Warren Buffett on Taxing the Wealthy More Heavily—Posner

Two weeks ago Warren Buffett made waves with a brief op-ed piece in the New York Times of August 15 entitled “Stop Coddling the Super-Rich.” In it he says that very rich people are undertaxed, but he would leave the federal income tax rates of 99.7 percent of taxpayers unchanged and only raise the tax rates of taxpayers who report more than $1 million of taxable income a year; if they report at least $10 million a year they would pay an additional surcharge. But he doesn’t say what the increased tax rates on either group should be. He also wants dividends and capital gains taxed at the same rate as ordinary income but does not say whether he thinks the uniform tax rate should be the present income tax rate (except for those earning over $1 million a year and therefore liable for the lesser or greater surcharge) or perhaps a lower rate because it have a bigger base. 

Buffett’s piece is short, and really the only thing of interest, besides the celebrity of its author, is his claim, based on his extensive personal knowledge of wealthy investors, that increasing  the taxes on the wealthy would not cause them to invest less. He may be right but he does not discuss the distinct issue of whether they would invest differently. 

The growth of the federal deficit, which is growing from a very high level at a rate of well over $1 trillion a year, cannot be arrested without more tax revenues. The alternatives are spending cuts and rapid economic growth. They are attractive to many conservatives but will not cut the mustard. The needs of government preclude the kind of drastic spending cuts that would curb the growth of the federal deficit without any need for additional federal revenues. Diehard opponents of increasing tax revenues even by closing loopholes without raising tax rates argue that the federal government is too large and can only be made smaller by reducing its income. But this argument contains two mistakes. One is to think that the federal government can finance its activities only by taxation. Not true; it can finance them with borrowed money, as proved by the Bush tax cuts, which did not lead to a reduction in the scale or spending of the federal government, but merely to an increase in borrowing. Of course, as the federal government approaches bankruptcy, the pressure to curtail federal spending is great and an increase in tax revenues would alleviate the pressure, but probably only slightly because the feasible scope for such an increase is very limited.

Second is a confusion between size of government and amount of government spending. The federal government is not too large in the sense of having too many employees or even too many functions. We need a large military, and we need regulatory agencies that are well staffed—regulatory laxity was a major contributing factor to the financial crisis of 2008 and the broader economic crisis that it triggered. What we can’t afford is not federal employees (including soldiers) but careening entitlements. But the administration of vast entitlement programs is not particularly costly. A small government can transfer immense amounts of wealth among its citizens. The problem is the entitlements themselves, not wasteful expenditures on administering them—indeed the Medicare program would probably be more efficient, and, specifically, less susceptible to fraudulent and other overbilling and approval of unnecessary or marginal medical treatments, if the Medicare administration had more staff. 

Military spending cannot be cut significantly without endangering national security. Of course there is “waste” in military spending as there is in most activities, but bureaucratic and political imperatives, as well as the inherent uncertainty of threats to national security, place limits on economizing on military spending. Most of the other discretionary spending of the federal government (that is, spending that Congress must approve every year) is likewise justifiable, including spending on domestic security, infrastructure, the environment, basic research, and disaster relief, as well as regulation. Discretionary federal spending can and will be cut if the deficit cannot be reduced by other means, but it probably cannot be cut a great deal without inflicting costs greater than the benefits. 

Anyway the real threat to the solvency of the federal government doesn’t come from military expenditures, which would be leveling off even if there were no budget crisis, or other discretionary spending, which if it cannot be greatly cut can nevertheless be kept in bounds without great hardship. The real threat to federal solvency comes from the entitlement programs—Medicare, Social Security, Medicaid, and many others—not because they are huge, though they are, and certainly not because they are costly to administer, but because their outlays are growing rapidly, especially Medicare and Social Security outlays because of the aging of the population and the rising costs of medical technology as a byproduct of technological advance. Political resistance to cutting these programs, or at least to cutting Medicare and Social Security, is fierce. The programs may be cut some despite their sacred-cow status, but not enough to reduce the rate of increase of the deficit to the rate of economic growth. 

So can economic growth be increased, then? In the near term, the combination of poor economic leadership and management by the Administration with the economic radicalism of congressional Republicans makes it unlikely that the government will do anything to stimulate growth before the 2012 Presidential election and the seating of a new Congress in January 2013. Eventually the economy may rejoin its long-term trend of an annual growth rate of GDP of a little under 3 percent; whether there is a set of economically and politically feasible policies that would increase that rate seems doubtful. 

Which leaves increased tax revenues as a seeemingly indispensable weapon against the soaring deficit. Indispensable—but not ideal. Any increase in tax revenues would be counterproductive in the present depressed state of the economy, because it would take money out of the private economy at a time when the government can finance its debt cheaply by borrowing at very low interest rates. The increase in tax revenues would have to be phased in gradually and meanwhile the deficit will be growing. 

Merely increasing marginal income tax rates, even on the millionaires and multimillionaires and billionaires, is likely to be counterproductive. Unless the percentage increase is substantial, it will not generate much revenue. And if the increase is substantial, it will induce a flight to loopholes. (Buffett would close only two of them—dividends and capital gains—and there are many more.) Only if increased rates were joined with a thoroughgoing reform of the tax system that would eliminate virtually all deductions and exemptions would the increased rates generate substantially increased revenues by preventing a flight to loopholes. The reform would have to be precise, leaving very little for regulatory adjustments by the Treasury, and represent an unshakeable congressional commitment, eliminating all uncertainty so that taxpayers would know exactly where they stood. Meaningful tax reform along these lines, though falling far short of what was, and today is much more urgently, needed, was achieved during the Reagan Administration; there is no reason, other than interest group pressures and other political forces, why it can’t be achieved today. But those pressures and forces are great.

Comments

[an observer]

Tanstaafl asserts, "NEH's basic view is that prosperity flows from the sovereign. Thank heavens our forefathers rejected that mistaken viewpoint when they freed us from the British Crown."

First, history has shown, repeatedly, that slavery results in the greatest prosperity, which flows directly from the sovereign

Second, since the distribution of income is always a political question, in fact the opposite is true, and that is prosperity flows from more effective government, which is why, for example, the Founding Fathers ditched the Articles of Confederation for the Constitution with its stronger central government which could protect patents, and copy rights and promote interstate and foreign commerce. Read the Federalist Papers. Or study a little history and learn about the prosperity created by our Banking system, which is government through and through, the Eire Canal, the Transcontinential Railroad, or today our universities and basic research.

Where would we be today, but for the Fed's $107 billion loan to Morgan Stanley

From Bloomberg, today:

"By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

"Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress."

Last, only government can provide people with Vision and where there is no Vision, the People Perish. "Where there is no vision, the people perish: but he that keepeth the law, happy is he."

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I am not rich but I am well off compared to many on basic wages or the dole. I would prefer to be taxed more rather than protected by a human shield of suffering of others. My only requirement is that you spend the money wisely on improving conditions for everyone. I make decent $ money, well not so decent anymore lol, but things could be a lot worse. I just see so many of my friends and family out of work and broke that it gets to me. Why should I feel bad for the rich (and I mean wealthy) that manipulated our gov into catering to their greed?

[NEH]

Sorry, tanstaffl, I'm not about to do your reading and thinking for you and then tie it all up in a neat little box with a bow. It's called individual study and analysis, something usually required in College, unless of course you're a member of study group to cut down on the work load...

[TANSTAAFL]

Observer asserts that "the distribution of income is always a political question." Imagine how history might have unfolded, had Observer's view won the debate in 1776. Most likely we would remain colonists of Great Britain to this day.

Observer and all his/her kind (NEH included) favor authoritarian means of distributing wealth in the mistaken belief they would be permitted to fill the chamber pots, rather than empty them as Observer undoubtedly does today.

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[an observer]

Tanstaafl

The Founding Fathers revolted exactly because distribution of income is a political question and (implicitly) they wanted to change how it was distributed.

If distribution of income was not a political question, Why bother with a Revolution?

[NEH]

Observer, I could comment, but in this case silence is the greater virtue and probably better course... ;)

[JIm]

ssume subsistent existence. Am I required to work in my neighbor's field? probably not. Assume a division of labor (complex) existence. Does my physical and/or intellectual effort have to be shared with someone who's contribution is less. I would say yes in the complex situation assumming that the lessor is limited in some way. Otherwise no. And the only way for the sharing to occur otherwise is by coercion which will limit productivity or produce noncooperation. There is no way around it. We are either free or we are not.

[NEH]

Careful Jim, that's dangerous thinking. If you keep this up we're going to have to turn you over to the Overseers for "Reeducation". Think about it. "It is with our "bondage" that we all become truly "Free""... ;)

[TANSTAAFL]

Observer. You are incorrect. The Founding Fathers broke away from the British Empire because they recognized that individual liberty is the superior means of creating wealth. To those who would seek to control the distribution of wealth and, inevitably, the lives of others, individual liberty is too messy and disorganized, impossible to improve upon, and exceedingly hard to argue against. But keep trying. No one will hold it against you even though persuasion always eludes your grasp.

[an observer]

TANSTAAFL

Individual liberty is not the superior means of creating wealth.

Patents and copyrights both infringe on individual liberty.

Slavery produces greater wealth, which is why the South fought the Civil War.

Beyond that you keep saying that I favor some "authoritarian means of distributing wealth," which is a false statement, a lie, and a distortion.

I favor policies that will have the effect of redistributing income, because they will reduce or end the distortion of income distribution now worked by our political system that favors the extremely rich and Fortune 500.

For example, I favor ending FICA and income taxes, both of which are extremely regressive (and very expensive) as applied and replacing them with a VAT on everything, but especially property and casualty insurance.

For an additional example, I believe that any product or service, including software, that incorporates an idea developed directly or indirectly by research funded by taxpayers should have to be made in America.

I favor both stronger laws to permit many more people to unionize and much stronger laws to assure that unions are more honest and better managed (and that neither unions nor corporations can donated funds or participate, directly or indirectly, in elections.

None of this is about authoritarian distribution of income, so you have absolutely no idea what you are saying. You are nothing but a propagandist.

[David Fuller]

Posner, What regulations were inadequately enforced that led to the housing bubble? The Community Reinvestment Act? Perhaps your intellectual cronies at the Fed didn't see their part in the bubble and the catastrophic results. ( You missed the greatest bubble your lifetime!) Tell me why your Keynesian viewpoint does not inevitably lead to utopian socialism and its soulmates - communism/fascism.
Social security and medicare payments have not increased dramatically in the last few years. Why do you blame the 4-6 trillion dollars in new debt on programs that have not increased 4-6 trillion dollars? Your reasoning seems to be based on made up facts and idealogical certitude.

[an observer]

Fuller

According to your theories, we should be in the best of economic times. Never have the rich held so much of our national income and assets and taxes been so low.

1) Why are you so worried about straw men----utopian socialism and its soulmates - communism/fascism.

2) Why do we have so many people unemployed and underemployed?

[David Fuller]

Observer, Keynes came along in hard, desperate economic times - all of the solutions including Keynes involve market intervention by an elite group - all with bad results. The movie "Serenty"
was on TV last night. The premise of the movie was that governmental intervention to make everyone better was a disaster. Do you know any Keynesian that actually believe in markets, private property or efficacy of private enterprise. Name one who does not propose some sort of intervention by elite experts.
You did not answer the question about regulations or the role of social security in the new debt of 4-6 trillion.

[an observer]

David Fuller

Not only did I know that Keynes believed in markets, private property, etc., but (as do I) he believed that in good times taxes out to collected to pay down deficits.

That's why I support raising taxes on the rich---to pay for all the horrible results of Bush's wars and policies.

Beyond that, you just keep throwing out totally meaningless bs ("intervention by experts" or "regulation").

Do I support common sense regulation of air and water pollution---damn right---I am old enough to remember when we had neither and we are far better off. Do I believe we are dealing effectively and practically with climate change. No. I believe the left lacks the ability to be practical or effective, due to complexity of the issue and the range of solutions, and the right is incapable of any act of governance, period.

Do I support intervention by experts. Absolutely. Look at the great job the Fed did keeping Morgan Stanley open with $105 billions in loans.

Do I understand why people are so mad about such a success. Yes, that are jealous and mad at themselves for not being worth saving.

[an observer]

Capitalism destroys

http://www.bbc.co.uk/news/magazine-14764357

[Anonymous]

"Military spending cannot be cut significantly without endangering national security."

A broad assertion like this one deserves more discussion. Other economists have written about the folly of the United States' policy of subsidizing the security of its allies in its military spending.

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[Eleazar]

The rich should happily share their blessings and giving them higher tax is not at all burden if they sense that they can really help their fellowmen and the country.

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