A Different Take On Buffett, Obama, and Taxes
I’m sure this will be a steeply uphill battle with this audience, but I’d like to make the case that Warren Buffett’s now-famous call for higher taxes on the super-rich is – as he actually proposed it – a lot more defensible than most conservatives have given it credit for being. And while President Obama’s co-option of the plan has now contaminated it with the intellectual and political equivalent of “cooties,” I think the Buffett proposal was a missed opportunity for Republicans to demonstrate an ability to be more pragmatic than dogmatic on the subject of taxes, as well as to blunt one of the few political arrows Obama has left in his quiver that actually has a chance of being somewhat effective.
Virtually all the critics of Buffett’s proposal have made one or more of three main points. First, there simply aren’t enough “millionaires and billionaires,” and raising their taxes, even significantly, wouldn’t make a perceptible dent in the federal budget deficit. This is true, but irrelevant. Getting the federal government out of the business of funding cowboy poetry festivals or studying the physics of interpretive dance also wouldn’t make a scratch in the deficit – but that doesn’t mean it’s not the right thing to do.
The second criticism is that raising taxes on the super-rich would be at best ineffective, at worst economically harmful. The argument here is that raising taxes on any group will alter and/or diminish that group’s economic activity. Various case studies have been trotted out showing that in jurisdiction X or Y, attempts to raise tax rates resulted in lower-than-expected, or even reduced, revenue. Nevertheless, there are weaknesses to this argument. One is related to the point raised above – if taxing only “millionaires and billionaires” a bit more wouldn’t raise enough revenue to make much of an impact on the deficit, it’s hard to see how it could have much of an impact on the overall economy. The other is that most of the studies demonstrating the reality of tax-avoidance behaviors in the face of rate hikes – at least the ones I’ve seen – focus on the short-term. That is, in the year following a rate hike, revenue turned out to be less than expected. This makes sense, because it is relatively easy to shift capital gains, or even income, from one period to another – once. But sooner or later the income or the capital gain has to be taken, or foregone altogether. From a common sense standpoint, I find it hard to argue with Buffett’s conclusion that the very rich (and he knows a lot more of them than I do or any academic does) may well take advantage of all legal means to reduce their taxes in the short term, but that over time they are in the business of making money, and they’re not going to pass up on good investments just because their tax bill may be a bit higher.
The third criticism is some variant of “the rich already pay their fair share or more” – usually accompanied by a graph showing that the top 1% of taxpayers pay 35-40% of income taxes, or that “millionaires” on average really do pay more than “secretaries.” This irresistibly calls to mind Mark Twain’s famous line about “lies, damn lies, and statistics.” One can cut tax data in such a way as to support virtually any point one cares to make. But the clearest and least-biased way, I think, is simply to look at what tax rates people actually pay across all income levels. This can be done fairly easily by pulling data from the IRS web site, and results in the following graph, which shows the actual taxes paid, as a percent of income, by filers at all different levels of income for 2000 (Clinton’s last year) and 2008 (Bush’s last year).
Owing to my background in consulting, I’m probably more of a “graph junkie” than most people, but I find this chart fascinating. Three things jump out. First, an awful lot of people – on average, all those making less than $100,000 a year – pay very little in federal income taxes. Second, the net impact of all the Bush tax cuts (or “tax cuts for the wealthy,” as the Democrats invariably put it) was remarkably even-handed – virtually every income group saw its income tax burden decline by a similar proportion during the Bush years. Third, although Warren Buffett’s example of himself and his secretary may be anecdotal and atypical, his uber-point is in fact correct – at income levels above $1,000,000 per year, the progressivity of federal income taxes simply stops and, in fact, reverses into mild regressivity at around $5 million/year.
Leave aside for the moment the question of whether “progressive” taxation is in itself a good or a bad thing. It’s what we have. There has been a settled public consensus for generations, across the majority of moderates, liberals, and even conservatives, that the principle of progressivity – the greater one’s income, the higher a percentage one should pay – is probably the least unfair way to structure the income tax. And even Adam Smith thought it was perfectly reasonable (Wealth of Nations, Book Five). People can and do debate whether the progressivity should be flatter or steeper, whether there should be more brackets or fewer, and whether overall levels should be higher or lower. But as far as I can recall, only Steve Forbes among even remotely serious presidential candidates in my lifetime has ever tried to make an issue of eliminating progressivity entirely. And his candidacy, of course, went nowhere.
So if progressive taxation is the reality of what we have, and most people agree at least on the principle, what on earth excuse is there for the progressive principle to stop precisely at the level where people can most afford it? If it is right and proper for a family earning $100,000 per year to pay a higher percentage than a family earning $50,000 per year, and if it is right and proper for a family earning $500,000 per year to pay a higher percentage than a family earning $200,000 per year, then why is it not right and proper for a family earning $2,000,000 per year to pay a higher percentage than a family earning $500,000 per year? Or for a family earning $10,000,000 per year to pay an even higher percentage than that? This, I think, is fundamentally Buffett’s point.
The legitimacy and effectiveness of any system of public finance in a free society depends on a widespread acceptance of the fundamental fairness of the basic structure of taxation. People may have a hundred grievances over this rate or that loophole, but they have to believe that the basic approach is roughly “fair,” or at least less unfair than any viable alternative. The super-rich may be few in number, but they are highly visible, and highly symbolic. For these people to be seen as exceptions to the rule of progressivity, which everyone else has to live under, contributes greatly to an increase in public resentment of a group of people who are, by and large, both decent human beings and enormously productive and valuable assets to the economy as a whole. And for conservatives to be seen, by intent or default, as defenders of this anomalous and favored treatment is to reinforce perceptions that they are willing to accept “unfairness” in order to favor “the rich.”
For reasons not entirely clear to me, I think conservatives have for some time now conceded the concept of “fairness” to liberals without so much as a fight. The contrast between what Warren Buffett actually proposed in his article – a sort of super-AMT only on incomes above $1,000,000/year – and what President Obama is currently proposing – an across-the-board sock-it-to-everybody-making-$250,000 – is illustrative of why I think this was a missed opportunity for Republicans. There is absolutely no empirical evidence to support the notion that raising taxes on households making $250,000 or $500,000 or $800,000 per year makes anything any more “fair.” These households already fall in the “steeply progressive” part of the tax rate curve. The only justification for such a proposal is political – there are a lot fewer people making over $250,000 than people making less, so the people making less may be inclined to support it. This is almost the very definition of “class warfare.” But there is empirical evidence (see above) that those making $1,000,000 or more are, on average, anomalous exceptions to the general rule of tax rate progressivity that holds across the rest of the population, and that correcting this anomaly would in fact increase the overall “fairness” of the tax system.
Reasonable people can disagree, but I think it is at least a defensible argument that the aggregate benefit of improving the public’s perception of the fairness of the tax system, and reducing the public’s resentment, even by a small degree, of successful, productive, and wealthy people, would outweigh any possible negative short-term economic consequences to the sort of tax hikes proposed by Buffett. And I think the political benefits to Republicans, had they embraced this proposal before the President, could have been significant. At the margin, it would have helped blunt perceptions, especially among moderates, that the party is too subservient to the wealthy or too rigidly inflexible on the subject of taxes. And I think Republicans could, with devastating effectiveness, have drawn a contrast between their own “fair” approach – limiting tax increases only to those who, on one dimension at least, are unfairly advantaged today, and thus minimizing any possible economic harm – and the President’s “unfair” approach – heaping yet more taxes on a lot of people who are by no means “rich” and who already pay more than those earning less, and, by hitting small business owners and entrepreneurs especially hard, putting economic recovery and job creation at risk.
Those who hold Buffett’s views – and he was explicit in his article in stating that while he supported increasing taxes on the $1,000,000-plus club, he believed taxes on everyone else should be left where they are – may be few in number compared with hardcore liberals or hardcore conservatives, but they are likely all to be found among the critical “swing,” or moderate, voters. I think the GOP has missed an opportunity to “lock in” the support of that group, and now risks losing some or much of it to the Class Warrior in the White House. And I think that’s a very big risk to take, just for the sake of maintaining rigid dogmatic purity, as opposed to strong directional consistency, on the subject of taxes.
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Comments:
Sep '10
Re: A Different Take On Buffett, Obama, and Taxes
Perhaps, though, it would be better to uncap the yearly limit paid into Social Security rather than increase the income tax rates for the rich-rich. Would that not actually offset the cost of entitlements, which would be a genuine positive, while increasing taxes on their income, given their ability of retain tax lawyers, might not result in much additional revenue?
Edited on September 22, 2011 at 5:48pmRe: A Different Take On Buffett, Obama, and Taxes
My understanding is that many conservatives oppose Buffett's idea because it would mean introducing progressivity into the capital gains tax (simply raising the income tax on income over, say, $1 million isn't going to affect very many people at all because the super rich don't earn their income from wages or salaries). And it's not just rich millionaires who are subject to the capital gains tax, but also businesses large and small that reinvest in themselves, and then after experiencing growth, are subject to the capital gains tax. It's not unimaginable that a higher capital gains tax, in addition to already high corporate taxes and income taxes would be enough to break some companies.
Mar '11
Re: A Different Take On Buffett, Obama, and Taxes
An uphill battle, indeed - kinda like the curve.
I think the current system is too progressive (the steep middle part of the curve), and favor a flatter, fairer, system such as Herman Cain's 999 proposal.
Then Mr Buffett and his secretary would both pay the same, lower, rate.
Even in the new system, Mr Buffett would be free to donate more to the Government, and pay the money he already owes them.
Edited on September 22, 2011 at 6:05pmSep '10
Re: A Different Take On Buffett, Obama, and Taxes
I am in agreement with you. First the GOP finds itself once again arguing against a populist proposal thus seeming to favor the rich over the poor. I realize not all of the GOP favors limited government; but limited government proposals favor the poor over the rich and happen to be at the same time better for both. How the GOP manages to portray itself as doing the exact opposite is simply amazing. Buffet’s original proposal would not have made much difference either to job growth or the deficit. Since income disparity is correlated with education disparity; the GOP could have earmark the funds for education vouchers for lower income earners. This could have proved quite interesting.
Apr '11
Re: A Different Take On Buffett, Obama, and Taxes
Steve, let me first applaud you on laying out a superb logical argument about this tax issue. Your premise that Republicans have missed an opportunity to win over moderates or anyone else who may think that our current tax system is unfair seems to me at least not what is the real issue at stake here. The wave of change that has come through public discourse and the 2010 elections revealed that we are on the precipice of fundamental ideas such as the rightful size and reach of the government, do your rights or entitlements change if your rich or poor, does it matter you're here in this country legally or illegally, etc. To me It's like we have a house, it started out modest, providing a roof over our head, just the basics but over time we have means for a second home or even a new and better one more lavish then the last. Since my means are unlimited (tax money), I just keep adding on, buying more homes justifying greater and greater amenities to fill each room, I deserve it.
Your argument is who should support this lifestyle not if it is necessary and proper.
Dec '10
Re: A Different Take On Buffett, Obama, and Taxes
“Negative short-term economic consequences” cause more harm to more families with less means to patiently await the long-term—hence, more class warfare demagoguery—than any possible aggregate benefit contradistinctively emanating from the penumbra of public “perception of the fairness of the tax system.”
Nothing can be more irresponsible than feeding Leviathan with more taxes.
Nothing in the real world is with a less metaphorical and more literal meaning of a bottomless pit than Washington.
This is fairness: No one pays over $100,000 in federal taxes. Leviathan can live off of that.
Tea party movement: Faster, please.
Edited on September 22, 2011 at 7:00pmSep '10
Re: A Different Take On Buffett, Obama, and Taxes
OTOH, I guess I'm sort of a Grover Norquist kind of guy; ie, we simply can't give this gov't any more money to blow. And we can't let the lefties know that we can be rolled on this; they'll learn the lesson that we're easy and they'll try to roll us again and again.
OTOH, because benefits are three times what we pay in, the Medicare payroll tax is gonna have to go up by a lot. Perhaps we could acquiesce to that with some serious effort to rein in Medicare's escalating costs.
Jul '10
Re: A Different Take On Buffett, Obama, and Taxes
The real question is why your graph isn't a straight, horizontal line in the first place. Why is it fair for one person to pay 25% while someone else pays 5%?
Jul '11
Re: A Different Take On Buffett, Obama, and Taxes
I think progressive taxes are quite disgusting by nature as are all loopholes. Can we just get simpler for a change. My life involves dealing with the ultra wealthy. Many of their ilk have taken their ball and left the sandbox because the feds do not play fair and are getting ready to be even worse.
On a separate note, I am positive revenue will need increasing but without real and meaningful reform I think the crack addicts in DC do not deserve anything more at all other than a pink slip.
Aug '11
Re: A Different Take On Buffett, Obama, and Taxes
I'm still trying to figure out posting with a 200 word limit. It's good for me to force myself to be concise. I'll try and figure this out.
You are right to point out that tax rates don't equal tax revenues. My rallying cry. I think that you dismiss this a bit too quickly. Echoing, Diane's point, not every business makes it into the "long term" and it isn't as though financial markets don't naturally go up and down. Keith Hennessy makes the point on his blog that gov'ts limit in tax revenue hovers historically around 22%. Even over the long run, we should be skeptical of our ability to take more through tax rates alone.
Also, I have concerns whenever we talk in static terms about the rich. Thomas Sowell opened my eyes. "The rich" over time, are a constantly changing group of people. Perhaps rich for a few years, not so rich all the time. Does that have something to do with "the really rich" not paying so much over time? I dunno. I'd guess yes.
Sep '10
Re: A Different Take On Buffett, Obama, and Taxes
I thought conservatives were supposed to be arguing for broad based tax reform? Lower rates, eliminate deductions, etc..
It seems to me that if we agree to the premise that we should tweak a few rates here or there on the highest brackets, it sends the signal that the current structure is more or less acceptable, and we have waived the white flag on true reform.
Re: A Different Take On Buffett, Obama, and Taxes
(warning: iPad post so typos inevitable). I've gotta disagree. 1) the graphs are wrong. They show individual taxation without the impact of upstream tax at the corporate level. If i own shares, the company's tax bill reduces their value as also the cash available to pay me dividends. 2) once you let that camel in the tent you will be debating in the liberal's happy zone eternally. What's the income threshold? Where's the phaseouts? Whether to index for inflation or not. All class warfare--bipartisan!--from here to the election. 3) in the interim, it's one more big area up for grabs and bound to get worse for investors and entrepreneurs. There are enough reasons to relocate to Singapore without creating another one.
Aug '10
Re: A Different Take On Buffett, Obama, and Taxes
Imagine two people who work the same job, the same number of hours, and do it equally well. But one of them works a part time job on the weekend, maybe to pay for special lessons for a gifted child.
When the two get their paychecks from the main job, one guy (the one with the weekend job) takes home less money for the same work, same hours, done equally well.
If that seems fair, then yes, progressive taxation is fair.
Re: A Different Take On Buffett, Obama, and Taxes
And we are back to accepting the "per year" poppycock. Entrepreneurs labor for years in the "middle class" to have a shot at exceeding "the rich" threshold one time. The more "fairness" piles up on the basis of $X "per year" the fewer small businesspeople striving, risking and investing. (My first company was financed by a really rich man writing a $500K handwritten check on his Wells Fargo account. Raise his rates and he may have decided to stay at his Lake Tahoe home in secluded retirement. Meanwhile, I would be unemployed, as also the many hundreds whom I've employed over the years)
Jul '11
Re: A Different Take On Buffett, Obama, and Taxes
I'm sympathetic to making taxes "more fair" (whose definition is another discussion entirely); there are plenty of carve outs in the tax system that I find jarring, unfair, and even unethical. My beef is that the entire argument Obama is making is not about tax reform, it's about divisive politics. It's premised on ONE guy's claims about how much he pays, extrapolated to imply that rich parasites are living off the system, republicans are the party of the rich parasites, and therefore vote for me. This is nothing more than a base pander. I will not give Obama the validation of even engaging his arguments, even if they have a hint of truth.
There are plenty of ideas on the right that deal with the real concerns of tax code cronyism: Cain's 9-9-9 plan, flat tax, fair tax, heck even Huntsman's plan. There is no reason to waste time on the age-old democratic stand-by of "tax the rich".
-E
Re: A Different Take On Buffett, Obama, and Taxes
If you go back and read Buffett's article, it's pretty clear he's not proposing raising taxes on the truly rich by raising the capital gains rate on everyone. What he's proposing is a sort of super-AMT that would only apply to people with incomes in excess of $1,000,000 per year. Since the number of these people is pretty small, and a lot of them work in finance, it's pretty obvious that the overwhelming majority of small business owners do not fall into this category. Thus, that overwhelming majority would not be affected by Buffett's proposal at all.
Jul '11
Re: A Different Take On Buffett, Obama, and Taxes
I am curious how these millionaire taxes are not basically taxation without representation. I bet that makes some people want to get a lobbyist or two.
I think Ayn Rand is rolling over in her amphetamine coated coffin right about now.
Mar '11
Re: A Different Take On Buffett, Obama, and Taxes
Actually, if we want to grow the economy, taxation should be *regressive*. That incentivizes everyone to be more successful.
The government makes doing business so difficult, that vast swathes of the economy are shaped because of taxes and regulations.
My company is incorporated overseas. When we go public, it will be in Singapore or Frankfurt. We have few or no US employees - despite many people working with us in one form or another. And if we did otherwise, we would not be in business: it is that simple.
Jan '11
Re: A Different Take On Buffett, Obama, and Taxes
Steve Manacek
If you go back and read Buffett's article, it's pretty clear he's not proposing raising taxes on the truly rich by raising the capital gains rate on everyone. What he's proposing is a sort of super-AMT that would only apply to people with incomes in excess of $1,000,000 per year. Since the number of these people is pretty small, and a lot of them work in finance, it's pretty obvious that the overwhelming majority of small business owners do not fall into this category. Thus, that overwhelming majority would not be affected by Buffett's proposal at all. · Sep 22 at 10:14am
Speaking of the AMT, wasn't that originally introduced as a special tax that only applied to a few select super-rich people? How's that been working out lately?
Jun '10
Re: A Different Take On Buffett, Obama, and Taxes
Don't give an inch. The drug addict must stop using. Cut the spending, balance the budget with the revenues we have. The tax code, like everything else in the Federal government, is on steroids. Simplify the whole thing. What is fair ablout attacking one very small segment of our society. Everyone has a cross to bear, so to speak. One person is healthy, happy, and poor. Another has millions, but his body is laced with cancer and his wife and kids hate him. Whose better off? Why should I be jealous? I have never been harrassed by a millionaire or billionaire. I wish i could say the same about my government. What if a person starts a business as a young man and runs the business for 40 years. He grows that business by re-investing his profits, but only after having paid taxes (as personal income) on those profits. Finally it is time to retire. He sells hios business and experiences a once in his lifetime event of several million dollars, one time, one year. This person should be castigated, set aside as example, and punished for his lifetime of work, which employed hundreds of people as well?