Warren on Wealth

The man who would pay more taxes...

Money, get back
I’m alright, Jack, keep your hands off my stack
money, it’s a hit
don’t give me that do goody good bullshit
I’m in the hi-fidelity first class travelling set
and I think I need a Lear jet…

People have asked me what I think of Warren E. Buffett’s editorial about taxes, so I thought I do a short post on some aspects of his commentary.

As Buffet notes, our wars are being fought by the poor and middle class. That is usually how war go-you generally do not see billionaires taking a bullet on the field of war. On the plus side, at least there is no longer the open practice of buying one’s way out of service by sending a substitute (a not uncommon practice during the civil war).

Buffet says that he paid $6,938,744 in taxes last year. As he points out, that is a lot of money. However, when considering taxes it is not just a matter of the total dollars-what also matters is the percentage. In Buffet’s case, that was only 17.4% of his taxable income, which is a pretty good deal. As he points out, most people who make much less pay a larger percentage of their income. Naturally, they will pay less in total dollars, but they will be giving up more of their income and thus have less left (both in terms of the percentage of income and, of course, total dollars).

On the face of it, this seems unfair. After all, the less wealthy are contributing a greater percentage of their income than the wealthy. This can, of course, be countered by the claim that the rich pay more taxes in terms of the total money and as such an individual rich person contributes more total dollars than a middle class or poor person. To use an analogy, if Sally is very strong and she is, along with Sherman and Winston, moving their Nordic Track, she might only be using 17% of her strength while Sherman and Winston are using much more as a percentage of their feeble power. Sally is, of course, doing more than her fair share because she is so much stronger than Sherman and Winston. Likewise, the poor and middle class give a greater percentage in taxes, but actually give less overall dollars.

This analogy works nicely in situations that are comparable to bearing a shared burden. However, the analogy seems to break when one considers income rather than strength. To use an analogy for this sort of situation, consider water. To survive, a person needs a certain amount of water and, likewise, needs a certain amount of money. If Sally has 1,000,000 times the water she needs to survive and meet her needs, then giving up 17% or more is not a hardship for her-she still has plenty left. If Sherman has just what he needs to survive, then any water tax would end up putting his life in danger. Likewise for money: people who make less are less able to afford the taxes because they are left with less with which to survive and meet their expenses. As such, taking more from those who have less seems rather problematic.

While Buffet argues for increasing the taxes on the rich, an alternative is, of course, to lower the taxes on the middle class and the poor. If Buffet is taxed at 17%, then perhaps the middle class should be taxed at 5% or 1%.

While this is appealing, there is a major problem: we need to have tax income in order to pay for things like police, defense, infrastructure, education, the CDC, the FDA, the FAA, the FBI, the CIA, and so on. In this case, the situation is something like the Nordic Track situation: we have a burden we must share and people must either contribute enough to carry the load or we must lighten the load. But, as noted above, it is also like the water situation: people need the income for their own well being and survival. So, the challenge is to leave people what they need to survive and thrive while also keeping our civilization going.

I agree with Buffet that it makes sense to have the rich contribute more than they do now, in terms of percentages.

Of course, as Buffet addressees, certain people will cry out that tax increases will destroy jobs. But, as he points out, the tax rates for the rich were much higher in the 1980s and 1990s. However, as history shows, people did not stay away from investing. While Buffet does not make this point, consider whether or not you would stop working just because tax rates had gone up. Obviously you would not-you still need (and want) money and hence will keep doing what you do to make money. People who invest money will not stop investing simply because of higher taxes. After all, they will still make money if they invest wisely.

Buffet also points out the fact that between 1980 and 2000 40 million new jobs were created. After the Bush tax cuts, job creation has slowed and we are experiencing high unemployment. If taxes were the main causal factor regarding hiring, what should have happened is higher unemployment in that time and high employment during this time of low taxes. As such, lowering taxes is not a magic bullet for unemployment.

Buffet also notes that, as always, the rich have gotten richer. In 1992 the top 400 taxable incomes added up to $16.9 billion, with a tax rate of 29.2%. In 2008, the income for the top 400 had increased to $90.9 billion, but the tax rate was 21.5%. Buffet does not note that income for the rest of us has stagnated or declined, which is a point worth considering. Given the massive wealth of the 400, it makes me wonder what basis there can be for crying that they have been taxed enough already.

Buffet concludes by contending that the rich should pay more, while the middle and lower classes should be left as is (that is, with the Bush tax cuts intact). His main argument is a moral one: the rich have much and many Americans are hurting. As such, the rich should pay a bit more for the good of the whole.

One stock reply to Buffet’s view is that rich people can pay more if they like. That is true-and, in fact, some rich folks have done just that. However, there is still the question of what is fair and right. Going back to the Nordic Track analogy, Sally could put in more effort if she wanted to, but there is also the question of how much she should contribute. One view is that those who are strong ought to help those who are weak and not merely please themselves. Another view is that the weak should fend for themselves and the strong should not be compelled or encouraged to aid those less able. There are, of course, other views-but these present the challenge in a clear manner.