The Obama-Buffett Siren Call


The topic of tax increases is again very much in the news, and it is a topic that I have devoted my Defining Ideas column to this week.

President Obama has just announced his intention to put forward yet another tax plan to close tax loopholes and increase the marginal rates on the rich, which he now restricts to persons whose income is $1 million or more a year. In order to lend legitimacy to this campaign, he has chosen to invoke the confessions of Warren Buffett to justify his proposal. After all, if one of the richest of men alive is willing to accept tax increases on the rich, how could any mere millionaire oppose that position?

Mr. Buffet and the president are not alone in their determined inability to understand how economic systems work. Many people think that increasing tax rates on the rich will not negatively affect the economy. As one critic put it to me bluntly over coffee, “do you think that an increase in the marginal tax rate from 35 to 37 percent will change anyone’s behavior?” His next sentence was, in its entirety, “Get real!”

People assume that we are always at a point where there will be no reduction in output for any small increase in tax rates.  But this point has to be wrong. Just consider the basic laws of supply and demand. I explain further over at Defining Ideas. 

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  1. Profile Photo Inactive

    If a robber tells a victim, look, don’t worry, you’re not going to miss it … why does the victim feel compelled to justify keeping his own money? The victim doesn’t owe the robber a justification for anything.

    The professor offers a reasonable defense against critics who claim that raising tax rates won’t really affect behavior, but it isn’t necessary to even answer the claim. The government doesn’t have the right to confiscate your money just because you have it. They have the power to do it, of course, but that doesn’t justify it.

    The government spends money in two ways that matter here: on entitlements and on stimulus programs. On entitlements, taking a little extra money won’t fix the problem anyway. Taking a lot of extra money might fix the program, but it would then contradict the “you won’t even notice it missing” claim. As for stimulus programs, why should we pay for Obama’s reelection payola? Telling me that I won’t miss it doesn’t justify Obama spending it.

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    Saw the headline of your post and thought at first that Himself was heading down to the Keys for a little R&R. Paradise indeed, but if Michelle goes along, there will of course be no cheeseburgers.

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  3. Profile Photo Member

    From your article: ” Yet could the effect be as large as three percent? Why not. After all, there are so many ways in which productivity could decline.”

    There’s another factor bound up in that quote which should be considered. That is, many businesses work on relatively thin margins. That being the case, the 2% increase in tax rate works a larger bite into the number of actual dollars taken home by the business owner relative to the amount of effort he must expend to maintain sales at such a level as to make his efforts pay off to him. That increase in tax rates is psychologically more than the mere 2%. The owner of a business working on a 3% margin (a grocery store, for instance) will find it more difficult to justify expanding his business if the next 2% of increased sales goes straight into taxes.

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    “After all, if one of the richest of men alive is willing to accept tax increases on the rich, how could any mere millionaire oppose that position?”

    This calls to mind the logical fallacy (or whatever it is) that always seems to come from the Times or the Globe or any other Lib source. To wit: “Prison populations are exploding despite significant decreases in crime” where the word “despite” should actually be “causing.” Or something like that.

    The reason “one of the richest…men alive is willing to accept tax increases on the rich” is precisely because he’s one of the richest men alive, not despite it!! He’s so rich it wouldn’t hurt him at all, at least not substantively. He’s not at risk at all.

    You wanna see Buffett squirm? Tax wealth, not income. Then he’ll be singing a different song. For sure.

    (edit: mind you, I’m not advocating a wealth tax!)

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    Art Laffer has convinced me and therefore I have no quarrel with your position. However I think the wise response to Obama’s campaign speech, (once again there is no plan, why is he being credited with one) is to say no Americans, rich or poor object to paying necessary taxes if the taxes are indeed necessary and being well spent. The problem is they are not and there is ample evidence that based on the necessary and well spent criteria, taxes should be reduced not increased. People know the government is doing a horrible job in this regard. Green eyeshade arguments simply confuse the issue.

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    Professor Epstein, I’m thankful for the way you present and defend your positions in such a logical manner. It reminds me of the way I value C.S. Lewis in his defense of Christianity.

    Agreeing with KC, as I often do, isn’t there a moral argument that is missing. Why do we often start from the place of “so what is wrong” with something? Shouldn’t we be arguing from the premise, as KC stated, that who is first entitled to the money.

    We all drive by a gas station for mere pennies per gallon difference don’t we? I don’t do it because of the savings, but often because of the principle that I can choose not to.

    If some make the argument that it is trivial and that your money wouldn’t or shouldn’t be missed why isn’t that same weak logic applied to government programs. Why are the pennies or percentages critical to them but not to those who forcibly provide them.

    I don’t know which about President Obama is worse, his nihilism or his narcissism.

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    I wish someone would point out the following:

    Buffett owns something like 23% of Berkshire Hathaway. In 2010, Berkshire Hathaway’s income tax expense was $5.6B. Therefore, Warren Buffett’s pro-rata share of Berkshire Hathaway’s income tax expense was more than a billion dollars.

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    I have heard that Mr Buffet is in court on a tax dispute, where he disagrees with the amount the Govt. feels he should pay (believing his obligation to be lower). If this is true, the sheer hypocrisy is, wow.

    To the person who wants us to “get real;” increased taxes, increased uncertainty, increased regulation, topped off with incredibly incompetent policy execution, at some point takes its toll. That point has already been reached for me – I live and have bought into a start up on the other side of the planet.

    I find it amazing that we have reached the point where our own Govt. has the right to vilify sections of the populace and assert itself to the point where feeding the Government beast takes well over half a year of an individual’s labor……and then they borrow irresponsibly on top of that.

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    I believe in soaking the rich. I just have a different definition of it. The best way to “use” the rich to benefit us all is to keep taxes low on capital gains and dividends. That keeps their money productively invested in the private sector where it does the most good for our economy. Better to let the goose continue laying golden eggs that promote growth and employment, rather than forcing the goose to engage in egg-tax-avoidance behavior.

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    If you don’t believe raising the tax rate from 35% to 37% will affect anyone’s behavior, then you probably don’t believe that raising it from 37% to 39% will either. Or 39% to 41%. Or 41% to 43%. Or 97% to 99%. But unless you’ve managed to convince yourself that raising it from 35% all the way to 99% won’t affect people’s behavior, you must either admit that raising it from 35% to 37% will affect behavior by roughly 1/32 of what raising it from 35% to 99% would, or you have to explain where the magic threshold lies above which tax increases suddenly start to affect people’s behavior.

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