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:
Re: A Different Take On Buffett, Obama, and Taxes
If fairness is the issue, why don't you propose that people who make less than $100,000 per year pay their fair share. They get nearly all of the benefits of governance provided to the rich, but they get them free. Progressive taxation is just another term for theft.
Jun '10
Re: A Different Take On Buffett, Obama, and Taxes
Warren Buffet never cared about paying too little taxes as a young businessman...that's my bet.
Jun '11
Re: A Different Take On Buffett, Obama, and Taxes
As a graph junkie you should be aware this one is misleadingly plotted with a nonlinear horizontal axis. The steep climb in rates for the folks making $200K-$800K would go away if the scale were uniform. Lies, damn lies, distorted graphs.
On the other hand, taxes are not really as progressive as this looks because payroll taxes (SS & Medicare) are not included. It's more valid to lump them in- that money's paying current federal bills.
On the major point: How much is a high enough percentage for anyone to pay in federal taxes? I think the "big chunk" even Elizabeth Warren thinks you should keep should be at least 75%.....which it is now, by this graph.
Jun '11
Re: A Different Take On Buffett, Obama, and Taxes
Or, well, my 75% number would suggest I'd go along with a sort of AMT on people making more than $2 million, which will result in no significant revenue, now let's figure out where to cut the federal budget and actually solve our problems.
Mar '11
Re: A Different Take On Buffett, Obama, and Taxes
Leaving aside the question of whether progressive taxation is in itself a good or a bad thing is pretty big question to leave aside.
You're essentially saying, “Let’s not focus on whether or not policy X is a good idea, let’s just debate whether or not we should have more of policy X.”
And it’s not like Adam Smith didn’t get anything wrong. But the notion that Adam Smith supported progressive taxation belies a potentially poor interpretation of the relevant passages. To the point, he specifically uses the phrase, “taxation in proportion to revenue.” Progressive taxation is necessarily taxation that is disproportionate to revenue. From what I can tell, the closest Smith comes to supporting higher taxes for the rich is when he suggests that “luxury” items be taxed at higher rates than items of “necessity.” Sounds more like a consumption tax to me.
Feb '11
Re: A Different Take On Buffett, Obama, and Taxes
Bear in mind that the capital gains tax rate is extremely misleading in an inflationary environment...what looks like a 15% rate can in reality be much, much more when the effect of declining dollar value is taken into account. In some cases, the effective tax rate can actually be more than 100%.
Mar '11
Re: A Different Take On Buffett, Obama, and Taxes
There is a moral dimension here
Whiskey Lima: Leaving aside the question of whether progressive taxation is in itself a good or a bad thing is pretty big question to leave aside.
You're essentially saying, “Let’s not focus on whether or not policy X is a good idea, let’s just debate whether or not we should have more of policy X.”
You put your fnger on it here. Taxation is not just about what works. It also has a moral dimension: what is right?
I would claim that using coercive force to take something that belongs to someone else is wrong, so to the extent that society does it, it should do it as little as possible.
Edited on September 22, 2011 at 9:48pmFeb '11
Re: A Different Take On Buffett, Obama, and Taxes
Also, since Buffett keeps talking about his secretary: a CEO of my acquaintance valued his secretary (whose role was quite a bit broader than the term may suggest, which is the case with many executive secretaries) that he got her a substantial option grant. Too bad Buffett doesn't do the same for his secretary.
I'm not sure exactly how much money the options turned into, but it was at least several hundred thousand $ and maybe more like a million. She took the proceeds therefrom and has started several businesses. This was another example of the lumpy kind of income stream that George Savage talked about above.
Had higher taxes been assessed on her for being one of the "rich," then she might not have been able to create businesses, at least on the same level. But just think: more money could have been directed to Solyndra, ethanol subsidies, etc.
Jan '11
Re: A Different Take On Buffett, Obama, and Taxes
The rhetorical problem with your argument, Steve, is that you're trying to defend extending the progressiveness of the tax system, but you skipped over the justification for any progressiveness in the first place.
The fact is, I don't accept the first premise (that taxation must be progressive), but I'm in no position to defeat it. America accepts it, of course, but that only makes it law ... it doesn't make it right.
Jan '11
Re: A Different Take On Buffett, Obama, and Taxes
As it is, I’m sympathetic to progressive taxation only because it takes less from poor people. Taking less from poor people is merely a small act of mercy. But mercy and justice are two different things. I’m happy to allow poor people to pay less, but if some politician interprets that to mean that rich people should pay more, then he’s misinterpreting mercy for justice.
Look, to help poor people, we’re willing to shade a little “justice.” But it isn’t justice, it’s mercy. So if others come along and try to extort money from the rich by “arguing” that if we accept progressive taxes, we MUST take more as people get richer … then that’s not mercy anymore. It’s the con job that smooth talkers can pull on unsuspecting, good hearted people.
The fact that this con job happens to coincide with politicians gathering more money … I’m sure that’s just coincidence, right?
Jun '11
Re: A Different Take On Buffett, Obama, and Taxes
Steve Manacek: 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.
How about this? We get the government out of cowboy poetry and interpretive dance stuff and then we can talk.
Sep '10
Re: A Different Take On Buffett, Obama, and Taxes
Right on Michael. Every time an example of ridiculous spending is raised it is argued that people should stop complaining about such a small part of the budget. That program remains and 3 or 4 more get added. Cut something for once and then, maybe, we can talk.
Aug '10
Re: A Different Take On Buffett, Obama, and Taxes
To have a rational tax debate, it's important to separate philosophy from policy options. Debating the morality of taxes is a valid discussion to have when talking about philosophy of government, but if you're trying to determine the correct policy proposals for a presidential candidate, you have to limit the debate to the realm of the possible. What policies would result in a tax system that is closer to the philosophical good, while still being palatable to voters in a general election?
I've been a libertarian most of my life, and the Libertarian party provides an abject lesson for what happens if you can't learn to separate the philosophical ideal from the politically practical. The Libertarian party never figured that out, and it became defined by people arguing over whether there should be any taxes at all and whether the police should be privatized.
The result: In a country where anywhere from 15% to 49% of the population could be described as being somewhat-to-very sympathetic to the general libertarian viewpoint, the Libertarian candidate could never muster more than low single digit vote percentages.
So what debate are we having here? Practical or philosophical?
May '11
Re: A Different Take On Buffett, Obama, and Taxes
The original income tax was 1-6% That era's version of a billionaire (earning more than $250,000/year, not adjusted for inflation) paid 6% in 1913. By 1918, people in the lowest taxed group were paying 16%
The history of the Alternative Minimum Tax is similar. Originally targeted against only the super-rich, it quickly found its way into the middle class.
Give Obama a new, higher tax bracket, and it will migrate into the middle class in short order. There is a reason they call it a slippery slope.
Besides, the whole premise is flawed. People earning more than $10 million pay less income taxes because many of them (including Warren Buffett) are business owners. Count in the double taxation on corporate earnings at 35%, and they are paying far more than what the graph suggests.
One last point. The tax burden does not necessarily fall on the person who pays the tax. It gets passed on. The sales tax is a perfect example. Uber-rich Walmart pays billions in taxes on its sales. Every penny of that gets passed on to Walmart's customers. It says so right on your receipt.
May '10
Re: A Different Take On Buffett, Obama, and Taxes
Buffett's proposal is not new- he was pushing a version of this back in pre-Joe the Plumber days as well, according to Greg Mankiw's paper for the National Bureau of Economic Research.
I honestly think that Steve's point is well-taken, but will be a noise-level issue. Why? Because the tax equity problem is so far dwarfed by the total expenditures issue that it isn't particularly relevant.
He is right- you can philosophically argue that there should not be a nasty hockey-stick at $200k (and there shouldn't), but that dive down at the far right end of the makes no sense. What we are arguing about here is the proper shape of the curve before $2 million, not the dip at $5 million.
Our fundamental political problem is how to address the noise-level politics-of-envy campaign themes. And we have done an horrific job of that so far- why? Lack of message discipline. The core problem is post-2007 spending- after that is controlled, we can talk revenues and "fairness.
But I still don't see every single Republican spokesperson pounding the message and showing this graph at every appearance.
Feb '11
Re: A Different Take On Buffett, Obama, and Taxes
Steve M.- Kudos for taking up the task of making an unpopular argument, and good work.
While I think Obama's tax proposal is a lie and a fraud I was shocked to see people here agonizing about the heavy tax burden faced by people such as Warren Buffett.
One he plainly doesn't want that and two it won't help conservatives win elections. No middle class person, voter, feels any pity for poor put-upon Warren Buffett, billionaire, because of his tax bill.
Once the principle of progressive taxation is conceded- which it was, decades ago, why shouldn't Buffett's taxes be higher than the average taxpayer? Or at least the same as that of the average family?
I am not in favor of progressive taxation, by the way. The GOP should be arguing for a flat tax, and also making the case that at some point folks have in fact paid their "fair share" and should be excused of further guilt about taxation.
I won't hold my breath.
Feb '11
Re: A Different Take On Buffett, Obama, and Taxes
I hope I'm not being unfair to complain, but when I watch something between a third to a half of my income vanish to taxation I do not believe I'm getting the benefits of governance for free.
I know the dollar amount I actually pay in taxes is a merely a rounding error in Warren Buffett's landscaping bill, but the dollar amount still matters to me.
I earned that money, and I want to keep it. This seems to me an important principle, and I wish the GOP would advocate it.
The democrats certainly won't.
Edited on September 23, 2011 at 5:42amDec '10
Re: A Different Take On Buffett, Obama, and Taxes
One may speak for oneself but not for those writers of the posts above who are among the middle class and do feel the pain of every taxpayer’s tax bill. They are not alone, hence the Democrats’ necessary perseverance in the use class warfare rhetoric to subvert the instincts of voters imbued with our American way of life.
Accumulated capital expands the tax base not when it is taxed or confiscated but when it is invested in businesses. Singapore or Red China? West or East Germany? Curaçao or Cuba?
When we serve Leviathan with taxes in excess of the needs of its enumerated powers, the taxes of the Buffetts, Leviathan’s only priority is serving the purposes of Leviathan, not ours. It is a pity to acquiesce to tax bills that enable its morbid obesity, the debt and inflation collapsing the value of our currency as a result of its binge spending, and to believe all middle class voters are indifferent to creeping collectivization that always culminates in killing the beast and many of us with it.
Feb '11
Re: A Different Take On Buffett, Obama, and Taxes
Charles Gordon
One may speak for oneself but not for those writers of the posts above who are among the middle class and do feel the pain of every taxpayer’s tax bill.
Are you seriously arguing that middle class voters who surrender an incredible portion of their income to taxation agonize about the struggles of Warren Buffett?
Really?
I don't. It isn't because I like taxes or wish ill upon the rich including Mr. Buffett but because I'm in the same sinking overtaxed boat as most rich people.
Bluntly, the United States has become an ugly place to do business. That harms everyone, including Warren Buffett.
The GOP needs to notice that, and stop merely hand-wringing about the heavy taxes rich people pay.
Yeah, they pay heavy taxes, but so do I, and the GOP never seems to get around to arguing that people can actually pay their fair share and should cease accepting any sort of guilt about that.
Re: A Different Take On Buffett, Obama, and Taxes
Yes, I am aware of that -- this just happens to be how the IRS buckets its data, and I have no research staff to figure out how to translate the data accurately to a true linear axis. I should not have used the word "steeply;" otherwise I stand by what's written.