Warren Buffett’s Fiscal Innumeracy

Warren Buffett’s at it again. He has a column in the New York Times complaining that he has been coddled by the tax code and that “rich” people should pay higher taxes.

My first instinct is to send Buffett the website where people can voluntarily pay extra money to the federal government. I’ve made this suggestion to guilt-ridden rich people in the past.

But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.

But Buffett goes beyond guilt-ridden rants in favor of higher taxes. He makes specific assertions that are inaccurate.

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 numbers are flawed in two important ways.

1. When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.

Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be signficant.

2. Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding  retirement benefit (which actually is tilted in favor of low-income workers).

Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).

If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.

But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.

So why doesn’t Buffett endorse this approach? Tim Carney offers a very plausible answer.

For more information about why class-warfare taxes are misguided, this video may be helpful.

Read Full Post »

Should the Government Try to Stop Discrimination Against Ugly People?

While the case for minimal government is very strong, that doesn’t mean that there are easy answers for every question. For instance, we know that markets will – over time – penalize people who discriminate. A merchant or employer who deliberately shuns women, blacks, or some other group of people is being economically irrational and is going to incur higher costs and lose out compared to competitors.

But that doesn’t mean discrimination won’t exist, and that’s a challenge for libertarians. For all intents and purposes, a belief in private property and an aversion to government intervention leads to the conclusion that racists, sexists, and other unpleasant people have the right to be jackasses.

But that offends us as moral people, which is why libertarians have been wrestling with this quandary for decades, trying to figure out how to be against discrimination without giving government powers that inevitably will be abused.

I was reminded about these issues while reading about discrimination against unattractive people. Simply stated, life is better if you were lucky enough to be born with good looks, and life is not so much fun if you got the genetic short straw. And the discrimination goes well beyond who you can date. Here are some key segments of the article in New York magazine.

… attractive people make more money than unattractive people. A lot more money, in fact: $230,000 over the course of a lifetime, which holds true even in professions where looks wouldn’t seem to matter. Hamermesh found that fetching professors, for example, earn 6 percent more than their average-looking peers, while unattractive quarterbacks earn 12 percent less than their hunkier counterparts. Men, in fact, suffer the greater repulsiveness penalty in general: Unattractive women earn 3 percent less than average-looking women, while unattractive men’s take-home is reduced a whopping 22 percent. …Knowing the extent to which people are economically penalized (or rewarded) for their looks raises the question: Should the ill-favored be protected? And if so, how? Hamermesh, in the Über-cautious fashion of an economist, predicts that the most unsightly people will eventually receive the same kinds of legal protection extended to Americans with disabilities. Putting such statutes in place would require agreeing on a universal scale of attractiveness, and then having eligible people step forward to claim their protections. The financial incentive is obvious; the social and psychological costs, murkier. Would you be willing to petition the U.S. government for official recognition of your ugliness? Would you do it for $230,000?

I’m rather surprised, by the way, that ugly men suffer significantly harsher consequences than ugly women, but that’s just an aside. The real issue is whether this discrimination is real and whether it justifies government intervention.

I’ve actually written about this issue before, including a link to other research showing that tall people have an economic advantage over short people. So I don’t doubt that “lookism” exists. Heck, I try to engage in such discrimination in my personal life and I keep my fingers crossed that women won’t be similarly shallow.

But does that mean we should have some sort of government bureaucracy with the power to sue, fine, arrest, or otherwise harass based on whether people claim they didn’t get promotions because of their appearance?

Read Full Post »