Missing Warren Buffett’s Point

If you use Facebook, or any form of social media, you’ve probably seen it about six-thousand times already. But on the off-chance that you didn’t, hyper-billionaire Warren Buffett took to yesterday’s Times opinion pages to beg America to force the super-rich, like him, to pay their fair share.  Let’s investigate.

The way I read it, Mr. Buffett takes aim at three myths:

  1. That the rich already pay their fair share,
  2. That current brackets approximate confiscatory taxation, such that any increase would be unfair, and,
  3. That the rich would rather leave the country than pay higher taxes.

Republican backlash against the article was swift and brutal — which rather suggests that its author is on to something — and entirely off-point (e.g.). That Mr. Buffett’s comparatively lower tax burden is the product of aggressive deductions and good accounting practice doesn’t detract from his argument that the tax code is broken. Instead, it proves it.

As an avowed philargyrist, in fundamental competition with others who certainly will not shy away from taking tax exemptions wherever applicable, Mr. Buffett would be foolish not to seek, in all cases, to minimize his tax burden. Because exemptions are available, market forces and basic business sense require that he, and other similarly situated billionaires, take them. He could pay more, it’s true. But the basic inobligality of such an act dooms it. Taxpayers will (and should) pay the least that they legally can. If we want more, we can’t rely on charity, we have to change the law.

Put it another way: capitalism works because we permit selfishness, and harness the results. Mr. Buffett, by words and deeds, validates the selfish impulse, but observes that under the current tax code, the actors too easily slip the bonds that pull the whole system forwards. Nothing could be simpler.

The article seeks to set us straight on a critical point: we used to have a progressive tax system, but thanks to years of lobbying and loopholes, we no longer do. It should also prompt a decision: we can either return to a system where the necessary cost of government is paid by those capable of paying it; or we can entrench a culture where success carries no concomitant obligation — one where Jack Kennedy was wrong — and let the middle classes keep paying it.

Or we can take the Republican route, and just stop paying it altogether.

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54 comments

  1. “…we used to have a progressive tax system, but thanks to years of lobbying and loopholes, we no longer do.”

    This:

    http://www.taxfoundation.org/blog/show/27134.html

    “Indeed, because of the expansion of tax benefits aimed at low- and middle-income households, the OECD finds that the U.S. has the most progressive income tax system of any industrialized country. What that means is that the top 10 percent of U.S. taxpayers pay a larger share of the income tax burden than do the wealthiest decile in any other industrialized country, including traditionally “high-tax” countries such as France, Italy, and Sweden.”

    and this:

    http://dx.doi.org/10.1787/422013187855

    1. Paying a larger share of the income tax burden – which is what the quote says – does not means paying higher taxes. It just means they put more dollars into the tax system, which on an absolute basis is true. Warren Buffet pays over $6Million a year in federal taxes, but his effective tax rate is 17%. I pay far few absolute dollars, but my effective tax rate is well north of 25%. Lets compare apples, please and not apples to ice cubes.

  2. Analysis by decile is FAR too broad of a brush.

  3. Feel free to slice the data any way you want. The fact of the matter is that those other Western countries that liberals love so much (re: Scandanavia) all place the tax burden on the upper AND middle classes. It’s only in the United States where middle class liberals have decided that rather than share the tax burden it is more prudent to double-down on the rich.

    1. Um, Mike,
      My effective middle class liberal tax burden is around 30%. Mr. Buffet’s is 17%. And thus, why, exactly, do I need to pay more of my income in taxes while he keeps the same or less?

      1. Then you will have to explain this one to me:

        http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456

        If I am reading it right it says that in 2007 the ETR was 29.5% for the top 1% and 14.3% for the middle class.

    2. Because socialism!, Philip.

  4. Those damn middle class kids! Always oppressing the rich! It’s like the reign of terror here!

    And they’re so successful at it!

  5. That doesn’t sound like a refutation Ames. So please, explain the data provided by the OECD in a way that supports your contention that we no longer have a progressive tax system?

  6. But don’t we have a far higher income disparity than any of those socialist European countries? Does the top decile shoulder more of a burden because of our rates, or simply because they hold a fuckton of income.

    1. Kris – Income inequality in the US is going up not because rich Americans are seizing money from those below. It’s because the people in the bottom half of the scale are losing much of their income to foreign competition. Any suggestion that the rich are taking from the poor assumes that wealth is a zero sum game that doesn’t transcend borders.

      The truth is that the rich are better positioned to take advantage of a global economy that those below them. That’s basic capitalism.

    2. And partially because of policies:

      “Democratic presidents have
      produced slightly more income growth for poor families than for rich families, resulting in a
      modest decrease in overall inequality. Republican presidents have produced a great deal more
      income growth for rich families than for poor families, resulting in a substantial increase in
      inequality.”

      http://www.princeton.edu/~bartels/income.pdf

      http://rodrik.typepad.com/dani_rodriks_weblog/2008/04/larry-bartels-r.html

      1. Ugh. Thanks Oneiroi. Now I’m sad :(.

      2. I’ll have to dig into this more but just on its surface it doesn’t jive with what we see in cities. The cities in the US with the biggest income inequality are almost all Democratic strongholds.

      3. Yeah, you always go there. Assuming you’re right — which I shouldn’t, I admit — there are two possibilities. First, that most of the cities you’re basing your point on are sui generis, whose disparities are the product of unique situational factors. Like New York City. Or second, that cities aren’t really analogous to a nation of 300 million. I think both are true.

      4. It doesn’t seem that divided by Democrat/Republican states:

        http://en.wikipedia.org/wiki/List_of_U.S._states_by_Gini_coefficient

        I have typically assumed that the high inequality in NY and DC are directly related to being highly populated cities. And large cities are usually Democratic.

        “according to Nathaniel Baum-Snow the Stephen Robert assistant professor of economics at Brown University. Baum-Snow does believe, however, that city size is “an important correlate of inequality.” He continues, “It seems like there is something about the structure of the economy in large conglomerations that generates sort of a lot of inequality. … In large conglomerations [of people] you have the sorts of industries that benefit a lot from being exposed to a lot of other economic activity. That’s why they locate there.” This may help to explain Los Angeles and New York City’s places among the 10 most unequal metro areas, as well as why none of the 10 most equal metro areas have populations of over 1 million.”

        1. Wouldn’t that same theory also apply to the country as a whole?

        2. No. The analysis indicates a trait of cities as a part of the larger whole.

          Did you ever play SimCity 4? It’s like that. The region may average out to an even distribution of residential/industrial/commercial zones, but the wise player will skew individual cities more towards one demographic or another.

          Or it’s like Civilization IV, where production-focused cities, industry-focused cities, big cities, and small cities all have their advantages and disadvantages. It’s also common sense, it feels like.

      5. Also from the article: http://www.usnews.com/news/articles/2011/04/29/large-cities-have-the-greatest-income-inequality

        “The presence of corporate headquarters–and thus high-paid executives–can also augment the upper end of a city’s earning spectrum. The metro area surrounding Charlotte, North Carolina, for example, is home to several corporate headquarters, including those of Bank of America and Lowe’s, which might help account for that metro area’s high inequality measure.”

  7. Right. I rather thought I did answer it. If it’s all a middle class conspiracy, Mike, it’s failed catastrophically, because after-tax income for the rich has skyrocketed while every other class has stayed constant, bumped a tiny bit, or fallen. It should logically follow that the decile-based analysis is hiding something, which is exactly what I suggested.

    1. It’s not hiding anything Ames – you continue to not understand the realities of a global economy i.e the competition for wages in the lower half of the working population.

    2. You continue to not understand entirely unrelated things too!

      Which is to say — huh?

      1. basically – the higher you are up the food chain the more you are insulated from foreign competition for jobs. People in the lower half doing things like unskilled manufacturing are seeing their jobs shipped over seas or they are being replaced by cheaper illegal immigrants. this depresses overall wages. people in the upper half, your NYC lawyers and such, are insulated from global competition so their income grows as a % of GDP.

        it’s basic economics Ames – and you always seem to ignore it when you’re doing your class warfare posts.

      2. Well I’m sure that’s part of the problem. But if you’re saying that, alone, describes the entire trend, well that’s unrealistic.

        I also think it’s charming how any discussion of the duties we owe each other as fellow citizens becomes “class warfare” … but the right’s attempts to justify a tax policy increasingly focused on letting the right rich “cash out” of the American system is somehow about “freedom” instead of “warfare.”

        1. It’s class warfare when you paint an inaccurate picture that suggests we could solve all of our problems if only we could get our hands on more of the top earners’ money.

          It’s also class warfare to not be honest with the people in the lowe half about the reasons why they have seen their wages decline and stagnate. Unions have been doing it for year with their ‘living wage’ BS, instead of being responsible and telling young workers that maybe relying on unskilled manufaturing to realize your middle class aspirations is unwise in a global economy.

          If the rise of the global workforce doesn’t explain it alone, then by all means, please tell me how the rich stole all of that money from the poor?

        2. I guess Rick Perry is now a class warrior too.

          No-one’s saying that all of our problems would disappear, if only we could tax the rich, or that it’s the only cause of the poors’ decreasing state in the American venture. But it is ONE COMPONENT — that is undeniably true, but rejected in your part as an article of faith. Why?

          1. I reject it because it’s an incomplete argument. We need to tax the upper AND middle class. The Left is guilty of the same sort of class protectionism as the Right.

  8. Isn’t FICA the most regressive component of Federal taxation on income?

    I’m glad (contextually – I’d rather the conversation were about something fun, like pool noodles) everybody’a talking about effective tax rate instead of nominal/highest marginal rate. Yay intelligent people.

  9. It seems like these discussions continue to miss the only point that really matters in my opinion – that raising taxes is inevitable if the deficit is to be solved, and that raising taxes for the top earners is the approach least damaging to the economy. So that’s what should happen.

    All this other talk about income inequality and whose fault it is and where seems a bit pointless, on the other hand.

    1. That’s true, but I think ignoring the affects of our policy on income inequality is also an important discussion.

      It can also lead to the idea that, since the largest gains of the past X years were to the upper class while the lower class has been stagnating, partially due to our own devices, then that can then be used as another way to discuss the need for tax increases on the top earners.

    2. ‘…and that raising taxes for the top earners is the approach least damaging to the economy.”

      First – it also would be helpful to not pretend that the top earners alone can get us back in the black. We need deeper tax increases than that. To suggest otherwise is to be unserious about real fiscal reform.

      Secondly – why is that least damaging? There are much higher rates on middle income earners in most of the Western world and in most countries they shoulder the burden just fine. Of course, they also live much more within their means (hence the popularity of IKEA in Scandanavia) and do no require the same luxuries that American middle class earners expect.

      And that’s the reality of the liberal tax agenda in the United States. Take more from the rich so the middle class can maintain their same lifestyle without sacrafice.

    3. ….so while we’re making generalities…

      The conservatives tax agenda is to put additional burdens on people that are more likely to have a difficult time economically, even if it actually has relatively little monetary advantage…

      And as we’ve already talked about…income inequality is happening….helping it along isn’t that useful for our country.

      1. I don’t know what choice the Right has (other than to grow-up and look at Defense spending). Obama took entitlements off the table early on in the debate – ironic since he accuses our side of being inflexible.

        1. Okay, sorry, but that’s just total BS. The whole reason why the left wing of the Democrats are attacking Obama is is precisely becuase they think he’s willing to sacrifice too much on entitlements.

          http://thehill.com/homenews/senate/173979-obamas-entitlement-cuts-paved-the-way-for-dems-support-of-reid-debt-plan

          1. I don’t know. Certain pundits have claimed that nothing was really lost on the entitlement side:

            “…Republicans also let defense cuts onto the table, in a serious way, and accepted the premise that heightened spending is necessary to pull us out of recession, by agreeing to cuts so backloaded that only 1% of them will take place this fiscal year. Oh, and since the majority aren’t immediate… they can always be modified in a more favorable/reasonable/Democratic climate. Which means that the GOP gave up its only chip in exchange for a deal that does almost nothing that can’t be undone .”

            1. That’s a little short on context, but if we’re talking about the debt ceiling agreement, and especially the sequestration mechanism, there’s no argument that it didn’t actually do very much good in terms of the deficit. My personal theory is that’s because nobody, not even the Republicans, are actually all that interested in substantial cuts to entitlements, because they know people will hate them for it.

              But you could say exactly the same thing as in that quote about the defense cuts – they won’t take effect until 2013 either, so Congress might just as well cancel those as they might entitlement cuts.

              1. So as I understand it:

                – The Left doesn’t want entitlement cuts

                – The Right doesn’t want defense cuts

                – The Left doesn’t want to raise taxes on the Middle Class

                – The Right doesn’t want to raise taxes on the Rich

                And all four of those things are necessary in order to get us back on track conomically. Both sides are going to back the other by actually doing anything (hence the debt ceiling deal that maintains the status quo).

                So do we keep talking partisan nonsense and pretending that one side is worse that the other – or do we get serious about discussing real reforms that transcend party politics?

                1. Exactly. The big stumbling block is that Congress is way too dysfunctional a body to actually get anything done (and both sides being to blame), although I guess it’s possible this new “supercommittee” or perhaps the Gang of Six might get things moving.

                  As a matter of fact, I’m beginning to think some form of this ‘balanced budget amendment’ the Tea Party have been pushing for recently might not be such a bad idea – even though I doubt they themselves have thought through what the implications might be of it (eg. that they’ll have to raise taxes). But at least then Congress would have to do something.

      2. Also, I would be much more willing to have the middle class pay higher taxes, if like in Europe, we were receiving similar benefits as they have in Europe for those additional taxes, which also benefit the middle and lower classes more than the upper class.

        1. So – you’re willing to accept higher taxes only if we increase spending on new benefits? That seems a bit selfish. Wouldn’t it be better to dig out of the hole first?

  10. First – it also would be helpful to not pretend that the top earners alone can get us back in the black. We need deeper tax increases than that. To suggest otherwise is to be unserious about real fiscal reform.

    I at least am not suggesting that. I’ve said several times that dealing with the deficit will require both tax increases and cuts to entitlements and defense. Suggesting that either approach is sufficient is, indeed, being unserious.

    Secondly – why is that least damaging?

    Because high-income earners spend a much smaller proportion of their income and save much more of it. Middle- and in particular low-income earners, on the other hand, spend more. So if you start taxing those groups more, they’ll cut spending, which decreases aggregate demand, which hurt growth, which in the end means you risk going right back into recession again.

    There are much higher rates on middle income earners in most of the Western world…

    But salaries in those countries are also much higher. $60K a year before taxes would be considered an average entry-level salary for a college graduate in Denmark, for instance.

    And that’s the reality of the liberal tax agenda in the United States. Take more from the rich so the middle class can maintain their same lifestyle without sacrafice.

    Isn’t the point that the middle class will be making their sacrifices through entitlement cuts? It seems that the reality of the conservative agenda is to put the whole burden on the middle class, while the upper class (who pretty much by definition are best able to shoulder those sacrifices) don’t have to sacrifice anything at all – which is precisely Warren Buffett’s point.

    1. “But salaries in those countries are also much higher. $60K a year before taxes would be considered an average entry-level salary for a college graduate in Denmark, for instance.”

      I don’t understand how higher salaries are relevant unless goods and services aren’t also higher. Taxes are based on a % of one’s income. So, for example, someone making $25,000 in the US being taxed at 15% pays $3750 in taxes. Someone in Denmark that makes $50,000 to do the same job and is taxed at 30% pays $15,000. Either way, they are still giving up 15% more of their income.

      ” So if you start taxing those groups more, they’ll cut spending…”

      I think you over-estimate the willpower of the American middle class.

      1. True, goods and services are also more expensive. But ont the other hand, things like education and health care are free – so no expenses to health insurance, no need to pay to put the kids in school or save up for their college years. My guess is it roughly evens out.

        Besides, people here have been used to paying those higher tax rates for decades now. There’s a huge difference between already having high taxes, and then raising tax rates from a lower level all of a sudden.

        1. If it evens out then why not go to a European model where the upper AND lower classes pay higher rates?

          Like you say though, people in Europe are used to it. Americans might need a shift in perspectives, not protectionism from both sides of the aisle.

  11. Yeah, but then you’d also need single-payer health care and all the other things you don’t want. Otherwise you’re just basically hosing the middle class twice by both cutting services and raising their taxes.

    My real point, though, is that in the middle of an economic crisis, it’s a really bad idea to hurt the purchasing power of the people who drive the recovery the most (and that’s not the rich people, the conservative talking point about them being “job creators” aside).

    1. I think the numbers show we can keep Medicare and SS at current levels if we cut in other areas (military, etc) and raise taxes on both the upper and middle classes.

      If it’s just a timing issue – we’ve pulled out of recessions before while maintaining low rates for the rich. Why not just wait until the recession is over and then raise taxes on both?

      I guess I’m more interested in the idea of taxation as a generic idea and less moment-specific. In general my belief is that if you are going to raise taxes, it needs to be on the upper and middle equally because there should be a shared burden, no different than what we see in other Western countries (the ones Ames claims have more progressive taxation).

      1. I guess I’m more interested in the idea of taxation as a generic idea and less moment-specific.

        And that’s exactly a part of the problem, because taxation isn’t a generic idea, it’s a fiscal tool just like interest rates, monetary policy, public spending, and so on.

        Unfortunately, taken to the extreme, “the idea of taxation as a generic idea” leads to the Tea Party attitude that all taxes are by definition evil, which is just crazy talk.

        Sometimes it’s a good idea to raise certain taxes, sometimes it’s not. But it’s a decision that should start from economic, rather than ideological considerations.

        On a related note, the US should really consider cutting the corporate tax rate, because it really seems awfully high – and that’s where the real “job creators” are, after all.

        …if you are going to raise taxes, it needs to be on the upper and middle equally because there should be a shared burden…

        Well, around here we have the saying that “the strongest shoulders should carry the heaviest burdens”. Sometimes an absolutely equal distribution isn’t actually all that equal.

        1. ‘Generic’ may have been a poor choice of words. What I mean is that I don’t think we need to tinker with taxes on a year-by-year basis. So giving the vaunted ‘middle class’ a pass so they can buy more flat screens and SUVs isn’t good policy longterm (and in the interest of full disclosure I just bought an SUV). What I am talking about is a very simple tax policy that uses increases the burden on EVERYONE that is comfortably above the poverty line.

          “Well, around here we have the saying that “the strongest shoulders should carry the heaviest burdens”.

          If the spending habits of my fellow middle classers is any indication – our shoulders are plenty strong.

          1. I don’t disagree in principle, and once the economy has recovered, that will probably be necessary to some extent. Perhaps through some form of VAT system as an alternative or part of it.

            Until then, though, you’ll want to keep buying those TVs and SUVs, that’s how the recovery happens.

      2. I don’t remember if I’ve talked about it here before, but I’m in fundraising (probably have).

        I’ve gone to donor events with millionaires, and I also gotten on the phone and tried to get $15 dollars from a person.

        The way one considers that $15 a huge sacrifice and the other one throws down a $20,000 a year without a sweat.

        To treat them as if a dollar is equal between the two of them, or that they have the same relative level of expendable income, just never fits with the reality I see.

        1. No one is suggesting we match dollar to dollar. I’m suggesting we math % to %.

        2. That doesn’t really change anything though, since that percentage still amounts to a different value of a dollar for people in each income bracket.

          If someone took 50% of my income versus 50% of a billionaire’s income, I think I would end up below the poverty line, while a billionaire would still be a billionaire.

          1. That’s why you have a progressive tax on those lower down the economic scale. Basically you make the tax system progressive until people clear a certain amount. For example, let’s assume a goal tax rate of 45% for the upper and middle class. Let’s also say that we set the line between lower and middle class at $20,000 annual income. What that means is that you have a progressive tax rate on anyone making below $36,364. Once you hit $36,364 though you can be taxed at the full rate of 45% and not fall below the middle class income floor.

            As for 45% affecting you more than a billionaire – there has to be some kind of perk for being a billionaire. Otherwise why not complain about the guy that makes $60K and is taxed at the same rate as the guy making $40K. Obviously one of them feels the pinch more.

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