I kid with the title; if only to distinguish myself somewhat from the other million people or so linking to Warren Buffett’s latest opinion in the New York Times. Sometimes I wonder if guys like Buffett and Soros are viewed by other billionaires in much the same way as a lot of gay people view Log Cabin Republicans.
Buffett points out that he pays a smaller percentage in taxes on income he makes from investment than people make on income they actually work for. He further contends that it’s a fallacy that people will walk away from investment if the taxes are any higher. And, he points out that the job creating power of lower taxes on investment does not comport with historical experience. Lower taxes on investment have coincided with a period of weak job creation in the U.S.
Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.
The taxes I refer to here include only federal income tax, but you can be sure that any payroll tax for the 400 was inconsequential compared to income. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)
. . .
Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.
We should keep in mind that the super-rich are, by and large, not extraordinarily good or bad people. They are not demons who should be reviled; but, by the same token, they are not Galtian heroes either. Some worked harder than usual. Some were smarter than usual. A lot were some combination of hard working, smart, and very lucky – in terms of opportunities life sent their way to seize and/or in terms of coming into life with a nest egg they could use to make money.
My sense is that profit should come from labor, innovation, and/or risk. Where the system breaks down, in my mind, is when the economy rewards individuals in excess of the labor, innovation, or risk generating the profit. “Who’s to say?” Good question. But, I would venture a guess that, of 238,663 households making more than $1 million per year, only a tiny percentage of them are generating value from their labor/innovation/risk that is twenty times more valuable than that generated by the average household making $50,000 per year.
I know plenty would say that the value is whatever the market will bear. But, I think the market is structured to overcompensate certain activities — financial services and investment come to mind. I think these services and investment could be had for less. Mr. Buffett, who can speak on these matters with considerably more authority than me, seems to agree; for whatever that’s worth.
Forget economics. Just from a moral standpoint, why should capital gains taxes vary by income? That is a recipe for those high income individuals to go to tax havens, or to set their businesses up such that they do not pay these taxes.
Or, more likely, this is a ploy by Buffet to sell life insurance policies, which of course are untaxed.
What rate maximizes revenue? Buffet seems to ignore that question. It is not axiomatic that a higher rate leads to more revenue. It seems that capital gains tax revenue has exploded as the tax rate has decreased.
But, I would venture a guess that, of 238,663 households making more than $1 million per year, only a tiny percentage of them are generating value from their labor/innovation/risk that is twenty times more valuable than that generated by the average household making $50,000 per year.
We know that household income is highly correlated to education achieved, hours worked, and how many people in the household work.
Now, that data tops out at $250,000 household income. But why should it not extend to $1 million?
Even if that $1 million household doesn’t do twenty times the work of the $50,000 household, they most likely do work more, have more education, and have more workers per household.
Geez, Buffet doesn’t even have the math right. His tax rate is not 17.1%.
One word: “tax incidence”.
Buzz: you asked “Just from a moral standpoint, why should capital gains taxes vary by income?”
I understand your point, but I think the real question is “why should ANY taxes vary by income?” It would seem the only answers (capability to pay, vertical equity concerns) would be the same to both.
I think the “dual taxation” on dividends argument works only if you don’t regard the corporation as an entity distinct from the investor. Which is obviously not legally the case.
As the man said, corporations are people too.
It would seem the only answers (capability to pay, vertical equity concerns) would be the same to both.
Why? Ultimately, capital gains and dividend taxes are taxes on savings. It is a reward for thrift, and it doesn’t seem to me that either of your justifications should be germane.
You’re just playing games with words, Doug, and misquoting Romney to boot (he was saying that corporations are not the nebulous thing that liberals make them out to be, they are organizations made up of people like you and me).
Buffett owns 23.3% of Berkshire which paid $3.5B in income tax in 2010. His pro-rata share of that tax payment is $815 million.
Buzz: I still don’t understand why you seem to differentiate capital gains income from other (earned) income. Yes, capital gains are taxes on saving. Earned income is taxes on working. Why should the guy who works harder pay more taxes than the guy who works less?
Because what I saved is money earned from working. It has already been taxed. Taxing my returns to saving is thus double taxation.
We could solve all of these issues by taxing consumption only. But then guys like Doug would complain that that is regressive.
Obviously I’m having fun with the “corporations are people too” line — that’s going to ride Romney as hard as the “Al Gore invented the Internet” misquote, unless I miss my guess. It plays into a narrative that already exists for Romney.
But, it highlights a couple of things. First, there is at least some distress (possibly not penetrating the general consciousness yet) over decisions like Citizens United that expands the notion of Constitutional rights for corporations. (I think the notion of corporate personhood has suspect underpinnings; and is very much at odds with libertarian and conservative principles of individual responsibility).
Second, I think calling taxes to the corporation and taxes on dividends “double taxation” is slight of hand and employs a double standard for taxation on those transactions versus other series of transactions.
When I work for some money, I get taxed on it as income tax. When I take the resulting money and try to spend it on a widget, it gets taxed again. When the widget seller uses the money to pay a worker, it gets taxed again, and on and on. I don’t see that we should care any more when the person through whom the money flows happens to be a corporation and then an investor.
Sorry Buzz, we usually agree on tax issues, but I can’t follow your line of reasoning here. I recognize that capital gains should be taxed lower than earnings because cap gains are not true “income.” However, I don’t see any reason that cap gains taxes can’t vary just like income does.
I’ll give you an example: two people make $200,000 a year. One makes millions on Apple, one makes .3% in a money market account (or on Intel if you value risk). How is this different than a doctor and a janitor earning vastly less?
Doug, I always wonder at what fuels your thinking on this, because I don’t take you as a jealous person, but these opinions invariably read at least a little that way. I hear a lot of critical value judgments made about what people earn. Some people bemoan athletes or actors their millions. Others bemoan business executives their millions. Why? How really does it hurt anyone that collectively, a whole lot of people really like sports or hip-hop such that a few dollars for a ball game here, a few dollars for a download or concert there, before you know it you have Derek Jeter or Russell Simmons? Or computers & phones, Bill Gates or Steve Jobs?
You know, I think both you and I could, if we really decided it was what we wanted most in life, could become millionaires in just a few years. We’ve just honestly never valued it enough to make it so. We value the time we take with our families too much, our hobbies, hell- our slacking, enough that we don’t do the things required to make us millionaires. So what? Why not be happy with the lives we’ve created, while respecting the lives others have created for themselves?
Believe me, Mike; it’s not jealousy. It takes very little to make me comfortable. What I’m after is a balanced, efficient system – and by “balanced,” I’m not terribly concerned with “fairness” – so, perhaps that’s not the best word. I’m not a mechanic, so that’s probably why I struggle with the metaphor that jumps into my mind.
I see a steam engine with heat and steam spewing out of a hole in the line, untapped. This makes the rest of the machine work that much harder, and other pieces start to break. You need to plug the hole and stop the wasted energy to prevent damage to the other parts of the machine.
No, if all you were doing was saving it – throwing it under a mattress, say; you wouldn’t be taxed again on it. You earned money by risking it. Essentially, by entering into another business transaction to let another guy use it to pay workers or whatever and, in return, he’d pay you back a piece of the profits.
I think a major disconnect causing me not to see eye-to-eye with you fellows (and feel free to correct me if I misstate your thinking on this) is that I see these big earners as taking more out of the system than they put into it; and that imbalance comes out of someone else’s hide.
I think you guys see them as simply getting compensated for the value they create with no particular detriment to others if they get paid more.
However, I don’t see any reason that cap gains taxes can’t vary just like income does.
Since the moral argument isn’t working for you, let me switch gears and give you a very utilitarian reason: labor is rather inelastic (you have to eat, right), but savings is very elastic (you have alternatives to saving, such as spending).
So… capital gains taxes that increase with increasing income would be worse from a supply side perspective than progressive income taxes are (and even then, progressive income taxes have huge supply side effects).
Again, this is why capital gains taxes have increased in revenue even as rates have fallen substantially over the last decade and a half.
I think a major disconnect causing me not to see eye-to-eye with you fellows (and feel free to correct me if I misstate your thinking on this) is that I see these big earners as taking more out of the system than they put into it; and that imbalance comes out of someone else’s hide.
Zero sum game fallacy.
Look, I understand that there were something like 2 million college grads in 2002. Something like 1800 graduated from the most elite college: Harvard.
But only one 2002 college grad is worth $10 billion: Mark Zuckerberg.
So who is Zuckerberg exploiting, in your humble opinion?
Could it just be that technology and globalization make returns to scale and first movers more lucrative than in the past?
Buzz, why would we motivate people to save their money (thereby removing it from the economy) rather than spend their money & make the economy stronger? That is also the issue I have with “FairTax”, where we only tax on sales. We’re moving people not to spend, and I fail to see why that is a good thing.
Your reward for saving money *is* the money. Income is income.
Again the reason I point to flat tax & doing away with all of this. I really don’t want the rich to pay a higher tax rate than me, I just want them to pay the SAME rate as me. Making money on holding onto a pack of stocks for 10 minutes & selling it for millions makes us no stronger of a nation than my computer work does (I’d argue it hurts us), but there is no reason that someone that flips stocks for a living should pay less of his profits than I do into taxes.
Buzz, why are you so opposed for tax equality?
Jason: reason #1 to encourage saving: If people save, they have money when they need it. This means that taxpayers and other citizens don’t have to bail out these spenders with costly handouts like Medicaid, and the spenders would be able to pay their debts.
There is little doubt that we spend way too much in the U.S., and that spending needs to decrease.
Paul C, sounds like a “nanny state” idea to me.
I personally plan to save quite a bit, as I plan to never go into debt again once my house is paid off. I despise debt & think it is a terrible way to run your finances.
However, that is my opinion. I shouldn’t force my opinion on others through the tax code. We all have a bill to pay for all of the public services we get, and we should all pay a fair amount.
From your point, though, I assume you love the idea of Social Security, since it also assumes people won’t save on their own & forces them to save money for retirement. :)
To me, the nanny state wants you to rely on it for all your decisions. Smoking is dangerous, so we will take away your right to do it, etc. This is the exact opposite, where the state is pushing for you to be self-reliant for your finances, not reliant on the state. That being said, this is only one small reason to encourage a consumption tax.
All sorts of opinions are enforced through the tax code. It is impossible to get away from them, as a consumer or esepecially as a corporation. Example: we like home ownership, and interest (and capital gains) on home ownership is tax deductible.
Social Security was a bad idea that assumed permanent population growth and stable life expectancies. But to me, it is sort of like the housing preferences in the tax code. Terrible, but little can be done to fix it because people are so reliant on it. Either way, I am not counting on Social Security for my retirement.
Since you brought it up, are you prepaying your mortgage? The govt. is telling you not to do so. With rates at 4% and interest being tax-decuctible, the tax code suggests you invest your money somewhere else where you can make over 3% (assuming a 25% marginal tax rate). That’s not very hard to do.
Buzz, why would we motivate people to save their money (thereby removing it from the economy) rather than spend their money & make the economy stronger?
Keynesian fallacy. Savings doesn’t “remove money from the economy”. Savings becomes investment, which increases the productive capacity of the economy.
If we had no corporate income tax, we only taxed individuals, and there was one flat tax rate for capital gains, dividends, and income, I suppose that would be accaptable. Would that meet your “equality” standard, Jason?
Social Security was a bad idea that assumed permanent population growth and stable life expectancies. But to me, it is sort of like the housing preferences in the tax code. Terrible, but little can be done to fix it because people are so reliant on it.
In both cases, you phase it out over time. In the case of the mortgage interest deduction, phase it out over 20 years and hardly anyone will even know about it.
We are doing the same thing with Social Security by raising the retirement age slowly over time.
First, nothing in federal or state law requires taxpayers to ferret out and claim every available tax break. Yet Mr. Buffett, it seems, is quite adept at limiting his tax burden. He writes that he sent the IRS a little over $6.9 million last year, about 17.4 percent of his taxable income.
To put his tax burden in perspective, consider that in 2007 the “total effective federal tax rate” of the wealthiest 1 percent of taxpayers was 29.5 percent, according to the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.
For 2008, the IRS itself reports:
For returns reporting positive adjusted gross income, the top 1 percent of taxpayers had an average tax rate of 23.3 percent; the top 10 percent of taxpayers had an average tax rate of 18.7 percent; and the bottom 50 percent of taxpayers had an average tax rate of 2.6 percent.
But those statistics refer only to the wealthiest 1 percent of taxpayers, most of whom dare not dream of the riches earned by the likes of Mr. Buffett. What about the “super-rich” to whom Buffett refers in his op-ed?
No matter how one cuts it, Buffett’s total federal tax burden of 17.4 percent is below the norm for the “super-rich.” Among the wealthiest 0.1 percent of taxpayers, for example, the average tax rate in 2008 was 22.7 percent. Even among the top 400 taxpayers, Buffett still fared well. The average rate among this elite group still came in at 18.1 percent. Clearly, Mr. Buffett’s tax accountants earned their fees.
Berkshire Hathaway owns LIFE INSURANCE companies. Rich people put their wealth into life insurance–big, high-premium policies at that–in order to help their heirs–whether individual offspring or foundations, no matter–AVOID INCOME AND INHERITANCE TAX because the proceeds of such policies are, of course, tax free.
So…to the degree that any higher income tax mandates inspire people to shield more of their wealth for their heirs by buying more life insurance policies from his companies, Buffett stands revealed as just another solicitor for favored nation status from the Obama/Democrat administration–no different than G.E. or fast food companies or labor unions seeking waivers from the Obamacare they endorsed and promoted and the candidates they give money and time/support to.
To your above comment, I’d use that as more proof that all income should be taxable. I don’t care if it is lotto winnings, life insurance, your house selling for $100k more than you bought it for, etc. Income is income.
Only if we also stripped all personal rights from corporations, such as the ability to donate to political movements. As of right now, corporations are treated as a legal person in enough ways that they should pay taxes as well.
However, I’d be fine with corporations & humans both paying the same fixed rate.
To Paul’s point:
I’m fine with getting rid of those, too. Imagine the money that would be saved by having a minuscule IRS and far fewer accounting & legal groups finding all of those loopholes.
As to Buffett paying people to avoid taxes, I understand the idea. He doesn’t want pay more in taxes if his rich buddy isn’t going to pay more, too.
It is very easy to see this in people you know. How many people to you know that cry for smaller government yet still cash their Social Security check instead of mailing it back in?
Or Medicare benefits or farm subsidies. But, that’s a Craig T. Nelson case of “I’ve been on food stamps and welfare. Anybody help me out? No. No.”
Apparently some studies of Tea Party attitudes reveal that they’re not really against government spending exactly; they’re really against government spending on “the undeserving.”
Jason: I don’t think you realize how many “opinions” are present in the tax code. In fact, the only way to get away from those opinions it to have a simple consumption tax without “prebate.” Otherwise, it is impossible to get away from “opinions” such as:
1. Should we give a deduction/exemption for having a kid?
2. Should college education expenditures be tax-exempt (Section 529)?
3. Should medical expenses tax-exempt?
4. Should Retirement accounts be tax-exempt?
and so on.
First, there are only 413 billionaires in the United States. If the federal government were to attach their ENTIRE net worth – – $1.5 trillion — it would reduce the federal debt by a little more that 10 percent.
Buffet is engaging is projecting himself to be a compassionate capitalist without the pain of voluntarily donating 35% of his annual income.
Second, I fail to see how the Log Cabin Republican analogy applies. The LCG is one of the few sane gay advocacy groups in existence. Compare the LCG with the goof balls (no pun) at bilerico. The Bil in bilerico announced on his web site that the Indy coroner refused to release the remains of one of the State Fair victims to her lesbian partner. Hyperbole.
The coroner didn’t refuse or consent to release the victim’s body to anyone whilst he determined the legal next of kin. It’s this kind of knee-jerk nuttery that embarrasses the Hoosier gay community.
The gay community in Indiana deserves a rational LCG-type group to speak up for them, rather than the homo-erotic, christopobic crap that bilerico produces.
Just a thought—some observations about this blog: on this topic as with many there has been major difference of opinion but in most cases a very rational expression of the why. Different from some responses to blogs and news articles the tone of the replies even when very different are presented in a civil manner wherein the thought and not the thinker is “attacked”. Thanks to all for the civility.
Doug- Thanks for the clarifications re: jealousy & inefficiencies. As I said, I didn’t take you as being a jealous person from having met you, but the writing made me wonder. And, I think you correctly nailed the differences in perspectives. I can live happily with that. What bothers me is how many seem to have a “Let’s stick it to those wealthy bastards” because “They couldn’t have possibly earned all of that” mentality, which I can’t grok or support. I don’t want anybody ‘stuck’.
In the meantime, Mr. Buffett can lead by example, without waiting to be commanded by law, and show us how it’s done.
https://www.pay.gov/paygov/forms/formInstance.html?agencyFormId=23779454
Paul C,
I’m showing how extreme I am in my opinion, but I’m fine with saying we eliminate all of those as well. Every dollar that comes into my house is taxed at X percent, no exceptions.
I currently benefit from the tax breaks from my mortgage & the amount of charitable giving I do, among other things. I’d be perfectly fine with giving those up for equality & simplicity in our tax code.
The only thing I would make exception for is to establish a “floor” where we don’t tax below. So, income over say $20,000 a year is taxed at X percent. That’s to say that someone making $40,000 would have $20,000 tax-free & $20,000 taxed. Even someone making $1,000,000 would have $20,000 tax-free and $980,000 taxed. Still simple & equal.
Indianapolis,
I don’t get why you’re quoting stats about billionaires when Buffett is talking about people making over $1 mil & over $10 mil. No point in going into that.
I do agree, though, that tax increases are not the only thing we need to be doing, and I don’t think anyone is seriously saying that. We need both tax increases (or loophole closing) AND cutbacks.
I don’t get why you’re quoting stats about billionaires when Buffett is talking about people making over $1 mil & over $10 mil. No point in going into that.
It is the difference between income and net worth. Being a millionaire or billionaire refers to your net worth, which is not taxable directly (yet!).
It could be that someone with 10 million dollars of income is a billionaire.
The only thing I would make exception for is to establish a “floor” where we don’t tax below.
That is how most flat tax proposals work. There is still a standard exemption, to make sure that the poor are not taxed.
Apparently some studies of Tea Party attitudes reveal that they’re not really against government spending exactly; they’re really against government spending on “the undeserving.”
You can’t see the difference between welfare (where benefits are based on how poor you are) and Socialist Insecurity (where benefits are based on what you paid in)?
On the one hand, liberals speak of Socialist Insecurity as a pension, which over the years has made people think of it as a pension that has been earned. Then, when people treat Socialist Insecurity as a pension, the liberals come back and say that Socialist Insecurity is no different than any other government spending. It’s annoying.
There is probably a belief amongst Medicare recipients that it is the same as Socialist Insecurity (that it has been paid for by individuals by their previous years taxes), and to some small extent it has.
As to Buffett paying people to avoid taxes, I understand the idea. He doesn’t want pay more in taxes if his rich buddy isn’t going to pay more, too.
If that is how he feels, then he shouldn’t have printed that op-ed in the Times then, should he?
He’s a f-ing hypocrite. Or, more likely, he has some other agenda (like selling life insurance).
Jason,
Mr. buffet referred to a “billionaire-friendly Congress” which prompted my comments. But, yes, he was including million-dollar per year incomes. And, yes, the same principles apply as you noted.