paid out after corporate taxes are levied. If Mr. Buffett is failing to account for the tax burden associated with the corporate taxes that are levied before he gets paid (as he seems to be doing) then he is comparing apples to oranges. Its good rhetoric (as it seems to have snookered approximately 99.9999% of the liberal blogosphere) but its bad economics. Now, I personally believe that the more economically efficient arrangement would be to abolish the corporate tax and to recover the revenue by raising income and capital gains taxes by a proportionate amount, but that’s neither here nor there.

  4. SD,
    I think you are overrating the effectiveness of private charity. For every imaginative Bill Gates or George Soros, there are many many millionaires and billionaires who can think of nothing better than to endow their business schools. (Better that they buy a winery!) Every charity out there will tell you that it is far easier to raise money for edifices than for nuts-and-bolts operations. Gates is a marvelous example of how nimble and intelligent private charity can be; he is not a typical example of private charity in action.

    I think you are analytically correct with Buffett’s comparison of his effective tax rate with that of his secretary. But Buffett is unusual–he draws little in the way of salary or bonus. Your average wealthy corporate poltroon is an employee, not an entrepreneur. (Did I say “poltroon”? I must have meant “patroon.”)

  5. “CharlesWT says:
    August 16, 2011 at 9:27 am
    What Buffett doesn’t bother to tell you is how much his various business benefit from the existence of estate taxes and government spending.”

    So enlighten us. Surely you have this information at hand?

    Full disclosure: I work for a company that is wholly owned by Berkshire Hathaway, so I’m *really* curious what you think you’re talking about here.

  6. Ebenezer:

    Granted, Bill Gates is not representative of all charitable giving, and much charitable giving is of dubious value. But the trends here are overwhelmingly positive. Lots of the super wealthy are turning their attention to big programatic goals (public health, third world economic development, US educational improvement, etc) that are outside of the traditional fences of universities/museums/arts organization. This trend can be nurtured by the right cultural messages and by smart government policies, but its a trend that is having a significant and accelerating impact on charitable giving as we speak. Donors are getting smarter and more thoughtful with each passing year, and the “cachet” of giving to organization that can demonstrate a tangible impact on the lives of the less fortunate is growing with each passing year. That Gates has been able to recruit so many billionaires to pledge to give away significant portions of their wealth upon their deaths to well run foundations with clear missions and good governance is a testament to this trend. Yes, a lot of money still gets donated to traditional brick and mortar institutions, but even there its not clear that government spending the money would be a huge improvement in societal wellbeing. Does Princeton need an extra $10M? Probably not. Would that $10M be better spent on inner city elementary schools? Likely yes. But that $10M will be spent in proportion to whatever the elected Congress decided it likes to spend money on (e.g. fighter jets that can out-dogfight the fighter jets of the Soviet Union had the Soviet Union not collapsed and had it continued to invest in fighter jet R&D for the last 30 years). Relatively little of which is aid to the poor and unfortunate at home and abroad. Changing tax rates won’t change that – only a change in the culture, and thus a change in the preferences of voters, will move that needle.

    Your point about Buffett being unusual is odd. To the extent that other corporate chiefs draw a salary then they would pay an effective tax rate far higher than that of their secretaries. To the extent that their comp packages are largely in the form of stock options then they would pay a lower personal income tax rate but corporate taxes are still levied before they are paid.

    Again, one can argue that people who make a lot of money should pay more taxes. A number is a number. But the argument that there are a lot of rich people out there who pay less in taxes as a percentage of the pre-tax income of whatever land, labor or capital generates their income than do the working stiffs in their employ is just silly. The percentage of US tax revenue collected from the wealthiest X% of households (pick just about any value of X you’d like) is substantially HIGHER today than it was 20, 30 or 40 years ago.

  7. In the commentary on the Buffett piece by you and others, there is a lot of attention being paid to the equity arguments and the obligation of the rich to the society that creates opportunities for them to amass and protect their wealth.

    One of the most significant elements of the Buffett piece, however, is his assertion that higher tax rates do not deter investment. Here’s the quote “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

    The push to ease taxes on the rich as a spur to investment needs to be pushed back on. I trust Buffett’s take on investor behavior more than Paul Ryan’s or Eric Cantor’s. “That’s not what Warren Buffett says” is a reasonable rejoinder to the claims that high taxes kill job creating investment.

  8. Oh God. Anyone who thinks Bill Gates’ involvement in public education is a good thing, please go read Diane Ravitich’s book, at least the chapter on the Billionaire Boys.

  9. sd,

    If you cite some data to back up your “wealthiest X% of households” claim, I promise to dig up some data on the diminishing percentage of US tax revenue that comes from corporate taxes. I bring those up because you keep saying that rich investors and highly paid corporate officers are effectively paying them.

    In the meanwhile, I have to ask you: if we had a dead flat income tax structure (same rate for every dollar of every kind of income), and if the “wealthiest X% of households” had, say, 70% of all income, what percentage of all federal taxes would you expect that “wealthiest X% of households” to be paying? Is it possible that the ever-popular “wealthiest X%” statistics say more about the maldistribution of income than about the iniquity of the tax code?


  10. TP:

    You want data? Go here: http://www.taxfoundation.org/news/show/250.html#table6

    In summary, the top 1% of households (by AGI) paid 19% of federal income tax in 1980, 25% in 1990, 37% in 2000 and 38% in 2008 (the lack of growth in share from 2000 to 2008 is likely because 2008 was a recession year and those with high incomes tend to have more volatile incomes; the top 1% share was 40% for 2007). In contrast, the bottom 50% of households by AGI paid 7% of federal income tax in 1980, 6% in 1990, 4% in 2000 and 3% in 2008.

    If you look down to table 8, you see that the average federal income tax rate paid by the top 1% of households fell from 34% in 1980 to 23% in 2008 (a 32% drop), but that the average federal income tax rate paid by the bottom 50% of households fell from 6% to under 3% (a 58% drop). In other words, the fact that high income households have paid an increasing share of federal income taxes over the last few decades can only partially be explained by growing income inequality vs. the fact that tax rates have fallen far faster for lower income households.

    Granted, federal income taxes are more progressive in structure than overall taxes, which include state income taxes which tend to have simpler structure, payroll taxes which are capped* and state and local sales taxes which are at flat rates with respect to consumption level. But these other taxes are not as significant in scale as federal income taxes, which the data shows have been shifting in incidence toward higher income households over time.

    *The lack of “progressivity” of payroll taxes is not, it should be pointed out, a result of Mean Old Republicans. Rather, the architects of the payroll tax knew that at the time that tax was created there was little public support for an expansive welfare state, and that the programs supported by the tax would be much more palatable to voters if they could be pitched as “benefit plans” which citizens paid into in order to get benefits paid out in old age. Payroll taxes are capped because SS and Medicare benefits are capped.

  11. Jack Needleman quotes Warren Buffett as saying:

    “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

    What an odd argumnet. Yes, capital gains tax rates tended to be lower in the post 2000 time period than in the 1980-2000 time period (I say “tended too” because these rates get monkeyed around with quite a bit so some years after 2000 featured higher rates than some years between 1980 and 2000). But capital gains tax rates were much higher before 1980 than they were in the 1980-2000 time period (There was a 20% rate in place during the boom years of 1982-1986, the lowest capital gains tax rate seen in the US since the 1930s).

    In any event, the problem with high capital gains taxes is not that they make investors shy away from investments because of fear of the tax, but that they discourage deployment of capital away from enterprises with relatively modest prospects towards enterprises with relatively robust prospects. For an investor like Buffett who claims that his preferred holding period on an investment is “forever” (and who invests in some of the sleepiest, least innovative businessess in the economy) this isn’t a big deal. But for most of the capital markets this is a huge deal, acting as economic friction every time there is a legitimate need to sell an appreciated asset in order to redeploy the capital to a new asset.

  12. sd,

    Thanks for the link. Here’s mine in return: http://www.deptofnumbers.com/blog/2010/08/tax-revenue-as-a-fraction-of-gdp/

    Look in particular at the second graph, which shows 4 different categories of federal tax receipts as a fraction of GDP for over half a century. Notice that as a percentage of GDP,
    o Personal income taxes have hovered fairly close to 8% since 1950;
    o Corporate taxes have declined fairly steadily from 4% to 2% since 1950;
    o “Miscellaneous” taxes have also declined steadily, from around 2% to around 1%;
    o Social insurance taxes have taken up the slack rising from around 2% to about 6%.
    I say “taken up the slack” because, as the previous graph shows, federal revenue as a fraction of GDP has stayed damn close to 16.5% the whole time.

    Now, it could be that this shift of the tax burden from corporations to wage-earners merely reflects corporate profits declining relative to wages, as a fraction of GDP. Or it could reflect a steady accretion of “loopholes” that effectively allow corporations to present themselves as wildly profitable to their stockholders but not to the taxman. I find the second explanation more plausible, myself.

    As for this business about the “economic friction” of realizing cap gains and paying tax on them in order to “redeploy the capital”, I have to ask again: what’s wrong with that? I mean, given that we have to tax something, and given that a wage-earner who wants to “invest” has to do it with after-tax dollars, why should a corporation or a billionaire get to do it with PRE-tax dollars?


  13. sd,

    “In other words, the fact that high income households have paid an increasing share of federal income taxes over the last few decades can only partially be explained by growing income inequality vs. the fact that tax rates have fallen far faster for lower income households.”

    Technically true, but it’s a pretty large “partially”. Let’s look at a crude model using these numbers. Suppose the IRS takes in a total of $1,000 in income tax each year.

    Under that assumption:
    In 1980, the top 1% paid $190.50 on a total income of $552.65, with $362.15 left over.
    In 2008, the top 1% paid $380.20 on a total income of $1,633.86, with $1,253.66 left over.
    In 1980, the bottom 50% paid $70.50 on a total income of $1,155.74, with $1,085.24 left over.
    In 2008, the bottom 50% paid $27.00 on a total income of $1,042.47, with $1,015.47 left over.

    That’s a heck of a lot of work being done by increased income inequality. Note especially that the total income of the top 1% (relative to total tax revenues) has increased almost 200% (tripled) in the last 30 years, and after-tax income has increased 250%. And while the bottom half is paying less money in taxes, their income (again, relative to total tax revenues) is lower.

  14. Tony P:

    1) You say that corporate taxes have declined “fairly steadily from 4% to 2% since 1950.” Look at the graph you link to. Corporate taxes declined from ~4% to ~2% between 1950 and 1980. They’ve remained largely constant since then. Is it your contention that Ronald Reagan and George W Bush are responsible for the decline over the 1950-1980 period? In any event to you point about the relative level of wages vs. corporate profits: I have no idea (I’ve not seen the data) but no, I don’t at all find it implausible that in the post WWII period wage growth consumed a large share of GDP. During this period household incomes went up substantially as US firms, facing favorable global economic conditions (bombing out the industrial base of Japan and Europe will tend to set you up for some fat years after all), struggled to hire enough workers to keep up with generally rising demand.

    2) You are correct that the “Social Insurance” tax share of GDP rose from ~2% of GDP to ~6%, but again this rise happened almost exclusively in the 1950-1980 period, with most of the rise happening between 1970 and 1980. The line is remarkably flat since then. Gee – I wonder if anything happened in the late 1960s that would have caused the payroll tax to go up as a % of GDP? Its almost as if Congress passed some sort of new entitlement program in the last 1960s, raised the payroll tax to “pay for it*” and thus the Social Insurance tax share of GDP rose

    *How’s that working out? How’s that projected to work out over the next 30 years as the ratio of retirees to workers skyrockets?

  15. Brian,

    Nobody denies that income inequality has risen dramtically in the last 30 years – for a host of reasons, largely structural. But the tax code has, contrary to (I suspect) the instincts of many folks on the political left, gotten much more progressive during this period as well. One can argue that it needs to get even more progressive still – that wealthy people should be taxed at even higher rates. But the implicit argument in Buffet’s piece was that somehow the wealthy have come to have a lower tax burden over time relative to the not so wealthy. And that’s just false.

  16. SD, the government is actually incredibly efficient at *guaranteeing a basic level of service* to citizens. Markets are notoriously bad at public parks, roads, libraries, schools, hospitals, police forces, armies, courts, public defenders, coroners, etc.

    Bottom line is we need revenue if want to pay for the level of services we want. Sure, I can thing of plenty I don’t like that democratically elected government spends its money on. But that’s the “inefficiency” of democracy (although as Ohio Mom notes, Gates has been wasting enormous quantities on education, but that’s another discussion).

    If the public wants to give up on educating poor kids, guaranteeing access to healthcare to those who need it, raise the retirement age, cut funding for arts programs, etc., they can choose to. But there is a moral argument for taking from those who can afford it to pay for things that help people who can’t. I’m not sure it’s any more complicated than that.

  17. sd,

    If you prefer to look at that red line piece-wise, let’s do it piece-wise. Notice that in 1981-83, we see a sharpish step down in the personal and the social insurance lines, as well as the corporate line. (Reagan’s tax cuts.) By 1992-3, the red line creeps back up a bit, but not to its pre-Reagan level. In the Clinton years, we see a fairly noticeable rise in the red line — almost as if Clinton tried to get corporations to pay up — but even so the line never quite climbs back up to the pre-Reagan level. Then we see another sharpish drop in 2000-03, as Dubya gets into his stride. In 2005-10, there the housing bubble is, clear as a bell, in both the personal and corporate lines. So any “flattening” in the downward trend post-1980 looks to me like Reagan and the Bushes doing their best to keep it dropping and Clinton partly counteracting their valiant efforts, with the housing bubble making no net change but swamping any minor trend that may have been going on underneath.

    If that’s too granular for you, and you just want to look at the curve as two pieces — 1950-1980, 1980-2010 — that’s your prerogative. An impartial observer might want to know why 2 is the best number of pieces to examine the curve as, but I’m no more an impartial observer than you are.


  18. sd, whatever marginal effects tax rates have on the composition of investment, in the range we are talking about changing rates, notably going back to the Clinton income tax rates and taxing the incomes of investment managers (but not their investors)as ordinary income, the change in tax rates will not influence aggregate investment levels. That’s Buffett’s point and he’s right. When Republicans talk about these levels of tax rate changes as job killing, they’re talking nonsense. We’ve run this experiment. The Clinton tax increases that brought a balanced budget did not kill a substantial economic expansion; the Bush tax cuts did not spark one.

  19. Tony P says:

    “Notice that in 1981-83, we see a sharpish step down in the personal and the social insurance lines, as well as the corporate line. (Reagan’s tax cuts.)”

    Wrong. “Reagan’s tax cuts” effected only personal income tax rates. Payroll tax rates and corporate tax rates were uneffected. There were changes to depreciation rules implemtned in 1981 which would have reduced corporate tax burdens but those changes were repealed in 1982. Top corporate tax rates were 46% when Reagan took office and 46% in 1986. Corporate tax rates only started coming down in 1987. During the Bush I presidency the top corporate tax rate fell to 34%, only to rise up to 35% in 1993 (where it has remained since). The effect you see here is the effect of the early 1980s recession. Recession = less income = less income tax (personal income taxes are obviously income taxes but the payroll tax is collected only on employed individuals (unemployment topped 9% during that recession) and obviously the corporate tax is an income tax as well).

    “Then we see another sharpish drop in 2000-03, as Dubya gets into his stride.”

    Again, this effect is due to the recession. The recession at the beginning of this century (unlike the current one) hit corporate profits harder than households. Which is of course confirmed by the fact that corporate taxes shot up as a % of GDP starting in 2003 (at a much faster rate than they grew during the Clinton years) through the most recent downturn, when they have fallen yet again. And this is further confirmed by the fact that individual income taxes also plummetted in the 2000-2002 period only to recover sharply starting in 2003. Some of the decline in individual taxes is likely due to the Bush II tax cuts, but the cuts obviously don’t explain the rapid growth of individual income taxes as a % of GDP after 2003.

    The thing about corporate taxes is that they are paid only on income. Most businesses have substantial fixed costs. Thus corporate income is highly volatile with respect to overall topline performance. A capital-intensive business could easily make a profit (income) of $1M on $100M in revenue during a recession year, and then make a profit of $20M on $125M in revenue during a strong growth year. That’s a 20-fold difference in corporate income (and thus income tax burden) on a 25% increase in revenue.

    BTW – you’ll notice another drop in the individual and corporate income tax line in the 1991 recession.

    “In 2005-10, there the housing bubble is, clear as a bell, in both the personal and corporate lines.”

    Oh nonsense. Housing values began appreciating rapidly prior to 2005. And besides, appreciating house values don’t drive up income for the vast majority of individuals or corporations. If you want to argue that the late Bush II spike in taxable income was due to an irrationally pumped-up bubble economy, and thus should not be “credited” to Bush, then you would be forced to conclude that the late Clinton spike in taxable income was due to a similarly irrationally pumped up bubble economy. My house has lost value in the last 3 years, but I assure you its held its value better than shares of WebMD purchased in February 1999.

    In any event, all of this consists of arguments over changes in corporate taxes as a % of GDP that are MUCH smaller than the change in the same between 1950 and 1980. So even if the changes you’re pointing too weren’t caused by cyclical macroeconomic effcts (and they largely are), you would still be left arguing that Reagan/Bush decimiated the corporate tax base by presiding over a drop in the GDP share of corporate taxes from ~2.1% to ~2.7% (Wait a minute – that’s not a drop after all. Damn you data!) while somehow turning a blind eye to the drop in the GDP share of corporate taxes from ~5.9% in the mid 1950s to ~2.1% in 1980.

  20. Eli says:

    “But there is a moral argument for taking from those who can afford it to pay for things that help people who can’t. I’m not sure it’s any more complicated than that.”

    I agree. But right now about 1% of the population funds about 40% of the federal government’s general operating revenue stream*. If you think that number should be higher – that it should be 45% or 50% or 80% then that’s your right. But please don’t pretend that the tax system somehow lacks in “progressivity.”

    * Keeping the math simple here by only looking at individual income taxes. There are additional taxes on capital gains and corporate income, but lumping those revenue streams in would only increase the % of federal spending paid for by taxes on the top 1% of households.

  21. Whether or not it is sufficiently progressive is a matter of opinion. The top 1% also control 40% of the wealth.

  22. Why is anyone debating the flatly dishonest comparison of income to federal income taxes? Payroll taxes, sales taxes, and state/local taxes are all distinctly more regressive. In fact, the overall tax distribution is barely progressive. In other words, we need a substantially more progressive federal tax code to have a truly progressive overall tax burden. I also notice that the local reactionaries seem to neglect the specific points in Buffets article – such as the fact that the ultra-rich pay taxes at a lower overall rate than the upper middle class.

    One can use statistics to understand something, or one can twist statistics to support an agenda. People doing the latter are sophists, and there is little more fruitless than engaging them.

  23. Marc says:

    “I also notice that the local reactionaries seem to neglect the specific points in Buffets article – such as the fact that the ultra-rich pay taxes at a lower overall rate than the upper middle class.”

    I myself didn’t ignore this point – I pointed out why it was wrong. Namely, that the capital gains and dividends that are taxed at a lower rate than ordinary income are paid out after corporate taxes are levied. Effective corporate tax rates vary of course (from 0% to the statuatory maximum of 35%) but the weighted average for domestic income of US firms seems to be about 25%. Any assertion about the tax burden of the “ultra-rich” that fails to account for the fact that corporate profits are taxed before dividends are paid and before capital gains are realized is either ignorant or dishonest.

    Numerous countries treat dividends as a pre-tax expense of corporations, and then tax dividends as ordinary income of the recpients. That’s fair enough. Numerous other countries tax corporate profits directly at a high rate and treat dividends as after-tax expenses, but then treat the dividends as tax-free income to the recipients. Also fair enough. But the US has a blended system whereby we tax corporate profits at a moderate rate and then treat divdends as taxable income to the recipients but at a lower rate than ordinary income. Also fair enough.

    But what is not fair is to say that recipients of divdiends (which account for the vast majority of many “ultra-rich” peoples’ incomes – including Mr. Buffett) are paying lower tax rates than average workers because the nominal tax rate on dividends is lower than the nominal tax rate on ordinary income. Ordinary income is a pre-tax expense of corporations, and thus is not burdened with corporate taxes before being paid out. Dividends are a post-tax expense of corporations, and thus are burdened (again – at an average rate in the US of about 25%) before being paid out.

  24. Sophistry, pure and simple. I could say the same nonsense about the wages of a barber…I paid taxes on my salary, then I paid him. So why is it just that he pays taxes on the money that has already been taxed? Why is this different in any way than your example?

  25. Not sophistry in the least, which is why there are lots of countries that tax corporate profits at higher (effective) rates than the US but treat dividends as tax-free income, and lots of countries that treat dividends as a pre-tax expense of corporations but treat dividends as ordinary income.

    The difference with your barber example is that there is a market trasaction between you and the barber. You can choose not to patronize the barber and he can choose not to cut your hair. But a coporation cannot choose not to distribute profits to its shareholders (unless of course those shareholders have authorized that corporation, through its hired management, to re-invest those profits in the business with the expectation that said re-investment will yield capital gains).

    If the average effective corporate tax rate of US firms is ~25% then the pre-tax profits (i.e. INCOME) of corporations is taxed at a rate of about 40%: 25% at the corporate level and 15% at the individual level once the profits are distributed as dividends to shareholders. 40% is substantially higher than the 17% number that Mr. Buffett quotes as his own effective tax rate – a number which is an accounting sham. Buffett is the one engaged in sophistry here. He’s claiming that the proceeds from his business are not taxed as much as ordinary wages and salary income because he’s choosing to count only those taxes that show up on a tax return filed under the name “Warrenn Buffett” and not the taxes that show up on a tax return filed under the name “Berkshire Hathaway.”

    If we passed a new tax law tomorrow that treated dividends as ordinary income to individuals then I assure you that the vast majority of companies would simply stop paying out dividends and would re-invest the entirety of their profits (as their shareholders would undoubtedly want them to do, as it would be a more tax-efficient strategy). Of course some firms don’t pay dividends and re-invest all of their profits today. But those are firms that believe that they have attractive investment opportunities. Firms that pay dividends are generally those that generate more free cash flow from operations than they can re-invest at attractive rates of return. We don’t WANT those firms re-investing their profits because doing so would almost certainly mean wasting valuable capital resources on projects that are of little intrinsic value but that are tax-advantaged to shareholders relative to receiving dvidiends.

    FWIW I personally support the elimination of corporate taxes altogether and the taxation of dividends as ordinary income. The net effect on revenue collected would be minor (not sure if it would be slightly positive or slightly negative). But it would be cleaner and less distortive of economic activity.

  26. Also – to your question about the barber: the more appropriate question is whether the salary/wages you are paid by your employer ought to be paid out before or after corporate taxes are paid. Currently in every economy I know of and for the entitirety of modern history, wages and salaries are treated as a pre-tax expense of corporations. The corporation pays no tax on the revenue that it uses to pay you, and thus you are obligated to pay tax on those dollars as ordinary income.

    However the corporation does pay taxes on the revenue that it uses to pay dividends, and thus those who receive dividends should rightly pay a lower tax on those dollars than the tax they would pay on ordinary income, to account for the fact that the revenue generated by the enterprise in an arm’s length transaction in the market has already been taxed.

  27. sd,

    Corporations are taxed on their profits; individuals are taxed on their revenue. If a corporation needs a haircut in order to be presentable in The Free Market, it can pay its barber with pre-tax dollars. It gets to deduct the price of the haircut from its revenue, as a cost of doing business, before figuring its tax bill. We individuals, who also need to be well-groomed to earn our revenue, ought to be able to do the same, no?


  28. You’re acting as if there is some Olympian order as to what should be taxed and what should not. I don’t buy it.

    All of the rules of the tax system revolve around political decisions. Simple systems can be unfair; we decide, for example, that we may wish to exempt money spent on huge medical bills from taxes. Complex systems are prone to abuse (the corporate tax code provides many examples.) We tax some things (like cigarettes) because they have negative social costs. The historical justification for estate taxes was around the negative social consequences of unearned and inherited wealth. Abstract theories of economics have extremely limited power in guiding such decisions.

    Similarly we can decide that we want to favor people earning a living through their labor over people sitting back and cashing in on a big pile of existing money. We can view financial speculation as harmful or unproductive, and tax the fruits of such speculation accordingly.

    So, yes, I want to see fewer loopholes, much higher capital gains taxes, much higher estate taxes, a more steeply progressive tax code, and dividend income taxed as ordinary income. This will make the very rich pay a larger share, which is as it should be as far as I’m concerned. There are levels which would be counterproductive from a tax income standpoint, but I doubt we will ever get there, But the issue isn’t “fairness”, because if you want to talk about what is fair and what isn’t then you have to defend CEO pay.

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