World’s third richest guy proposes higher taxes… for other people

Yesterday’s New York Times carries an essay by Warren Buffet proposing that taxes be raised on Americans earning more than $1 million per year. This from the world’s third richest guy, worth approximately $50 billion. He says that it is vitally important that Americans give more money to the wise bureaucrats in Washington, D.C. He himself will be giving away the majority of his fortune. Now that Buffett has identified the federal government as such a worthy organization, is he going to write the IRS a big check? Apparently not. Buffett is going to give his $50 billion to the Gates Foundation, presumably because he thinks that they will make better use of it than Washington (the $50 billion would have covered about half the cost of the Detroit automaker bailouts).

The U.S. government does have an almost unlimited need for money. By contrast, an individual plainly does not need wealth in excess of $50 million. Instead of higher income taxes, why didn’t Buffett propose a 100 percent tax on any personal wealth beyond $50 million? Surely it would be much fairer for those who have such a massive surfeit of cash to give to the needy agencies in Washington.

[Separately, Buffett seems not to take globalization into account when he conjectures that higher tax rates would not reduce U.S. economic growth: “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.” Buffett ignores the fact that the U.S. had a much larger competitive advantage in 1980.  China and India were effectively closed to foreign investment, either due to laws or red tape. Communication within the U.S. was vastly cheaper and easier than communication across borders. On August 12, the New York Times carried a story about highly skilled Americans moving down to Brazil for the job opportunities there. Buffett doesn’t explain how the U.S. government can turn the clock back on the whole world and pretend that everything is just like 1980 again.]

33 Comments

  1. Brian Chaim

    August 16, 2011 @ 12:12 am

    1

    Buffet is a disingenuous, sanctimonious blowhard. He chooses to take his compensation as long term capital gains and therefore pays a lower rate (15%) than he would if taken as dividends or ordinary income. To do so, he hires teams of accountants and lawyers. Wouldn’t it be more equitable to pay dividends to his shareholders who then would be subject to the highest possible tax rates than for him to acquire $50b which is then donated (subject to 0% taxes).

  2. DeAngelo Lampkin

    August 16, 2011 @ 1:11 am

    2

    Am I alone in thinking that Buffet’s main points make sense?

    1) Whatever you think of the current system, it’s kinda silly the people most able to absorb taxes pay at a significantly lower rate than other tax-paying citizens (he says his rate was at 17.4%). If there’s any proof needed that the system is broken, this is it.

    2) Rich guys are not going to stop spending because of increased taxes. (Or maybe Steve Jobs would have refused to build the iPad because he’s being taxed at 20%, instead of 15%).

    3) Higher tax rates have never actually hurt job creation (stat provided above and in article).

    4) Job number one is to curtail future spending.

    This seems to be as reasonable of an approach to getting the country’s finances in order as I’ve heard. Yes some job creation is going to be offshore, but is *any* fiscal policy going to protect against that?

  3. Anon

    August 16, 2011 @ 1:13 am

    3

    Brian, you are making Buffet’s point for him! It is in no way inconsistent to advocate for higher taxes, while at the same times attempting to minimize your own tax liability.

    Phil, you take issue with him for giving his money to the Gates foundation over giving to the federal government while advocating higher taxes. Isn’t it a perfectly consistent/logical position (value judgements aside) to say that supporting the Gates foundation is more worthwhile than supporting the federal government, but supporting the federal government is more worthwhile than giving everyone making a over $1 million a year a 2% tax break? All of those other multi-millionaires and billionaires are free to “avoid” paying taxes by giving their wealth to charitable causes, too.

    I can understand that there is a case to be made against the policy Buffet is advocating. However, I do not see anything inconsistent, disingenuous, or sanctimonious about Buffet’s statement.

  4. Craig

    August 16, 2011 @ 2:10 am

    4

    I think it’s entirely sensible to look at both raising revenue and cutting expenses as a way of bringing the government budget back to surplus.

    And surely the best way to raise revenue is to tax where it’s less likely to impact economic growth.

    I think you perhaps have an ideological barrier to any taxes.

    Taxation + Representation = Democracy

  5. Tom Welsh

    August 16, 2011 @ 4:19 am

    5

    “The U.S. government does have an almost unlimited need for money”.

    Which, however, could be substantially reduced by kicking the urge to dictate to everyone else in the world how they should live, what they may do and say, and what they mustn’t.

    Or has that immense military and “security” bill actually proved a sound investment, by ensuring the dollar remains the world reserve currency so the US government can go on printing money indefinitely without causing undue domestic inflation?

    How complicated life gets once you get past the first few billion people.

  6. Z. Constantine

    August 16, 2011 @ 5:19 am

    6

    Perhaps Buffet is more interested in a legacy of treating malaria than killing civilians* ..?

    * Though routinely killing civilians overseas could act as a hedge against globalization – and American workers’ jobs are ensured should the US declare an all-out war on the rest of the world – so perhaps his advice is only mildly hypocritical.

  7. philg

    August 16, 2011 @ 8:15 am

    7

    I don’t think any of the comments above address the question of why Buffett did not advocate a wealth tax rather than an income tax. Plenty of countries have wealth taxes. Buffett earned most of his income under a regime of low income taxes. Now that he has a lot of wealth and comparatively little income, he proposes a higher income tax, starting with those who earn annually 1/50,000th of his wealth.

  8. YequalsX

    August 16, 2011 @ 8:15 am

    8

    The logic of this post is deeply flawed. One may hold the view that Buffet is hypocritical for not donating money to the government given his opinion piece in the NYT. (I don’t hold this position myself.) This supposed hypocrisy is not a valid attack on the belief that the government needs to raise revenues or on the belief that such revenues should come from the rich.

    Taxes can’t be optional (or consist of donation in your parlance) because then one runs into the free rider problem. Using the logic of this post people who are overweight have no right to be concerned about world hunger. Since they clearly aren’t donating excess food they have to people who are hungry.

    This sort of cheap game can be played with all policy positions. Attack the position, not the man or his alleged hypocrisy.

  9. LT

    August 16, 2011 @ 9:03 am

    9

    Your specific proposal of 100% top rate aside, Buffett has previously advocated against Bush tax cuts which among other taxes cut the estate tax from something like 55% top rate in 2000 down to 35%. Estate tax has historically been well received in America as it was considered dangerous for an individual and society when someone inherits wealth producing income in excess of what all but a tiny slice of the population earns with no obligations:
    http://taxhistory.tax.org/thp/readings.nsf/ArtWeb/672746F8E859EA77852570900006AC21?OpenDocument

  10. philg

    August 16, 2011 @ 9:38 am

    10

    LT: The government’s need for cash is urgent and pressing. It can’t wait for rich people to die. http://www.irs.gov/pub/irs-soi/ninetyestate.pdf shows that, even in the years prior to the depredations of King Bush II, estate tax never accounting for more than two percent of federal revenue (and therefore would pay for less than one percent of total government spending, including what state and local governments spend). The graph (Figure G) doesn’t show a big change during the cruel reign of King Bush II. Figure H shows the “net estate tax” declining somewhat from a late 1990s peak, but it also shows that the size of taxable estates slid.

    Consider http://en.wikipedia.org/wiki/John_Paulson . He made $16 billion betting that his fellow Americans were incredibly stupid. He was born in 1955 and, given his ability to afford a healthy lifestyle, should live until 2050. Can the government afford to wait 40 more years before confiscating this guy’s money?

  11. Dan Cunningham

    August 16, 2011 @ 9:57 am

    11

    Phil,

    Re wealth tax – Buffett actually is on the record to Congress proposing a 100% wealth tax on estate value above $100 million in assets. While that leaves substantial assets below $100 million, it would slow the formation of U.S. plutocracy. (It would also drive charitable giving up).

    But the issue you bring up is a critical one, and one that the media almost never mentions, though Buffett talks about it a lot, and has dubbed it “Berkshire’s single biggest gift from Congress.” All of the rates discussed above don’t kick in unless the investor recognizes the capital gain. Buffett, the Waltons (Sam cleverly handed down many of the shares in Wal-Mart when the chain was at a few stores), and now individual investors using prevalent index funds never have to recognize the gain. This leads to tax rates of not 17% but .75%, or the federal+state tax on just the dividends divided by the capital base. The capital base just carries forward tax-free in perpetuity.

    I’m amazed this issue doesn’t get more attention.

  12. philg

    August 16, 2011 @ 10:16 am

    12

    Dan: I don’t think a massive estate tax to encourage massive charities can be the answer. If it were, we would have a smaller government that hadn’t taken over most of the functions served by 19th century charities. If government spending is the most efficient way to achieve society’s goals then encouraging people to divert money into things like the Gates Foundation or Stanford University will make society worse off.

    http://en.wikipedia.org/wiki/Wealth_tax , on the other hand, would funnel money from its current wasteful private owners into efficient government bureaucracies. Maybe a 100% tax rate is too high, but surely a guy with $16 billion in wealth can afford to give the federal government $1 billion every year for 15 years, no? How is it going to affect his lifestyle? (And separately, Paulson was only able to make his money because of the U.S. government. Without Fannie Mae, the mortgage tax deduction, and other government support for residential housing, there would not have been any way for the real estate bubble to have inflated as much as it did. So really Paulson owes his fortune to the U.S. government and also to his fellow Americans, whose stupidity enabled him to get rich. Why should we wait 40 more years to see if he is willing to give anything back?)

  13. Anon

    August 16, 2011 @ 11:59 am

    13

    Dan Cunningham you write: “All of the rates discussed above don’t kick in unless the investor recognizes the capital gain.” Yes, but when you go to buy a house, boat, vacation, food, etc, you have to take your capital gain (which Buffett is in favor of increasing on the rich). So, really, the only way to get use of your money while avoid paying taxes is to give your money to charity. I can live with that (the Gates foundation is much more efficient at fighting malaria than the US government).

    All of the objections being raised by you and Phil essentially take issue with the charitable tax deduction, and are orthogonal to if raising income taxes is a good idea.

  14. Dan Weber

    August 16, 2011 @ 12:39 pm

    14

    Wealth taxes are much more intrusive than income taxes. Income taxes are very easy to collect because so much of the information is public. It can be harder to figure out what someone owns — something you pointed out only a few days ago on the Social Security thread, because someone could stuff all his cash in a locker.

    They also face political opposition, because people don’t like the fact that they own things only at the government’s discretion.

  15. PS

    August 16, 2011 @ 12:41 pm

    15

    Everyone looks from their perspective. You think no one needs wealth more than $50 million. I think no one needs more than $5 million. But you would fall into that category, right? So you want the bracket to be above $50mn. See, this is the problem. as long as the taxes are for the next higher bracket, we don’t mind.

  16. philg

    August 16, 2011 @ 12:49 pm

    16

    PS: No one needs more than $5 million in wealth?!?! Perish the thought! That’s not even enough for a decent apartment in Manhattan (sadly beyond my own current means). Do I want the heavy tax burden to fall on someone other than myself? Of course! I am inspired by Warren Buffett…

  17. Anon

    August 16, 2011 @ 1:30 pm

    17

    Phil, you have an extremely out-of-touch definition of decent: http://streeteasy.com/

  18. philg

    August 16, 2011 @ 2:32 pm

    18

    Anon: I checked out that site for NY apartments. The first listing on the page was for a 2BR apartment in Union Square. $3.7 million. It really wouldn’t have been large enough for a family with, say, 3 or 4 kids. And they would need some assets beyond their apartment in order to live.

    The current yield on a 30-year TIPS is 1 percent. So $5 million in wealth would generate $50,000 per year in spending power. That is not sufficient for a sybaritic lifestyle.

  19. Jack

    August 16, 2011 @ 3:13 pm

    19

    I have three basic questions for all would be political economists:

    1) If physicists conflated velocity with position the way you conflate income with wealth, where do you think technology would be today? Why do you think economic technology would be any better?

    2) If the primary function of government is to uphold property rights, then why is government funded by taxing economic activity rather than taxing property rights?

    3) Why don’t you ever answer the first 2 questions?

  20. Jack

    August 16, 2011 @ 3:16 pm

    20

    The problem is conflation of the function (net in-place liquidation value of assets) with the derivative (income, capital gains, value added, sales, etc.).

    The result of this conflation is a brain-dead discourse in political economy.

    OF COURSE people who have vast property rights should pay more for the existence of the entity that upholds those property rights — just as they should pay more for property insurance.

    OF COURSE people who make X dollars a year should have zero tax burden as a result of those CHANGES in their net in-place liquidation value of assets.

  21. Ian Rae

    August 16, 2011 @ 4:32 pm

    21

    No one has commented on the numbers in Mr Buffet’s article. 236000 tax payers making 1 million in income only sums to 236 billion dollars. Even if the government seized 100% of this income (which ain’t gonna happen) it wouldn’t solve the deficit problem, let alone the debt problem.

    One could argue for it in terms of perception; that everyone needs to be seen doing their part. But in terms of a solution to government debt, it’s a red herring.

  22. DT

    August 16, 2011 @ 4:32 pm

    22

    Does anyone actually stop to question why the government needs or deserves more money before arguing about who should give it?

    And for those of you who are eager to tax the income and/or wealth of ‘the rich’, please answer one question: what will America look like when all of ‘the rich’ have moved themselves and their businesses to other countries with lower tax rates?

    To DeAngelo: Steve Jobs would have still made the iPad, he just would have off shored even more of its research, development, production, and support to other countries. At some tax rate he would simply move all of Apple…except maybe its stores…to another country. How many more jobs can the U.S. afford to lose? And what makes you or anyone else think that further industrial erosion won’t offset any gains made from higher taxes on ‘the rich’?

    Why doesn’t the Federal government take a hair cut like everyone else and learn to live within its means?

  23. philg

    August 16, 2011 @ 5:25 pm

    23

    DT: Agreed that Apple could move the company offshore. I’m actually surprised that more multi-national companies haven’t moved their headquarters closer to where the growth is, e.g., to Asia. The U.S. market is a big one, but not growing and therefore shouldn’t need as much management attention. It is kind of tough to sell a Mac to an American; he or she probably already has a working computer. It should be a lot easier to sell a Mac to someone in India or China.

    The government “live within its means”? I don’t think the statement makes sense. Without government of some kind we would have a lawless English-riot-style world. So in theory all income and property is the result of having a government. Therefore government’s “fair share” is 100%. On the other hand, high tax rates (such as 100%) tend to discourage growth and therefore long-term government revenues. So a wise government will dial down tax rates until actual long-term tax revenues are at a maximum (taking perhaps only 40% of the pie, but encouraging the pie to grow). If there is a natural size to government, I think it is 100% of the economy.

  24. Mark Lutton

    August 16, 2011 @ 6:08 pm

    24

    The federal government doesn’t tax real estate, but most state governments do.

  25. Anon

    August 16, 2011 @ 6:59 pm

    25

    I love all you people that keep claiming that if we raise income tax rates on the highest bracket a few percentage points, we’ll lose our industries to other countries. Let’s take a look at how we campare to the rest of the world. Our top bracket is 35%, compare that to China 45%, France 40%, Australia 45%, Ireland 41%, Israel 45% and Japan 50%. Also note that there are plenty of countries today with lower top rates: Mexico 29%, Norway 28% and Singapore 20%.

    So by your logic it isn’t worth it for Apple/Google/Goldman/IBM/Microsoft/Etc to move operations from US to (say) Norway, when the top rate in the US is 35% compared to 28% in Norway. But if we raised the top rate to 37% then these companies would be leaving in mass?

    Also keep in mind that some states (and even cities) levy steep taxes on individuals. New York, for example, charges 8% tax on income over $200k . On top of that you pay 3.8% on income in excess of $500k to the city. By the logic all of you have been using, finance firms should be packing up and moving shop to Florida or Texas with no local income taxes to avoid the 11% marginal tax for doing business in New York. Guess what, they aren’t! In fact, to avoid the 3.8% city tax all you need to do is live across the river in NJ. Yet many individuals don’t do this.

    But if we raise the top federal bracket from 35% to 37%, everyone will move to Mexico (with their rampant drug violence).

  26. Craig

    August 16, 2011 @ 7:54 pm

    26

    Anyone see the contradiction in saying the US govt needs/deserves money.

    They actually print the stuff.

  27. philg

    August 16, 2011 @ 11:10 pm

    27

    Craig: I guess if the government printed enough money to generate hyperinflation that would be an indirect wealth tax.

    Anon: Would companies move to pay lower taxes? A lot of hedge funds set up in Greenwich, Connecticut because the taxes were lower than in New York City. Ireland captured a lot of corporations because its tax rates were lower than in the rest of the EU (see http://en.wikipedia.org/wiki/Corporation_tax_in_the_Republic_of_Ireland ). The deeper issue is that companies don’t have to move out of the U.S. to move out of the U.S. The world economy is growing nicely. Companies can leave their operations in the U.S. alone and expand in the world’s growing economies. Eventually their U.S. operations will be an insignificant part of the total, not because the U.S. operations have shrunk but because everything else has grown. (Note that my stock portfolio has done this already; the foreign stuff that I bought 10 years ago is worth a lot more whereas the U.S. stuff is worth about the same, so my investment in the U.S. has been reduced.)

  28. DT

    August 16, 2011 @ 11:31 pm

    28

    philg – “Without government of some kind we would have a lawless English-riot-style world. So in theory all income and property is the result of having a government. Therefore government’s “fair share” is 100%.”

    Price is not determined by necessity, but by supply and demand. If it was determined by necessity then farmers would get 100% of our income first because without food we would all starve, including the government.

    National government, at least in the U.S., is instituted by the people to perform certain specific, limited, enumerated tasks as stated in the Constitution. Government’s “fair share” is not a penny more than what is required to carry out those tasks. Our Federal government is running massive deficits because it has a) grossly exceeded the tasks given it by the Constitution, and b) spends far more than is necessary on many of the tasks it performs.

    Now if you had replied that ‘government living within its means’ does not make sense in the U.S. because the people continually vote for it to live beyond its means, then you would have had me.

    “If there is a natural size to government, I think it is 100% of the economy.”

    I agree if we’re talking about a dictatorship or a democracy. Unfortunately we’ve descended to become the latter.

  29. Katherine

    August 17, 2011 @ 12:57 pm

    29

    It’s really not helpful to say that Buffett can darn well donate extra money to the IRS if he wants to. The point is that, even though Buffett could indeed do such a thing, other wealthy individuals will not. Call it wealth, call it capital gains, call it what you will: if the government doesn’t impose a tax, chances of people paying in are slim.

    It’s also a bit annoying when people point out that even the combined wealth of the X wealthiest people wouldn’t cancel out the deficit. Of course no one’s proposing that as the sole solution; one would assume that other revenue increases and smarter spending would also be factors. But it’s wasteful to throw away money during hard times, and that’s exactly what the government is doing by extending tax breaks and leaving tax loopholes open.

    (Lest I be seen as a frothy-mouthed liberal, I do support tax breaks for small businesses, struggling individuals, etc. But heck, I make a tiny fraction of Buffett’s income, and still I am not struggling; I can do without my share of the Bush tax cut, and I’d happily contribute extra to help get my nation out of debt. And yet I get taxed at more than twice Buffett’s rate. The illogic kills me.)

  30. Dan Weber

    August 17, 2011 @ 2:59 pm

    30

    So by your logic it isn’t worth it for Apple/Google/Goldman/IBM/Microsoft/Etc to move operations from US to (say) Norway

    Google already moves its profits to other countries, including Ireland. Corporate tax law is pretty dense. It’s hard to comprehend by those even well versed in the field.

  31. Peter St Onge

    August 17, 2011 @ 11:20 pm

    31

    I am impressed how this Buffett scoundrel has managed such a folksy public image.

    World’s 3rd richest hypocrite talks his book, lines up for bailouts with the worst of them, and ole Warren’s always ready to open up your wallet to the taxman.

    +1 for noting WB is always free to donate to the Treasury, and he apparently doesn’t. Guess charity with other peoples’ money feels better than charity alone.

  32. Dan Weber

    August 18, 2011 @ 1:55 pm

    32

    I really don’t see any problem with someone saying “taxes should be higher on people like me” even if they aren’t writing checks. I think the home interest deduction is poor policy and should be abolished, but you betcha I take it as long as it’s the law.

  33. philg

    August 18, 2011 @ 2:57 pm

    33

    Dan: Buffettt did not say “taxes should be higher on people like me”. Buffett is a guy with relatively low income and extremely high wealth. Rather than propose an increase in taxes on wealth (“people like him”), he proposed an increase in taxes on income (“people other than him”).

Log in