Arnold Kling  

Stop Coddling Warren Buffett

Sounds Like PSST... A Day That Should Live in Infa...

He writes,

Last year my federal tax bill -- the income tax I paid, as well as payroll taxes paid by me and on my behalf -- was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income -- and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

His prescription is to raise taxes on capital income, otherwise known as savings. He is totally wrong about this. Editorial pages should stop coddling him by running his op-eds.

The statistic I would like to see is the amount of tax paid relative to consumption. By that measure, it is possible that Buffett's tax rate was more than 100 percent.

I do not care if he pays very little tax on saving. I would rather he pay zero tax on saving. His taxes are too high, not too low.

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COMMENTS (28 to date)
Lord writes:

The problem with low marginal tax rates is they promote consumption, not investment. It is high marginal tax rates that promote deferral.

Clay writes:

Would you like to give a reason why "He is totally wrong about this"?

John Goodman writes:

Excellent post, Arnold. You are absolutely right.

Ted writes:

I don't find his argument convincing since it's based on "fairness," which I think is a bad way to construct a tax system. But, it's important to recognize that given the current limitations of our tax system, mostly due to political reasons, there may be a very good reason to tax capital income at a high rate. It's well known in the dynamic optimal taxation literature that if you cannot condition labor taxation on age (or, alternatively, have the capital tax rate set as a decreasing function of labor income) then it is optimal to tax capital at a very high rate. Personally, I would argue for an age-dependent taxation system, but if we accept that age-dependent taxation is not possible for political reasons we may want high aggregate capital income taxes.

Martin writes:

Actually, i think he's almost right.

There really shouldn't be a capital gains rate... Treat corporate income as income and reduce corporate tax rates to zero and tax dividends as normal income.

This would make every corporation an S corporation with the exception that corporations can carry over untaxed income from year to year making interyear planning easier. This also reduces the corruption from corporations getting tax exemptions. Income is income and it should all be treated the same.

The issue, here, is that corporations are taxed, and incomes on capital income are essentially double taxed. Remove the double taxation, and fix the inter-year planning issues, and this would result in a dramatically more efficient tax system.

Ryan Murphy writes:

I thought the big problem here was the presence of inflation will wipe out returns.

From a purely neoclassical standpoint, I don't know why you would want to knock out all taxes on savings in favor of taxes on consumption. You'd get a bigger Harberger triangle.

nzgsw writes:

My "Wait, what did he just say?" moment in that op-ed was this statement:

"I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain."

Can this possibly be true? Or is he obfuscating with is phrasing (i.e. a "sensible" investment is defined as something that will achieve an appropriate gain when all costs, including high cap-gains rates, are factored in.)?

Bob writes:

The nonsense is even worse. Mr. Buffet has to be comparing his average tax rate to the marginal tax rates hit by others in his office.

Apples to oranges.

Zack writes:

Buffett owns 23.3% of Berkshire which paid $3.5B in income tax in 2010. His pro-rata share of that tax payment is $815 million.

Maxwell writes:

I find it interesting that Mr. Buffett insists that taxes on the mega-rich should be higher yet donates his own funds to charity rather than to government. Perhaps he believes charity offers a higher return (measured as a social good) to investment than government does?

effem writes:

I hate to break it to you but the army of hedge fund/private equity billionaires that are paying a 20% ish tax rate are able to classify all of their income as capital gains - even if not derived from their savings. I have a large moral problem with that while backing down on commitments to the poor. In many cases people have already planned their lives around those commitments as they were positioned as "permanent." Tax rules change every year - we know the game - no one views those as permanent and plans their life accordingly.

David C writes:

I second Clay's comment. And would add that there should also be a reason given for why he is unqualified to write columns about this.

Gary Rogers writes:

Don't look now, Mr. Buffet, but you are not being coddled you are being used. We want your investment. If the government takes another million dollars of your income to use on non-productive government spending, that is a million dollars that will not be invested in some enterprise. Please, you keep investing in companies that will become a success and create jobs while I work with my representatives in Washington to stop the spending.

Floccina writes:

If you have to lower someone's consumption for some else (Gov) to consume more then Warren Buffet is nearly impossible to tax.

Various writes:

Arnold, I'd recommend you submit an editorial to the WSJ. You have a good shot at getting it published.

Forbes writes:

Warren Buffett pays himself a salary $100,000 per year as CEO of Berkshire Hathaway--as he has for 40 years. With capital gains taxes at 15%, that's something like a $46 million gain he cashed last year. He could've paid himself a salary of zero and paid an even lower tax rate. By choice, he pays himself what he does, and he chooses when to take capital gains. Am I supposed to take his argument for higher taxes seriously?

W4LT writes:

On top of everything else that my able fellow commenters have raised, I ask: What the hell is Warren Buffet doing snooping into the tax returns of everyone in his office - and then sharing that information publicly?

Aaron Bernard writes:
His prescription is to raise taxes on capital income, otherwise known as savings.

Capital gains aren't savings. Savings is savings. Capital gains are returns on an investment. Similarly, income is the return upon labor.

For all of those who are saying Buffett is wrong because corporate income tax is a "double tax," then isn't it true that Buffet's secretary who works at that corporation also is being taxed doubly???!!! Her "effective tax burden" is also impacted by the taxes paid by the corporation.

Both of their income is reduced because of the prevailing corporate income tax and then one is taxed at a potentially much higher marginal income rate whereas Buffet gets taxed at 15%.

No matter how you slice it, Buffet pays about half the rate of tax of a guy who owns a couple of 7-11's. It's indefensible. Corporate income tax should be reduced to 0%, and all capital gains should be treated as income. Furthermore, they should all be reduced to the capital gains rate, not the capital gains rate increased to the income rate.

As it stands, a huge heaping of large corporations pay no income tax because of the Dan Mitchells of the world and their rapacious desire to find offshore tax havens in the Bahamas. So, contrary to the mantras of the supply-siders, they don't actually "pass the costs on" to the consumer, whereas small, arguably more honest companies do have to pass the cost on in the form of uncompetitive higher prices. It's cronyism plain and simple.

James writes:

Clay, he is wrong to claim that the problem with a too flat tax structure is for the government to raise taxes on the people at the top. Because the rich can afford to work less but the poor cannot, the relevant elasticities are much greater for rich than for the poor, and so most of the burden associated with taxation will be borne by the poor regardless of incidence.

Lord, I always thought the decision to consume now or consume later was a function of individual time preference, the market rate of interest, the expected ROI on available investments and expectations about the future prices and availability of goods. Why do you believe that higher marginal rates encourage postponing consumption?

peter jackson writes:

Taxing incomes, business or personal, is taxing production, specifically labor. And as with all things, we wind up with less of it because we tax it. Moreover, by taxing income we give the government a massive incentive to track our every move, lest, God forbid, somewhere somehow a dollar is earnt without being taxed. I've worked in the computer field for 20 years, and I can tell you that you would be shocked at the level of scrutiny possible with off the shelf technology, right now. With consumption based taxes, this onus currently focused on some 170 million workers shifts onto just under a million retailers.

We need to shake the fallacy that taxing income is the same thing taxing wealth. Under an income tax regime the wealthy are taxed, but so are a whole lot of non-wealthy people. It's the 21st century, it's long past time to actually progress a little—based on a modern understanding that taxing production is simply unintelligent—and reform accordingly. Let the United States become the Tax Haven to the World, and let's see if we make any money.

Buffet could easily write bigger checks to the U.S. Treasury. Instead,he's donated large amounts of money to the Gates Foundation. This suggests that he thinks that they will spend his money better than the Feds. So why should we listen to his calls to force other rich people to give more money to the Feds, when, given a choice, he does not do so himself?

Yancey Ward writes:

Aaron Bernard,

Then I can assume you would support lowering the corporate tax to zero and taxing all dividends and capital gains at ordinary income tax rates, right?

Aaron Bernard writes:

@Yancey Ward:

"Corporate income tax should be reduced to 0%, and all capital gains should be treated as income. Furthermore, they should all be reduced to the capital gains rate, not the capital gains rate increased to the income rate."

I think it's pretty clear that I do.

Craig Carey writes:

Why are you all analysing what the guy said? It's pretty cut and dry. The rich pay a lower tax rate because they pay for the elected officials. So, while it may seem to be a lot of taxes, in the mllions, percentage wise its less than the people in his office...By the way, he doesn't need to snoop around to find out what his employees receive and pay..HE PAYS THEM!! The guy is telling on himself and you all are disclaiming it. What's up with that??? It's like a guy saying he shot his friend, and you saying, "No you didn't you dont have a go to church..I saw you at 7-11"..etc Maybe you're just not used to honesty..

DougT writes:

My employer doesn't know what I pay in taxes, only what I have withheld. And if he told anyone else (without my consent), that would be a crime. What Warren did is pretty creepy.

But there's no way that other people are paying 40% of their income in taxes. Oh, wait. That's taxable income. After deductions. After exemptions. After tax credits. Oh--you think Warren, St. Warren, massaged the numbers? I'm shocked, shocked.

Warren Buffet advocates for higher taxes. Larry Ellison advocates for stronger intellectual property laws. Robert Gates advocates for a larger Defense budget. Surprised?

Aaron Bernard writes:


What Warren did is pretty creepy.

Warren Buffett has been using this example for almost a decade in uncountable numbers of books, interviews, shareholders meetings, quarterly emails, etc. It wasn't like it was some off-the-cuff thing.

But there's no way that other people are paying 40% of their income in taxes.

Are you kidding me? I guess you don't many income-wealthy people. The wealthier a person gets, the less the deductions matter in the overall percentage. If a person lives in a state with an income tax, that is added to the 35% the federal government takes from them. So, it's quite easy to pay 45% of your income directly in tax. However, very few states have capital gains tax.

Additionally, income wealthy persons don't get to decide that they're not going to pay income tax this year because they want the accrued result of compounding 35-45% more income a year and some point in the future they're going to cash out. Those who make their money in finance or capital gains can. Income earners can receive a very small deduction with a Roth IRA. But cap-gains earners have a difference of (.35 - .15 = .20) as a multiplier to a person's wealth over time (1.20^N) which is absolutely staggering.

All of the pro-capital-gains exemption "arguments" on this page are shocking in their hackery. They're analagous to "if Steve Jobs gets paid $100M in salary, he should pay $35-45M tax, but if Warren Buffett makes $100M in cap-gains, he should pay less than $20M taxes."

Jayson writes:

He was also trying to say that a positive npv project at the appropriate discount rate is positive no matter the capital gains tax. Its just a matter of how much of that positive return you pocket. If the project has a positive npv then you do it, period. People really need to study more of how finance people actually make decisions!

Bob Neal writes:

What about allowing the underground/cash/illegal economy to contribute? What about greatly increasing the tax base? What about giving each person their gross pay, with no payroll taxes, or federal witthholding? What about relieving low-income persons of federal taxes. We all pay embedded taxes on all goods and services purchased. VAT in Europe is recessive and mostly hidden.

The FairTax proposal will do all the above, but won't allow politicians to manipulate it. Remember, businesses don't pay taxes; they just collect and remit.

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