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The Buffet Tax

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Clayton Posted: Sun, Sep 18 2011 7:15 PM

 

So, the latest FedGov scheme to raise taxes is from the old, old playbook: Let's raise taxes but only on millionaires.
 
Leaving aside the glaring moral problems with taxation per se, let's consider some problems with the Buffet Tax. First of all - as Thomas Sowell points out in his book Basic Economics - incomes can vary widely from year to year, especially for small businesses and independent entrepreneurs. This is a very difficult point for government bureaucrats - whose pay, promotion and pension schedules are written in stone eons beforehand - to understand. A million-dollar earnings could be a one-time culmination of many years of work, effort, planning and so on. Tax schedules assume a regularity of income that does not hold for many people; these people are treated especially unfairly by the tax code.
 
Second, the populist appeal of the "Buffet Tax" is the idea that people with "so much money" clearly have more than they could conceivably "need" and, therefore, there can be little harm in separating them from a good deal of it. However, this idea also makes many presumptions about how people use their money that are simply not true. Here in Portland, Oregon, we recently had a Gypsy patriarch put on trial for tax evasion and several million dollars was seized and stolen by the IRS. Surprisingly, the IRS was later forced by the judge to return much of it even before the trial concluded because the patriarch was (legally) holding a lot of the money in trust for other members of the local Gypsy community - like a bank, the money did not even belong to him. Joint family ventures can generate apparently large income revenues under one household. The tax code tends to punish such joint family businesses but where is the evidence to believe that such ventures are not actually more efficient, productive and beneficial to society overall than the regularized, monoculture, cookie-cutter model that the tax code assumes?
 
Furthermore, it is generally true that people who generate large incomes are also more frugal with their money. As Steven Landsburg argues here, this is (contrary to Krugmanite economics) beneficial to the rest of us. The more money which is saved by frugal, high-income earners, the more valuable the money held in savings by the rest of us becomes. The more money invested by high-income earners, the longer the time-structure of production can become and the cheaper the production of goods becomes. Either use of money enriches all of us by either increasing the purchasing power of our money or decreasing the sticker price of goods and services. Therefore, it is detrimental to the interests of the public at large to transfer wealth out of the hands of frugal, investment-minded, high-income earners into the hands of government bureaucrats and welfare recipients. The populist rhetoric is merely a veil behind which stands actually anti-populist policy.
 
It is viciously untrue that millionaires are generally paying less than their fair share of taxes or that they are not part of the middle-class. $1,000,000 today has the same purchasing power as $178,772.43 did in 1971 by the government's own cartoon CPI numbers. Millionaires were definitely considered rich in 1971 and someone earning $178,772.43 was definitely very well-off but it was hardly a rallying cry to "tax the $178,000+ income bracket!" In other words, the million-dollar number is blatant populism just like raising taxes on the $250,000+ bracket was. An eye surgeon and his wife - who owns two franchise McDonald's - could pull down a million dollars in a year. They are very well-off to be sure, but hardly "the 0.1% ultra-wealthy" that own half the damn planet between themselves. In fact, if you look past the numbers to the occupations of people who make a million dollars in a year, most of them are not titular elites. Many of these people grew up in upper-middle class families and managed to make something of themselves. That's their crime. 
 
But the populist rhetoric of FedGov wants to make these people out like pampered nobility who make a living gladhanding at champagne socials and afterwards making dirty business deals in smoke-filled men-only lounges. The bar for entry to the Elites is significantly higher than the man on the street - who is vulnerable to this sort of populist rhetoric - understands. Being a billionaire - or, more accurately, belonging to a family with a net worth in excess of $1 billion - is the bare minimum qualification. Either having a title of nobility or being married into a family that does is also nearly requisite. The disconnect between the public's perception of who runs the show and who actually runs the show is, in large part, responsible for the success of so many of these kinds pseudo-populist policies whose real effect is decidedly anti-populist.
 
Finally, forget trickle-down economics - trickle-down tax-brackets is more like it. Today, the poorest pauper who earns even $5 in income is taxed at a rate higher than the highest tax bracket when the Federal income tax was first imposed on Americans in 1913. While tax brackets have fluctuated wildly over the last 100 years, the steady devaluation of the dollar has created an ever-lowering threshold to higher taxes. For example, the above chart might give the impression that, by 1932, low-income Americans were paying taxes similar to today's low-income Americans, but this is neglecting inflationary devaluation. In 1932, Americans earning $10,000 were earning the equivalent (by the government's own CPI funny-math) of $165,361.31 today but were paying just 10% in taxes. So, you can see how inflation - even neglecting the fact that it is a tax in itself - combines with the income tax schedule to form an insidious "rachet" effect on tax-bracketing.
 
Clayton -
 
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Wheylous replied on Sun, Sep 18 2011 7:30 PM

The more money which is saved by frugal, high-income earners, the more valuable the money held in savings by the rest of us becomes.

Do you mean because of investment or because of keeping money from flowing and thus causing deflation?

it is detrimental to the interests of the public at large to transfer wealth out of the hands of frugal, investment-minded, high-income earners into the hands of government bureaucrats and welfare recipients.

Don't get me wrong, I agree with you, but the counter to what you say is "these people need money now, not 10 years later when bread will become 30 cents cheaper thanks to more capital investment."

 forget trickle-down economics - trickle-down tax-brackets is more like it.

yes to the catchphrase

 the above chart might give the impression that, by 1932, low-income Americans were paying taxes similar to today's low-income Americans, but this is neglecting inflationary devaluation.

You think those numbers are not adjusted for inflation? (at least in the government's inflation index?)

If that is true, then it brings a whole new meaning to "inflation tax." Oh wow. If that is really true, then the public has severely, and very clearly, been duped.

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Clayton replied on Sun, Sep 18 2011 9:28 PM

 

Do you mean because of investment or because of keeping money from flowing and thus causing deflation?
 
Deflation due to lower supply of money (as money is taken out of "circulation" and stored in Scrooge McDuck's vaults, the purchasing power of money increases).
 
Don't get me wrong, I agree with you, but the counter to what you say is "these people need money now, not 10 years later when bread will become 30 cents cheaper thanks to more capital investment."
 
Yes, government bureaucrats will starve to death unless they get to suck our blood. As far as pressing needs of the poor, no one is saying that charitable giving is not important - often life-saving - we're only disputing the government takeover of the charity industry by welfare programs. So, the immediacy of the need is neither here nor there. Furthermore, the popular benefits of the frugality and investment-orientation (i.e. low time-preference) of the wealthy are also immediate. It doesn't take 10 years for prices to go down as the money supply decreases and as products become cheaper to produce through expansion of the division-of-labor.
 
You think those numbers are not adjusted for inflation? (at least in the government's inflation index?)
 
I'm pretty sure they are not inflation-adjusted. Yes, we are being systematically hoodwinked.
 
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Barty replied on Sun, Sep 18 2011 9:34 PM

Clayton,

I just want to say out of all the message boards I frequent I always look forward to reading your posts the most. You bring a fresh and thoughtful perspective to these boards.  Keep it up. yes

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Wheylous replied on Sun, Sep 18 2011 9:58 PM

Deflation due to lower supply of money (as money is taken out of "circulation" and stored in Scrooge McDuck's vaults, the purchasing power of money increases).

Do the wealthy keep their money in vaults and safe commodities or do they invest it? Do the two have the same benefit for the public? If the money is invested, production becomes cheaper. If it is stored away, deflation increases purchasing power. Can anyone evaluate the relative effects of the two?

 

While we're on the topic of the Buffet Tax.

The general reply to the Buffet proposal is "so why don't you donate the money yourself?"

I assume the standard counter, then, is "because everyone must do it otherwise it's ineffective."

Today I considered that one answer to that might be "ah, right. Apply the same principle to charitable giving, and because not everyone is donating, donating anything at all is inefficient!"

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Clayton replied on Sun, Sep 18 2011 11:53 PM

 

Oh, one other point that I forgot to mention that the video reminded me of: Why doesn't anyone ever consider the possibility that Warren Buffet wants taxes raised because he actually benefits from it? No one doubts that a wealthy nobleman 200 years ago who wanted to raise taxes was acting in a self-interested manner. He wasn't trying to "level the playing field" or "provide for the common weal", he was just exhibiting common avarice. The Official Fairy Tale of Democracy says that all titles, nobility, royalty and so on magically disappeared sometime in the late-19th, early-20th century so when politicians say they want to raise our taxes, they really are the do-gooders they pretend to be. But what about the lobbies? Don't they benefit from increased taxes which provides increased government revenues with which the government can purchase their products and services (e.g. defense industry, of which Buffet doubtless owns stock in many companies) or enforce the regulations that keep profits in their industry high (e.g. the railroads that Buffet owns), and so on? So, maybe the supposedly "do-good, give-it-all-to-charity" super-wealthy such as Buffet are not as selfless as they promote themselves to be.

@Barty: Thanks for the positive feedback, it's encouraging to know that there are people who benefit from reading what I write.

@Wheylous:

Do the wealthy keep their money in vaults and safe commodities or do they invest it? Do the two have the same benefit for the public? If the money is invested, production becomes cheaper. If it is stored away, deflation increases purchasing power. Can anyone evaluate the relative effects of the two?

Presumably, they do both. Savings (not investments) is a crucial part of self-insurance. You can't buy insurance for every kind of risk. However, you can always self-insure (save money under the mattress). This is even more important for the wealthy than it is for the man on the street.

I doubt the relative effects can be quantitatively compared but I'm sure a lot more can be said by real economists about the "positive externalities" of the two.

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John James replied on Mon, Sep 19 2011 12:17 AM

Just fyi, "Buffett" is spelled with two t's.  "Buffet" is what you get at Shakey's Pizza.

 

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Clayton replied on Mon, Sep 19 2011 12:35 AM

@JJ: Argh, I hate making those kinds of mistakes. Thanks for the catch.

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Kakugo replied on Mon, Sep 19 2011 11:50 AM

Clayton, your mention of "Why doesn't anyone ever consider the possibility that Warren Buffet wants taxes raised because he actually benefits from it?" made me remember this was often the case in the past, back when "democracy" was just a memory from Ancient Athenian history.

For example during the so called "struggle for survival" of the Byzantine Empire (VII-VIII century) great landowners and other "super-rich" all agreed on increased taxation on their part. Yet this wasn't done out of patriotic fervor. In return the Emperor was to give them (or their descendants) privileges of some sort. Sure, the Emperor could just have tried and made a grab for their money without asking but in those volatile times a man could find himself wearing the purple and commanding thousands of men one day and killed by his own military officers three months later without anybody raising a hand to defend him. What's changed? The mega rich like Buffett can stand losing a few extra millions but in return they want something. Whatever is more political power or something else it doesn't matter.

But more crucially this has a profund effect on the average Joe and Jane. It strips them of any possibility to defend against tax increases of any kind. "Even Warren Buffett wants to save this country from bankruptcy. You should just pay up front and shut up". This means there will be less politicians willing to make a stand against tax hikes and inflation, the media will become even more pro-Big Government and any talk of "you are sapping the lifeblood out of us" will be deemed the rants of selfish spoiled children.

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I find it amazing that they still think lack of funding is the problem.

"if only we had more money..." politician

 

Usually any changes in tax will increase the total tax intake of government. From what I have seen they use any sort of excuse to increase taxes on the population. They even brought income tax in on the basis and justified the tax by calling it a temporary tax and we still pay it today. If they were to increase tax on a specific group and decrease it on another and then at the same time reduced the total tax intake. I would be ok with that, as I see it as any reduction in taxation in total is a good thing and any increase in total taxation is bad.

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Clayton replied on Fri, Oct 14 2011 1:13 PM

http://www.dailyfinance.com/2011/10/12/billionaire-warren-buffett-earned-62-855-038-in-2010/?ref=mostpopular

Buffett earned $63M last year.

ROFLMAO

Aren't people capable of basic arithmetic? At that rate, it would take Buffet 16 years to save up a billion dollars if the world works as our Rulers would like us to believe it does. To save up his current net worth of $39 billion would take 624 years at this rate. 

Buffett's net worth grows at a much faster rate than his income could possibly account for, in large part due to his proximity to the Money Fountain, that is, the central bank. It also strains credulity that a multi-billionaire does not avail himself of the facilities for concealing his true income and net worth that millionaires use (overseas banking, tax havens, estate planning, etc. etc.)

I will reiterate what I pointed out before: has it crossed anyone's mind that perhaps Buffett wants to increase taxes because, being such an integral part of the system, he actually profits from higher taxes?

Look at the railroads he recently purchased, for example. Much of the land for those was seized through eminent domain, they are a highly regulated - protected - industry and the chances for new transport competition are essentially zero. His investment strategy is "invest in American value"... i.e. own Coke, own Ford, etc. This makes him a darling of the Establishment for the same reason that the hedge fund managers and speculators are the Establishment's Public Enemy #1. Buffett is Establishment and the Establishment is the network of families, businesses and political leaders who are the first, primary beneficiaries of government spending (tax revenues+debt+inflation).

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Wheylous replied on Wed, Nov 28 2012 9:39 AM
"forget trickle-down economics - trickle-down tax-brackets is more like it." I remembered this from when you wrote it and I recently rad about it in my econ textbook - turns out tax brackets are inflation-indexed.
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