Buffett's "Fair Share" Smokescreen

Buffett’s “Fair Share” Smokescreen

Warren Buffett’s taxes are front and center of a new round of class warfare.

The image of a large group of fat cats, living lavish lifestyles while others face layoffs and rising costs of living, is being used to push for more taxes. 

Increasing taxes on the rich is unjustified.

Their argument appeals to some people through its vague innuendo.  But look carefully and it falls apart, leaving nothing but the desire to punish the rich because of their wealth.

The argument hinges on the notion that the rich don’t pay their “fair share.”  The claim is that some people making more than $1 million a year are paying lower tax rates than middle-income workers.

Not according to IRS data.

As the Wall Street Journal points out, the rich don’t pay a lower average federal income tax rate.  Earners with an adjusted gross income of $50,000 - $100,000 pay 8.9%, while $500,000 - $1,000,000 earners pay 24.1%.  So as a group, the rich in fact pay higher taxes, in both relative and absolute terms.

Buffett has argued the rich derive most of their income from investments, paying a long-term capital gains tax rate of 15%.  Those earning as much as $200,000 pay on average 12.7% in federal income taxes. 

Even on those terms, Buffett is wrong: in general terms, the more money you make, the more you pay in relative and absolute terms. 

There is not a big group of fat cats avoiding the tax code.  The folks at Motley Fool  found that only 20,000 people in 2009 earned more than $1 million and paid a lower rate than the middle class.

The Cato Institute came to the same conclusion: Buffett is wrong. 

The “fair share” argument is a package deal, counting on the undefined meaning of tax fairness.  The term could mean all sorts of things: a more progressive tax, a flat tax rate, or a simplified tax code.

When the details of a package deal like this one are made explicit, it falls apart.  The political value lies in keeping it ambiguous and non-specific.  Let voters interpret it as they wish.  After all, that approach worked for “Hope and Change” in 2008.

Notice that the details don’t matter in another respect: the goal is to raise taxes on the rich.  The point is the increase, regardless of exactly how much or on what precise basis.

If the issue really were fairness, the debate would be about the tax code as a whole, not about how (supposedly) wrong it is for some to pay less than others.

If it were really about fairness, the debate would focus on how to make taxes fairer, and different approaches would be suggested.

Some would suggest a simple, flat tax rate.  Others would counter that that isn’t fair because the rich would be paying more in absolute dollars, so the tax should be a fixed dollar amount for everyone.

Some would argue for closing loopholes and ending exemptions, as they unfairly benefit a few.  Others would push to end tax credits for the same reason.

Some would point out that the rich have a greater ability to pay taxes without impacting their lifestyle.  Following Marx (“From each according to his ability, to each according to his need”), they’d push for a far more progressive and redistributive tax code, with the wealthy paying a much higher rate, and the poor actually receiving a subsidy.

A debate of this kind would be healthy, as the tax code needs a major overhaul.  Instead we are debating how much more the wealthy should be paying.  It panders to envy and class warfare.

If the goal really were fairness, it would not necessarily follow that taxes should go up on one group.  Lowering taxes on others would achieve the same end.  If Buffett is paying less than his secretary, why raise his taxes when you could lower hers?

Raising taxes punishes the taxpayer.  That is the idea behind “sin taxes” on cigarettes, gambling, “gas guzzler” cars and the like.  The tax code is used as an enforcer of moral judgment, punishing bad behavior through taxes or rewarding good behavior through credits, deductions, loopholes and subsidies.

Recall that the tax code is very progressive.  It taxes higher incomes at higher rates; the harder one works, the more one pays.

The tax code also redistributes wealth; the less one works, the more one is rewarded.  Many poor are literally living at the expense of the wealthy. 

If anyone should be morally condemned, it is those living on the backs of taxpayers.  They treat taxpayers as slaves, with themselves entitled to the benefits of the actions of others.

This is a condemnation not of poverty, but of the attempt to justify slavery.  No person is entitled to live at the expense of another.  That flies in the face of the notions of a free society, of equality before the law, and of individual rights.

The current code is an indecipherable, unknowable, and contradictory web bought and paid for by lobbyists.  Some see this aspect of the tax code as the least fair, and for good reason.  Those with political pull use the force of government to benefit while those without it suffer.

It is important to keep this in mind when discussing a “fair share” of taxes.  The context is an omnipotent government with its tentacles in every aspect of our lives.  To fund this requires enormous amounts of money, so there is a lot at stake with the details of how that money is raise – that is, with the tax code.

But consider the situation with a smaller government.  Suppose we didn’t have an alphabet soup of regulatory bureaucracies and departments.  Suppose we had a government whose sole job was protecting the rights to life, liberty, and property of its individual citizens – and no more. 

Such a government could operate on a tiny fraction of today’s tax revenue.  In which case, all taxpayers could pay less.

For many people, it wouldn’t matter if someone else paid less or more than he did, so long as his taxes were substantially reduced.  If his total tax burden was only 5% it wouldn’t matter if his neighbor paid 1% or 10%.  He would be far better off than he is today, regardless of whether his neighbor was in even better shape.

In other words, the issue of tax fairness arises only in the context of a government far larger than it should be, doing things it should not be, and requiring vast sums to fund it.  The tax fairness issue pits one group of citizens against another only because they feel they are paying more than they should be, and resent those that they feel are not.

This is why the “fair share” argument is a smokescreen.  The issue is not that a few rich people are paying less than some other people, but that we all are paying far too much.

Shrink government.  Stop it from micro-managing the economy through regulations.  Get it back to only defending our liberties.  Then the issue of whether a tax is fair or not becomes a very minor issue.

Even in that case, the nature of a tax as such raises another issue in regards to fairness.  A tax is involuntary – we are compelled under penalty of law to pay it, whether we wish to do so or not.  In the middle ages the king’s representatives would knock on doors and take money by force.  Today it is indirect and subtle, but it is still ultimately taken by force.  It is still theft of one’s wealth.

With that in mind, “tax fairness” is really an issue of “theft fairness.”  The debate is over how much money the government ought to steal.

This provides a clear answer: no amount of theft is moral.  On that basis, there is no such thing as a “fair tax” in the most objective, most literal meaning of the words.  All taxes are unfair.

The “fair share” of taxes that everyone – Buffett and his secretary, the middle class and the poor – ought to pay is none.

Shrink government and the amount of money needed will be small.  End taxes and find an alternative, voluntary means to fund that smaller government.

That would be fair for everyone.

JOHN BOLTON ON 9/11 + 10

John Bolton spoke Sunday at the American Freedom Alliance event 9/11 +10: IS THE U.S. ANY SAFER TODAY?

He had some interesting comments.  (The following paraphrases are based on my notes. He discusses the same topic in this article at AEI's website.  Much, but not all, of what he said Sunday is in this commentary.)

RESPONSE TO KRUGMAN

Paul Krugman's blog post on Bush and Giuliani is the view of someone deep in the heart of the establishment, not some fringe element.  It is typical of the "blame America" view.  Why are our responsibilities so great?  Consider Krugman and his ilk who deny our right to defend ourselves.

ARE WE SAFER TODAY?

Yes and no; there’s no simple answer.  There are several variables in play with more forces unleashed against us.  Our military has had amazing successes overthrowing the Taliban in Afghanistan and Hussein in Iraq.

However, we are not yet fully safe despite these big victories.  We need to wage war against the direct and indirect state sponsors of terrorism.

Bush was correct in saying shortly after 9/11 that this would be a “long war.”  The proper comparison would be to the long war we won against communism.

In today’s “world of ambiguity” we can never be fully safe.

LAW ENFORCEMENT VERSUS WAR

An important decision post-9/11 was to reject the metaphor that terrorism is a law enforcement issue.  This doesn’t capture the nature of the threat.  As an act of war against us, we can marshal the nation to action.  The fact that Obama maintained or extended several policies of the Bush administration (keeping Gitmo open, increasing drone attacks in Pakistan, etc.) means the debate of war versus law enforcement view of terrorism is now resolved in the U.S.  This is not the case in Europe.

NATURE OF THE THREAT

The threat from “radical Islam” is growing and metastasizing because the overthrow of autocrats in Egypt, Libya, and elsewhere are releasing the repressed forces, which include radical Islam.

The threat from radical Islamist governments comes not just from the direct violence but also from their policies.  There is a philosophical and political component, not just a military one.

American weakness, not strength, is provocative.

We face the alternative of fighting them in America or in the Middle East, which is why we need to maintain a strong American presence there.

Changes since 9/11 have raised new worries.  Most notably, WMD proliferation opens the door to their use by terrorists.  This threat is real: computers captured in Afghanistan show in great detail the long-term goal of Al Qaeda to use WMDs.  Al Qaeda in the Arabian Peninsula, for instance, is working to develop the capability to use Ricin.

ROGUE STATES

The rogue states are cooperating against America.  Iran and North Korea are potential sources of nuclear proliferation to terrorists.  Pakistan is estimated to have 60 – 200 nukes, which could fall into the hands of the radical Islamists if they seize control of the government. 

North Korea has shown itself to be a major player in the Middle East.  For instance, it was their nuclear reactor blown up in Syria not too long ago.

[Bolton is] very worried that the Obama administration has given up trying to prevent Iran going nuclear.  There are fundamentally different ideas running the Iranian government than run that of the USSR.  We can’t contain and deter them the way we did with the Soviets.  This leads to the Saudis, Egypt, and others getting nukes, and eventually the terrorists getting them.

GREAT POWERS

The “Great Power” politics from the Cold War haven’t gone away.  We have a resurgent Russia, using oil to influence Europe.  China is developing for the first time a blue-water navy, including subs and aircraft carriers.  They are already fighting for mineral claims in the South China Seas.

DEFENSE BUDGET

Over the next few months we face an important defense budget battle.  The economic crisis has spurred the need to reduce government spending, taxes, and regulations.  The Congressional “supercommittee” appointed to specify budget cuts may trigger dramatic budget cuts.  The Obama administration has already cut $350B from defense.  As part of the debt ceiling fight, another $400B has already been cut.  If the trigger is pulled, we’re looking at a total $1.5 Trillion in defense cuts.

Such drastic cuts are contrary to a proper view of war, such as that articulated by JFK: “Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty.”

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My comments: 


It was great to see an enthusiastic audience cheering many of these points.


Bolton made many good points with which I agree.  He has an excellent grasp of the dangers we face from terrorists and their state sponsors, and the problems we're having in dealing with them.  Some of the information was new to me, but the general assessment was not.  He did a good job of assessing how unsafe we are, but didn't provide new insights into how to deal with the problem.  It also isn't clear what he thinks the long-term future shape will be: will we find a permanent solution to the radical Islamist threat, or learn to become like Israel, under constant threat?

WHAT THE GOVERNMENT SHOULD DO ABOUT JOBS

Suppose you run a small store employing a few people.  Your business is growing and you find yourself swamped with work.  Should you hire another employee?

This decision is something businessmen confront often. Projecting this issue across the country, to all industries and to companies of all sizes, gives us a perspective on the persistent high unemployment rate.  What issues should the businessman consider?  What causes him to decide to hire or not?

Let’s examine this issue in detail and see how government policies impact hiring.

Will there be work tomorrow?

At the moment, you certainly have enough work to keep someone busy full time.  But is the growth temporary, or do you project it to last for the foreseeable future?  If it is temporary, then it makes more sense to avoid taking on the long-term obligation of hiring a full-time employee.  Maybe you hire a temp or offer extra pay to encourage current employees to work longer hours.

To answer this, look at the source of the growth in business.

Suppose the growth is due to a spending stimulus package from Washington.  What type of hiring would that encourage?  If your customers are buying more because of a one-time surge in extra cash, they won’t continue once it is spent.  A full-time employee, without the extra business, may need to be laid off.  Could you count on another stimulus, then another, in an unending series?

Suppose instead it is a permanent income tax cut.  The customers now have extra cash, and you can project they will have more cash next year as well.  Hiring a full-time employee makes more sense.

What’s the job worth?

You need to offer at least enough to motivate someone to work for you.  Yet the work that needs to be done is worth only so much to you, and you can’t pay someone more.  These facts set a range for an offer.

You also have to factor in the overhead costs.  You have to rent the space from the landlord, pay benefits, keep the lights and air conditioning on, buy supplies, carry insurance, time to comply with business regulations, and so on.  Add these up and spread the costs across your staff, and you have to reduce the offer.

A lot of these overhead costs – benefits, taxes, insurance, regulations – are directly driven by government policy.  Every increase in these rates makes the case for hiring new employees less compelling.

Medical Benefits:

ObamaCare has unleashed massive changes to the health care system in this country.  Every business has to look carefully at the details and determine its impact.  They have to calculate the cost of benefits for every employee. 

It is not clear that an individual business comes out ahead on this.  An interesting point is the deluge of demands for waivers from large corporations like McDonald’s to small companies with political connections to unions.  If this is such a good deal, why the exemptions?  (Curiously, there is a disproportionate distribution of waivers to Nancy Pelosi’s district.  One would think the electorate that chose Pelosi, who championed ObamaCare, would eagerly accept the law.)

Taxes:

Every time a “windfall profit” tax is proposed on a company, consider the impact to potential new hires.  Will ExxonMobil or Chevron be able to expand if they are taxed at a much higher rate?  What about Citibank or Bank of America?

If a city like Los Angeles raises its local sales tax, some shoppers will cross into neighboring Orange County to save a little.  Does that help or hurt employment in L.A.? 

Don’t forget to add all the taxes employers and employees must pay – Social Security, Medicare, state and federal income, state disability and unemployment.

Regulations:

Think of the ridiculous regulations businesses face, from San Francisco’s fight to ban McDonald’s “Happy Meals” to the Los Angeles ban on disposable paper and plastic bags from grocery stores.  If you make Happy Meals or grocery bags, you won’t be hiring anyone soon.  If you use grocery bags in your store, you’ll have to figure out how to comply with the new law, dispose of the existing bags, figure out from whom to buy new bags (or whether to offer them at all).

These burdens make the case to hire harder to make.  In some cases, the profit margin may be so large that it is an easy question to answer, and one needs to hire quickly or lose business.  In some cases the profit margin is so small that it clearly isn’t worth it.  But there is a great middle ground where it is too close to call without looking very closely at the numbers or taking unnecessary risk.

These are all contributing factors, but so far I’ve treated them as if they are objective – well understood, predictable, and objective.  In reality they are rarely so.

More often, the taxes, regulations, laws and other business burdens change with the political winds.  It may depend on who is in the White House, but often they come down to anonymous government bureaucrats deciding who gets investigated (Gibson Guitar) and who doesn’t, whose taxes deserve extra scrutiny, what types of industries curry political favor ("green" tech companies like Solyndra) and which get targeted (coal-fueled power plants).

Consider Obama’s deals to bailout GM.  Decades of established contract law and bankruptcy rules were thrown out when the government ignored the rights of GM bondholders, leaving them empty handed.  If this can happen to one of the biggest companies, what’s to stop the government from stepping on your property rights as a business owner?

Consider the Defense industry.  In August, a deal was struck to establish a special committee to cut the federal budget.  Failing to find agreement in November means automatic cuts in the Defense budget in hundreds of billions of dollars.  Consider the uncertainty that creates for defense contractors, who won’t know – who CAN’T know – whether or which programs may get funding or get cut.  In such an environment, would a contractor seek to hire staff?

Consider how long we waited for the last Democratic Congress to pass a budget; in all that time, businesses had no way of knowing how much tax they’d have to owe.  In such an environment, would your business hire?  Or would you wait until the budget was passed, and your accountant could determine the cost of each employee and how much profit (if any) you could anticipate with a larger staff?

You can begin to see why it is not just the amount of taxes or costs of laws that cut into hiring, but the sheer uncertainty in planning for the future that is a significant burden.  This is not just a financial or business issue, but fundamentally a cognitive issue.  A businessman cannot function long term in a market ruled by arbitrary laws and regulations; a businessman who cannot function long term will be less likely to make the long term investment in new employees.

This is why the best way to reduce long-term unemployment is to get government out of the way.

A small tax reduction, a moratorium on new regulations, a repeal of ObamaCare, Dodd-Frank, Sarbox, and the like will help, but it is the sum of all of it that contributes to the Great Uncertainty that keeps businesses from expanding. Repeal of the major regulatory legislation of the last few years would be an important step.

While each little improvement is good, what’s needed is a major overhaul of the tax system and regulatory environment.  It will take a dramatic step to change the mood of the country and give businessmen the confidence that they will be able to forecast without government intervention arbitrarily changing things.  They will see the potential return on their investments in new employees.

Above all, reduce uncertainty.  Restore the rule of law and respect for the property rights of businesses and businessmen – loudly and clearly so that all will hear the message and understand.  This will unleash a flood of new hiring.

POSTSCRIPT

A 9/7/11  Wall Street Journal article (“Private Ideas on How to Create Jobs”) asked business leaders for their views on how to spur job creation.  (What a radical idea: to find out how to create jobs, ask people who create them!)

A few excerpts:

CEOs:

“Chief executives … support repairs to aging infrastructure… and point to lower taxes and fewer business restrictions…”

“… U.S. infrastructure is simply not competitive.” – Rio Tinto CEO Tom Albanese

“The CEOs also want lower corporate taxes… and a moratorium or rollback of business regulations.”

“U.S. companies need the ability to recruit the best workers…. We must increase the number of H1-B visas available and reform the employment-based green card process.” – Bob Greifeld, CEO, NASDAQ-OMX

SMALL BUSINESS:

“Carey O’Donnell, chairwoman of the Chamber of Commerce of the Palm Beaches, said that the lack of access to capital is the top impediment to growth… Loosening financial regulations for banks, she said, could make it easier for business in her area of Florida to grow.”

O’Donnell adds that “… cuts in her tax burden would prompt her to add to her own 14-employee staff. ‘It would reduce the risk of hiring more people, even if it was temporary.’”

And finally, there’s this:

“Republican Douglas Holtz-Eakin, a former director of the Congressional Budget Office and president of the American Action Forum think tank, said measures such as tax credits for new hires and extending emergency unemployment-insurance benefits won’t encourage hiring. ‘They’re all one-time things that don’t genuinely raise the long-term growth capacity.’”

Bingo.

POSTSCRIPT NO. 2

Here's a list of taxes Obama has imposed on us since he's taken office.  Is it surprising?

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