David R. Henderson  

Warren Buffett--or Howard Buffett?

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A non-libertarian economist colleague recommended Warren Buffett's recent op/ed, "Stop Coddling the Rich," to me and I decided to read it for myself. I came away unimpressed. I won't do a full analysis, but I will point out a few of my disappointments and disagreements as well as one important point of agreement.

Warren Buffett starts off with his prime example of people who are sacrificing: "the poor and middle class fight [who] for us in Afghanistan." Put aside the fact that they're not fighting for me, nor, I suspect, are they fighting for many of the readers of this blog. I have opposed those wars from the getgo and I would have rather they not have fought, not have killed, and not have died.
But the other point is that they are all volunteers. So what they're doing is not sacrifice in the normal sense of that word. They are choosing what they regard as their best option. The people who are sacrificing for those wars are people who pay higher taxes because of those wars. Buffett could argue that the wars are being financed by debt rather than taxes: tax revenues are fungible so who knows. But debt generally leads to higher taxes in the future. And those taxes are likely to be disproportionately on those who are taxed heavily now. Of course, the government could default and then bond-holders would lose. But bonds are disproportionately owned by the wealthy.

His taxes were "only" 17.4 percent of his taxable income and, he writes, "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."
Here I agree with him that that's unfair. Those other people shouldn't have to pay more than 17.4 percent of their income in taxes. But does he advocate a tax cut for them? No. He says that he would leave their rates "unchanged." With friends like these . . .

Now one of the big ones. Warren Buffett writes:

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. People invest to make money, and potential taxes have never scared them off.

But doesn't the marginal tax rate affect what one regards as a "sensible" investment? Think of a standard investment decision where you have some probability of a big gain, some probability of a big loss, and a whole lot of other probabilities of lower gains or losses. If you look at the expected values, you'll conclude that a higher tax rate will push some otherwise "sensible" investments below the threshold. Is Buffett really saying that he and his investor colleagues don't do those calculations?

Warren Buffett writes:

And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what's happened since then: lower tax rates and far lower job creation.

But lots of other things happened too. The baby boomers got into their highest-income years and now a lot of them are in much lower-income years. Moreover, if you're looking at tax policy, you can't look at the 20 years between 1980 and 2000 as undifferentiated. 1980 started with top marginal tax rate of 70 percent that fell to 50 percent by 1982, 38.5 percent in 1987, and 28 percent in 1989 and 1990. Then Bush I and Congress raised it to 31 percent in 1991 and Clinton and Congress raised it to 39.6 percent in 1993, where it remained for the whole decade. There's lots more to say but his simple story is too simple by far.

Now another big one, probably the most important one. Warren Buffett writes:

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn't mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

I agree with his first sentence. I know fewer mega-rich than he knows (three, actually), but I have found them to be decent people. But notice what these decent people have done. He says it himself. They have donated to philanthropy. So given a choice between sending an extra check to the IRS and giving to a charity, they have chosen the latter. What does that say about what they think is the relative value of government spending versus charitable spending? Does Warren Buffett even pay attention to his own actions?

I wish Warren Buffett would emulate his father, Howard Buffett, the late Congressman from Nebraska. Howard Buffett decried the move to the welfare state. He wanted to end it. Also, he wanted the U.S. to get out of the Korean war and move to a non-interventionist foreign policy. Indeed, he was the campaign manager for Senator Robert A. Taft when Taft ran against Eisenhower for the 1952 Republican presidential nomination. I have a proposal for Warren that could cut tax rates for those whom he claims to care about and, at the same time, save having to raise tax rates on him and other rich people: get out of all the wars, close all the foreign bases, and save about $500 billion a year. His father would have liked that.


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CATEGORIES: Fiscal Policy , Taxation



COMMENTS (13 to date)
Blackadder writes:

Warren Buffett doesn't seem to understand the difference between marginal and effective tax rates. Which is pretty astounding if you think about it.

cjc writes:

@Blackadder, Oh, I'm sure Buffett understands the difference, but it's much better to conflate the two when he's pushing his rhetorical point. He's not stupid. Rather, he's deceitful here.

Ravi Saraogi writes:

With regard to the previous comment,

"Warren Buffett doesn't seem to understand the difference between marginal and effective tax rates. Which is pretty astounding if you think about it."

Lets just say that the world's most respected investor knows much more about marginal and effective tax rates than both the writer of the post and Blackadder can ever imagine.

Henderson says that, "But the other point is that they are all volunteers. So what they're doing is not sacrifice in the normal sense of that word." This holds true for any kind of "sacrifice", like when Mother Teresa choose to serve the needy, that was her personal choice. And hence according to Henderson, since it gives her utility to serve the poor, its not "sacrifice". Basically, we can get rid of the word "sacrifice" from the English dictionary because based on Henderson's criteria, nothing can be defined as "sacrifice". But all this is moot point. Coming over to more serious points.

"Here I agree with him that that's unfair. Those other people shouldn't have to pay more than 17.4 percent of their income in taxes. But does he advocate a tax cut for them? No. He says that he would leave their rates "unchanged." With friends like these . . . "

With regard to the above paragraph, Henderson fails to understand that Buffet is trying to advocate increase in taxes for the rich. How does this imply that he should advocate a tax cut for his employees?

With regard to this statement, "Is Buffett really saying that he and his investor colleagues don't do those calculations?", trust me Mr. Henderson, with close to USD50billion in wealth, you would not want to question whether he understands his investment decisions or not!

"They have donated to philanthropy. So given a choice between sending an extra check to the IRS and giving to a charity, they have chosen the latter. What does that say about what they think is the relative value of government spending versus charitable spending? Does Warren Buffett even pay attention to his own actions?"

Now the above paragraph is where the writer completely stops making sense. Why should Buffett's decision to donate to charity be extrapolated to him considering government spending to be wasteful?

This is like saying - Buffett gave money to a charity. Hence, all non charity universe is considered worthless by him.

He wants to help the needy with his wealth. Yes, one way of doing that would be to give money to the Government. However, government expenditure is diverse. It involves helping the poor, but it also involves sending space shuttles to moon. If a person wants to only help the needy, giving money to government rather than a philanthropic organization would not make sense.

John Jenkins writes:

Buffett doesn't want to help the needy. No matter how confiscatory the tax rate is *now*, he is set for life and won't suffer the consequences of a higher rate himself for long. He took advantage of an investor-friendly tax regime to make his money, now he wants others not to be able to follow him. Pretty typical.

He's also being disingenuous when he talks about his average tax rate, but not for the reasons described above. At the 15% tax rate for most of that income (capital gains, dividends before 2013), that means that it came from a c corporation, which itself pays a tax of about 34% of its income. Buffett is ignoring that tax, which necessarily reduced his income (if a C corporation has some value, x per share with the 34% tax rate, it will have some higher value with a lower tax rate, and dividends are not deductible for the paying corporation to an individual like Buffett). He's not stupid, so he knows that, he's just lying.

Martin writes:

"If you look at the expected values, you'll conclude that a higher tax rate will push some otherwise "sensible" investments below the threshold. Is Buffett really saying that he and his investor colleagues don't do those calculations?"

A profit-opportunity is a profit-opportunity no matter how small it is. As long as the profit-opportunity is larger than the available alternatives and more valuable than leisure - in the case of Buffett investment is leisure - the opportunity will be acted on and the investment will be made.

Remember Buffett doesn't really believe in risk and believes in that consistently applying his method will always yield profit. Taxes diminish that profit, but the profit is always worth more than any other opportunity open to him.

As for the charity vs government spending. The charity spending is his deferred income and the income he is talking about is the income he takes out of the company to use for his private investment and his other hobbies.

Blackadder writes:

Ravi,

When Buffett calculates his tax rate, he uses the effective rate. The rates he says his employees pay, by contrast, just happen to be the 25%, 28%, and 33% marginal rates, plus 7.65% payroll tax. If you believe one of Buffett's employees is actually paying 41% of his salary in federal income and payroll tax alone, then I have a bridge I would like to sell you.

Probably cjc is right. Buffett knows the difference. He's just lying.

Seth writes:
His taxes were "only" 17.4 percent of his taxable income and, he writes, "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." Here I agree with him that that's unfair. Those other people shouldn't have to pay more than 17.4 percent of their income in taxes.

Is that unfair? I believe his taxable income consists primarily of dividends and both he and you ignore the taxes paid by the dividend-paying corporation on his behalf (while inconsistently including all payroll tax paid on his behalf). If he included the taxes paid on his behalf by the dividend-paying company, I believe his tax rate would be much higher.

Also, if I were auditing Buffett's tax return, I might ask why he chooses to pay himself so little salary as CEO of Berkshire Hathaway. It's well below market averages for CEO's of similar companies, even owner-operators like himself.

Could it be to avoid paying the high tax rates on wage income?

George writes:

@Ravi

"How does this imply that he should advocate a tax cut for his employees?"

Well you can increase the "tax burden" on the rich in a number of ways namely keep all taxes the same and increase taxes on the rich, or keep taxes on the rich the same and reduce the "tax burden" of everyone else. Either way at the end of the day the rich will be paying relatively more when compared to everyone else.

I think Henderson was advocating the later.

Tom writes:

I thought Buffett was trying to preempt a class war against rich business folk by proposing a tax hike. You can pick at his analysis, but I think his main goal getting the rich out of the cross-hairs of Washington politicians. Being in their cross-hairs is just bad for big business.

I was surprised that he proposes relatively minor changes to the present tax system -- raising taxes on those making more than $1M. Why not a more comprehensive tax reform?

I wonder if he is actually trying to preserve the current, byzantine tax system. This would reduce the uncertainty that would accompany major tax reform. It would also favor businesses which use tax code to their competitive advantage.


David C writes:

"1980 started with top marginal tax rate of 70 percent that fell to 50 percent by 1982" - when GDP growth stagnated

"38.5 percent in 1987" - growth continued

"28 percent in 1989 and 1990" - growth stagnated

"31 percent in 1991" - growth started up again

"raised it to 39.6 percent in 1993" - growth continued

so when we cut rates, it tended to correspond with less growth, and when we increased rates, it corresponded with more growth, looking at the numbers closer makes his case stronger

GIVCO writes:

Buffett lowered his income taxes by deducting charitable contributions. He could've written an article chastising his employees for not giving away more of their income to charities.

Also, don't most economists view corporate tax burdens as borne by their shareholders (e.g., Buffett bears Berkshire's 35% corporate rate on his stock holdings)?

Blackadder writes:

Also, don't most economists view corporate tax burdens as borne by their shareholders.

I think the general view among economists is that all or most of the burden of corporate taxes are borne by employees is the form of lower wages. See here.

Jim Glass writes:

Buffett expanded at length about all this on Charlie Rose -- yet for some reason nobody mentions his far more comprehensive comments there. Such as, in his opinion:

1) Revenue should be increased to 19% of GDP, the long-term average over recent decades. Spending should be held at 21%, for a sustainable permanent 2 pt of GDP deficit. That 21% is a big cut from the current 24%, and a bigger one from projected future spending.

2) His tax increase would be only on persons with income over $1 million per year, not the Obama/Democratic $250,000. "In today's world $250k income isn't rich".

He makes no pretense that his tax increase would significantly reduce the defict. He said it would collect only $50 billion, with the deficit at $1.4 trillion. He said it was a matter of principle that the >$1 million per year people should pay more than others.

3) Entitlements should be means-tested, with the rich entirely out of them. "I get $30,600 from Social Security, partially tax free. This is absurd. People struggling to make ends meet shouldn't be paying me this."

For some reason, all the progressive media and blogs pushing the "Buffett says increase taxes on the rich!" story have been entirely silent about the "Buffett says slash spending and means-test entitlements!" stories.

As for people who say, "Buffett doesn't understand [incentives from taxes, marginal tax rates, whatever]" you can just forget that. (Why did he set up a tax-favored insurance company to invest through?) He understands everything entirely -- *especially* the public image he projects, which literally is worth like a $1 billion per deal for him *at the margin* (see the B of A deal).

Buffett is a naive Nebraska investor the way Joseph Welch and Sam Ervin were poor country lawyers.

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