A truly scary picture
Hint: Who’s not connected to any of the others?
Is that it? A two sentence article?
PS. As of today the Federal tax rate on Treasury securities is over 100%. That’s for all Treasury securities—maturities from 3 month to 30 years. Conventional and indexed. Tax rates on many corporate bonds also exceed 100%. Taxes on stocks are also higher than the number you see quoted by certain progressive Nobel Prize-winning bloggers. In other words, the entire “inequality debate” is being fought using essentially meaningless tax data. (The reason is that the tax on nominal interest income now exceeds the real interest rate.)
PPS. Warren Buffett’s proposal for much higher taxes on the rich would not impact him, unless he dramatically changed his lifestyle and started selling stock to buy fancy mansions, yachts, etc. How do we know this? Because his proposal to raise taxes would only apply to 0.9% of his total income. The other 99.1% of his income would not be affected. Buffett seems like a great guy, but his tax proposal is aimed at other billionaires, not him.
Tags:
10. February 2012 at 08:21
The odd one out is Krugman, everybody else has jaundice.
10. February 2012 at 08:22
Indeed, Scott Sumner is a lonely figure in that constellation. But another victory for Market Monetarism, in getting included (on Sumner’s coattails) into the big picture.
Forward!
10. February 2012 at 08:25
Re: Warren Buffet. The number one thing you learn in finance is that everybody, even the oracle of Omaha, yes *everybody* talks their book.
10. February 2012 at 08:34
Actually, neither you NOR Tyler Cowen belong…
Tyler made a comment about Krugman
You made a comment about Krugman
Krugman did NOT make a comment about Tyler – that arrow is misplaced. (Note “The Context” inset text – “The response wasn’t directed at Cowen by at Cochrane…”) So the chart is really quite awful. You and Tyler should have your own shared bubble in the corner.
So in this chart we have:
Krugman, the High Priest of Keynes
The Magnificent and Malevolent Priesthood of Chicago
The agnostics – Tyler Cowen and Scott Sumner
The chart is also quite strange in that “the world” seems to ignore many OTHER bloggers who have much higher profile than the Chicago crowd – oh, say, Calculated Risk, Mark Thomas, DeLong, etc…
The writer of this Business Week article obviously has an agenda. I’m shocked and surprised. Shocked, I tell you.
10. February 2012 at 08:42
@ ssumner and Nick….
You are grossly distorting Buffett’s position here. Read the article…
“since he has generously pledged to give away his fortune he would avoid the tax he wants to increase.”
EVERY BILLIONNAIRE has the same option – give away 99% of your wealth, and you can avoid 99% of your taxes. Your comment, Scott, strongly implies that Buffett is shielding 99% of his wealth from taxation but preserving his ownership and future consumption through some tax scheme. He’s avoiding taxation by giving up his future consumption. NOT SO WITH OTHER BILLIONNAIRES.
Forgive me, but your Buffett point seems very Krugmanesque of you.
10. February 2012 at 08:51
Scary indeed. I’ve often wondered how it is that would-be civil, intellectual discourse seems to always turn into arguing matches (replete with misleading graphs and statistics and specious arguments). It’s like everybody in the political realm has been in a state of arrested development since their teens.
10. February 2012 at 08:51
Well at least this time you won’t have to ask if that’s supposed to be you.
Your point about Krugman is correct of course. Krugman has picked pleasing his “base” with attacks over having influence. A shame really.
10. February 2012 at 08:54
Statsguy,
I don’t think that Scott has a problem with people doing that at all, though it would better represent his position to say “and the rich investing their money and delaying its use for consumption is fine by me!”
10. February 2012 at 08:55
PS: I don’t understand all this yet. Ignore the above comment!
10. February 2012 at 09:00
” Because his proposal to raise taxes would only apply to 0.9% of his total income.”
Well, that depends on how one defines “income” and (his) “taxes”.
The chart refers to Buffet’s proportionate share of Berkshire corporate income. Whether that is “his” income is, of course, a good question. Under the existing tax code shareholder’s don’t get taxed at the individual level until they sell shares or get dividends (there are some anti-avoidance exceptions under personal holding company rules, etc). The “realization of income” requirement has been an element of the tax code since it was enacted, Haig-Simons, notwithstanding.
That said, I don’t see how one can argue with this rationale that Buffett has “income” but does not pay any tax. If the corporate income is his, then certainly he should get credit for the corporate tax paid by Berkshire? To deny this, strikes me as very inconsistent.
10. February 2012 at 09:11
I would add, of course, that Sumner did not make the argument that Buffett (indirectly) pays no income tax on his proportionate share of Berkshire income, but there have been several articles recently attacking the “realization” requirement in the context of Mark Zuckerberg, including a recent op-ed in the NYT. Presumably, this is a push for a wealth tax or a mark-to-market regime; however, I think the attack should rather be against the charitable deduction. Buffett, unlike many other methods of calculating an effective tax rate, noticeably did not include corporate income tax in calculating his own rate versus that of his secretary. Clearly, Buffett has a different concept of “income” than Haig-Simons (and perhaps Sumner?).
10. February 2012 at 09:14
“what began as a semi-civil battle of ideas between “saltwater” Keynesians of Krugman’s persuasion and “freshwater” economists of the Chicago school has escalated into a two-way barrage of insults and name-calling.”
It was semi-civil at one time?
10. February 2012 at 09:30
As to the picture: Funny? Yes. Helpful? No.
10. February 2012 at 09:33
Scott writes,
“Buffett seems like a great guy.”
No. Not in the least. Buffett seems like a really superficial and often dishonest guy — a crony capitalist who games the system at the highest level and lies about it (who came out with the most billions from TARP etc.?). A man who wants to kick down the next guy coming up the ladder, a man who wants to profit from buying out family run businesses which must be sold because of estate taxes, who wants to block oil pipelines for America because he wants to profit from his railroad and other investments.
There is a power and status war by the super rich against the upper middle class, and Buffett is one of the generals leading the charge.
10. February 2012 at 09:34
I feel like I’ve heard that claim about the tax rate on Treasuries before, but I’m not really sure I remember what the argument is. Can you either provide it, or a link to where someone else made it?
10. February 2012 at 09:35
StatsGuy – Not sure how I’m distorting…Buffett vocally advocates a position that on the face of it appears to be merely sound advice or an objective critique but in fact is far more self-serving than a superficial reading would give it. And that is “talking your book.”
10. February 2012 at 10:39
Re tax rates on Treasuries: As we cannot go to negative interest rates, so as to discourage savings and promote consumption, do heavy taxes on Treasuries actually make sense?
10. February 2012 at 10:42
I recall the Fama comment, which prompted me to experiment with Paint. But it’s a shame they left out the line (Paul Krugman to Scott Sumner): “Did you mean to address this letter to someone else?”
10. February 2012 at 11:01
I love how Paul “I sell newspapers for the Ochs Sulzbergers” Krugman heaps his disdain on the “wealthy right-wingers have pumped so much money to subsidize the field of pro-rich people polemics that the demand for competent defenders.”
As for Warren Buffet, he’s making billions a year on his BNSF (Burlington Northern Santa Fe) monopoly thanks to Obama’s rejection of the Keystone Pipeline. But he’s not sharing it with his secretary.
One million bucks to Warren for each train:
http://www.youtube.com/watch?v=BvreQfcv-Hw
10. February 2012 at 11:03
Glad to see you understand Buffett and the game he plays. I don’t see him arguing to get rid of tax benefits for insurance policies….it seems he wants the upper middle to use the standard issues tax shelters that his companies deal in.
In other words, Buffet wants to you the heavy hand of governemnt regulation to prod us cattle into the the products he shleps out for a living….all at a dead weight loss to society.
10. February 2012 at 11:05
Lets eliminate tax-free foundation rules that the billionaires use and at the same time get rid of the income tax for all people making less than 1 million per year.
Can’t afford the wars anymore? ok stop them.
10. February 2012 at 11:05
Thanks for reminding us of another corrupt Buffett gambit, Gabe. There are many.
10. February 2012 at 11:08
I wish I could edit my prior posts. Here’s the full Krugman copy of the Chait quote:
“wealthy right-wingers have pumped so much money to subsidize the field of pro-rich people polemics that the demand for competent defenders of letting rich people keep as much of their money as possible vastly outstrips the supply”
Greg, Gabe, DITTO!
10. February 2012 at 11:28
@ Nick
Sorry for the harsh language – not intentional.
“but in fact is far more self-serving than a superficial reading would give it”
That’s the part I disagree with. Charity is not self-serving. Preserving money for future personal (or family) consumption is self-serving. I do not think Buffett is being self-serving, unless you consider altruism selfish. If EVERY billionnaire pledged 99% of their wealth to a 501c, then the country would be better for it – and they can avoid their taxes. But for other billionnaires to call Buffett a scoundrel because he’s evading taxes is ludicrous. (Although I’m sure Buffett would be even happier if every billionnaire made a pledge to give away money.)
http://givingpledge.org/
Now you may argue that Buffett’s altruism is bad altruism, or that what I (and the tax code) consider altruism is evil. The Gates Foundation vaccinating kids and ridding the world of parasites, etc… All pure evil. Sure, you could argue that. And, indeed, not every 501c(3) really should be considered a charity – case in point, the Von Mises Institute.
10. February 2012 at 11:33
@ Greg Ransom
So, if you consider Buffett corrupt because he pushes for favorable regulation, I can only imagine what you must think of people like the Koch Brothers. Or Rupert Murdoch.
10. February 2012 at 11:36
Gabe,
If there were any real anti-war liberals they would instantly trade reductions on military spending for reductions in SMB owners taxes.
$350B in cuts out of MIC would happen, if all of the top 2% of SMB owners (that generate 50% of SMB revenue) got to stop paying taxes.
That’s a lot of SMB employees all being pushed by their bosses to GOTV. Main street plus the progressive left could easily swing it.
But the institutional left despises the big fish in small ponds SMB conservatives, more than they despise the .1% or they despise war.
10. February 2012 at 12:12
@Morgan,
Why does the anti-war position have to be attached to any sort of expenditure reallocation? I am 100% the hippie you want to punch, but the idea I hate SMB’s is news to me…
10. February 2012 at 12:16
Morgan,
You write that as if there is any such trade offer. Besides, you might as well have written, “If there were any real anti-war conservatives they would instantly trade reductions on military spending for increases in food stamps… But the institutional right despises poor people more than they despise war.”
10. February 2012 at 12:22
I don’t want to bother Scott with this because its off topic and he’s obviously super busy, but would appreciate if some commenters took a shot at it.
How do I reconcile the fact that profit margins among US businesses in 2011 were higher than all but one year (2006) in the post-war era, with the idea that real wages are too high and need to be brought down by a return to trend NGDP growth? I think profits/profit margins are the biggest puzzle in Scott’s story. I hear the “overseas profits” argument but anecdotally I can’t buy that, because I’m an equity analyst and I’m looking at numerous industries that are doing tremendously and are not reliant on overseas business.
The historical episodes Scott talks about where monetary policy was extremely potent occurred in the context of extremely depressed business conditions (I think).
Anyone else find profit levels puzzling? Insight appreciated.
10. February 2012 at 12:24
‘Charity is not self-serving.’
Never? No rich guy ever created a foundation that ended up employing his children? Allowing them to travel on the foundation’s money, live in foundation owned homes?
10. February 2012 at 12:27
‘If EVERY billionnaire pledged 99% of their wealth to a 501c, then the country would be better for it….’
Why? Bill Gates made his billions by providing products that tens of millions of people found useful (that’s why they voluntarily paid to get them). Doesn’t that suggest that his money might be better used to provide even more products for sale to more millions to accept or reject as they see fit?
10. February 2012 at 12:30
“Charity is not self-serving.”
You guys don’t think like a rich person.
One you are rich enough, it’s not about whether you spend the money on yourself or someone else. It’s about whether or not you are obsessed with self-aggrandizement.
10. February 2012 at 12:34
Britmouse. Yes, I look pretty sickly.
Thanks Ben.
Nick, Yes and no. I mostly agree. But I think people like Buffett do have a genuine desire to help others through charity.
Statsguy. I don’t mind bias, as long as it favors ME.
Krugman has often attached Tyler Cowen, although not harshly for the most part.
You said;
“EVERY BILLIONNAIRE has the same option – give away 99% of your wealth, and you can avoid 99% of your taxes. Your comment, Scott, strongly implies that Buffett is shielding 99% of his wealth from taxation but preserving his ownership and future consumption through some tax scheme. He’s avoiding taxation by giving up his future consumption. NOT SO WITH OTHER BILLIONNAIRES.”
But that supports all my arguments. Income data is meaningless. Tax incidence data is meaningless. What matters is consumption. That’s exactly my point. If it was meaningful, then he’d be completely dodging the tax he’s proposing on other billionaires.
So I think we agree.
But note, he could have proposed a tax that would have left him less money to donate, but didn’t.
Mark, A lot of it is the anonymity of electronic communication. You have the same problem with office emails, which are harsher than face to face comments.
Cameron, Since I sent them the picture, I guess I can’t complain.
Vivian, I agree, but the point is that he’s proposing higher personal income taxes, not corporate taxes.
Charlie, Good observation, I was going to comment on that too.
Greg, I like him.
John Hall, It’s not an “argument” it’s a fact. The real tax rate is taxes paid divided by real interest earned.
Ben, The problem is that real interest rates are negative.
Kevin, You have a long memory . . . so do I. I’ve spent 3 years in payback mode. (Just kidding folks.)
Steve, Yes, I love how the progressives keep calling the right illiterate, even as they make arguments using “income” as the benchmark. In real scientific public finance everything relating to incidence is done with consumption. Even many liberal economists admit that income shouldn’t be taxed, consumption should be taxed.
Gabe, Replace the income tax with a payroll tax–no forms to fill out.
10. February 2012 at 12:36
Brendan, I don’t think real wages are too high. I think wages/NGDP are too high, and I want to bring the ratio down with more NGDP, not less wages.
10. February 2012 at 12:57
Scott, if leverage did not occur in the world (firms governments, individuals, etc. had no way to borrow and never did) would a sustained fall in NGDP still cause a sustained fall in employment all other things held constant?
10. February 2012 at 13:03
Scott,
Interesting position, given that compensation was in Q3 2011 at its lowest share of GDI since Q1 1955.
The compensation share peaked in Q4 2008 at 57.1%. By comparison, the compensation share was never below in the (nearly) 28 years from Q1 1967 through Q3 1994.
So how far do you want it to fall?
10. February 2012 at 13:12
Ah, you slipped in that real. Real tax rate, not the same as nominal tax rate.
10. February 2012 at 13:17
DR, that’s what puzzles me. Scott and his market monetarist peers’ explanation of the recession/recovery is far superior to everyone else’s. I’m a believer. But I’m very puzzled by profits and the wage share numbers you’re talking about. Is this (high profits, low wage share) consistent w/ the Japanese experience w/ tight money? The US during the depression experience? Or is this unique?
10. February 2012 at 13:17
Anyone that argues for higher marginal income tax rates has a bad agreement, because we don’t know how much smaller the new pie will be compared to what it would have been. Buffett has this one wrong.
How much do high tax rates affect willingness to work? What if the effect is real growth slowing by 50 basis points? What a disaster.
10. February 2012 at 13:38
Kaching .. that Warren Buffett cashing give or take a few hundred million more of your tax dollars:
http://freebeacon.com/warren-buffetts-net-worth-jumps-154m-thanks-to-mortgage-settlement/
10. February 2012 at 13:39
Folks liked Joseph Stalin …
Scott writes,
“Greg, I like him.”
10. February 2012 at 14:18
Gabe, Replace the income tax with a payroll tax-no forms to fill out.
when i lived in the UK i came to this semi-startling revelation that most UK citizens did not even have to file a return, let alone a myriad-page 1040. well, i still did (foreign income and all that). but still…. no paperwork. how archaic are WE.
10. February 2012 at 15:43
My argument:
Liberals say they are anti-war, they can achieve that if they just trade for the “end war” part, by paying off the guys who currently look at military spending like, “at least it doesn’t go to pay off Dem voters.”
It’s a true half a loaf. You give up gvt. to give up war.
For you to make a comparable, you’d need to find something conservatives say they want, and they can achieve – something liberals would gladly be paid off for.
I argue aggressively, they should for over gay marriage so they can get all the rich gays to vote Republican, after all, if you are rich and feel like you have to vote for higher taxes, you are not really equal.
10. February 2012 at 15:46
I’m not against Buffett’s (or anybody’s) charity or the tax benefits derived thereof. What I am against is giving Buffett kudos for advocating a tax that will be (predominantly) borne by others and avoided by him. His stance is morally neutral at best.
10. February 2012 at 15:52
“Liberals say they are anti-war”
Morgan, you are too funny.
10. February 2012 at 16:55
Fed valentines from Justin Wolfers, beginning with this and getting progressively worse!
“You’re my long-run target, my nominal anchor”
http://www.freakonomics.com/2012/02/10/what-does-your-fed-valentine-say/
10. February 2012 at 16:59
Piketty and Saez identify *pretax* income share of the top 1% as more than doubled today from forty years ago. It’s pretax inequality, not just aftertax inequality, that has soared.
So if you want to argue the inequality surge is fake, you need a pretax argument, not just an aftertax one.
If your real point is that investment income taxes have inane outcomes, I get that. But I’m still yearning for someone to help me answer the standard retort: if we exempt capital gains from taxes, every executive will find a way to disguise their earned income as capital gains.
As, for example, Romney already did with much of his partnership income – the famous ‘carried interest’ loophole.
You could just tax consumption, not income, but then how do you achieve a progressive tax system? A really huge Earned Income Tax Credit?
But if your point is merely that inflation indexing for investment taxation would be a good idea, yes, I agree, and I do wish I understood why nobody’s done it yet. Are the Washington lobbyists of the rich only interested in improving the tax treatment of stocks, not bond income?
10. February 2012 at 17:58
Brendan, I thought that the problem was that *prices* were too high relative to NGDP, not *wages*.
If Scott really thinks that (all other things being equal) lower wages/NGDP would be a more useful change than lower prices/NGDP, that surprises me and I’d love to hear the rest of the story.
10. February 2012 at 18:02
If you aren’t willing to let the guys who pay for the military, to keep their money without a military…
BY DEFINITION you are not anti-war / anti-military, you are just a wagon rider who wants free shit, and will close down the military to get more of it.
If you want butter, not guns – you are not really anti-gun, you are just pro-butter.
d r – I’m logical and funny!
10. February 2012 at 19:47
You are grossly distorting Buffett’s position here. Read the article…
“since he has generously pledged to give away his fortune he would avoid the tax he wants to increase.”
EVERY BILLIONNAIRE has the same option – give away 99% of your wealth, and you can avoid 99% of your taxes.…
Charity is not self-serving. Preserving money for future personal (or family) consumption is self-serving.
~~~~~~~~~~~
As a professional who works in this area I can tell you charity often is *extremely* self-serving in estate planning, by this definition.
The key fact you aren’t recognizing is that when they give it away they don’t give it away.
Mr. Mega Millionaire “gives his wealth away” by donating it to a family charitable foundation. His spouse, kids and other family members work for it and are paid full market rate for managing the mega millions. Full market rate can be even *more* than Dad collected, and often is.
The family is still running the same investments/business as before for the same compensation, or more. They’ve kept it. But assets have escaped estate tax and are now compounding earnings in a tax-free environment. They can do this for generations.
But wait, there’s more! Dad, by making his “generous pledge” while alive to make the gift in the future when he dies can get very *ample* income tax deductions for as long as he lives, while he still personally owns and runs the business without restriction — getting tax-free income for the rest of his life. Generous pledges begin at home!
That can not only fund greater consumption on his part for the rest of his life but also increase the size of the estate that he will leave to escape taxation, for the family’s benefit.
And there’s more! The kids who get the power to distribute funds from the foundation receive a lot of “friendship gifts” from those competing to receive, let’s just call them ‘opera tickets’ and ‘Christmas hams’. Plus there is ample “job and perk trading” between friendly groups.
Even better yet, it’s all audit free! The IRS and state attorney general audit rate for these is negligible — there’s no tax to be collected so the IRS doesn’t waste the effort, and no politician gets votes for being tough on charity (especially, rich influential peoples’ charities) … so can we say “no show jobs”? *Unreasonably* large compensation? Ample personal expense reimbursements.
The business world is replete with, well, interesting stories, about the kids who control their inherited shares of the family business “for charity”. A lot of the notorious complications of the Compaq-HP merger resulted from the Hewlett Packer kids who were (absent, international jet-set) members of the HP board via their control of shares through their family foundations, and who fought the merger because they were going to be bounced from any control position in the merged firm.
One might also remember the famous words of Rep. Patrick Kennedy campaigning with Howard Dean before the 2004 election, “I don’t need Bush’s tax cut. I have never worked a [bleeping] day in my life.”
The Kennedys have been riding the fortune Joe left them for four generations so far, through their famous web of foundations, not-for-profits, and friendly affiliated groups.
So the idea that the rich escape estate tax by “giving their wealth” away — um, not so.
Here is very simple reform to the estate tax — our wealth tax — that I *guarantee* you Buffett, Gates, Rockefeller and the Kennedys will NEVER support, no matter how much they *say* they support increases in estate tax rates.
To wit: The estate tax charitable gift deduction will be made available *only* to those who meet the terms that apply to making a gift under the regular income tax — that is, the gift assets must actually be given away with **no beneficial interest of any kind retained**. Truly given away.
That would be a *huge reform*.
You think billionaires should actually *give away* their wealth to avoid tax on it? Good luck trying to make it come true!
10. February 2012 at 19:55
Jim Glass — thanks for laying all that out.
10. February 2012 at 23:48
“Vivian, I agree, but the point is that he’s proposing higher personal income taxes, not corporate taxes.”
That’s true, but *my* point is that the quote indicates Buffett’s proposal will only affect 0.9 percent of his total “income”. If you are talking about “higher personal income taxes”, then, for that purpose, Buffett’s proposal affects 100 percent of his (gross) “income”.
The quote confuses and mixes several things in one. First, even the strict Haig-Simons definition of income (which does not apply to personal income tax and which even they did not insist it should) is generally the “accretion to wealth”. The chart refers to Buffett’s indirect pro rata share of Berkshire Hathaway corporate income, which may or may not equate to the accretion to his wealth (through higher share prices).
Essentially, what the quote suggests is that we should use a different concept of “income” for purposes of the personal income tax. Otherwise, it is not corrrect to say that his proposal only affects 0.9 percent of his “income”. Presumably, this would be a mark-to-market regime, or a regime that treats all corporations as flow-thru’s, or a regime that includes a wealth tax. But, as I indicated, and which Jim Glass has further demonstrated, what really results in Buffett’s avoiding tax is the charitable deduction (for income, gift and estate tax purposes).
11. February 2012 at 00:00
@ Greg
Are you really comparing Warren Buffett to Stalin?….
11. February 2012 at 06:30
Joseph, Yep, sticky wages.
DR, I never said anything about wanting compensation to fall, even as a share of NGDP. Reread what I wrote.
The ratio of hourly wages to NGDP rose in 2009, do you disagree?
John Hall, Yes, I assume we are interested in real tax rates?
Brendan, Read my answer to DR, you have it all wrong.
Crush, That’s right.
dwb, Yes, we are masochists.
Morgan, Good point about gay rights. But the GOP is too wrapped up in the Bible to go for that.
Becky, Those are good ones, I won’t even try.
Daniel, You said;
“Piketty and Saez identify *pretax* income share of the top 1% as more than doubled today from forty years ago. It’s pretax inequality, not just aftertax inequality, that has soared.”
To me it’s a disgrace that prominent economists are still talking about economic inequality in terms of income. Suppose you have identical twins, both earn exactly the same wage income their entire lives. Both start with nothing. Only difference is one chooses to spend his money now and one later. Do you see any inequality? I don’t. Yet their lifetime incomes will be vastly unequal. What matters is consumption inequality. That may be a problem too, but let’s at least use the right data.
No I don’t want to index investment income, that would make the tax system even worse, it’s already way too complicated.
There are lots of ways to have a progressive consumption tax. The payroll tax is a consumption tax, make it highly progressive instead of highly regressive. It’s simple. You could also put a big luxury tax on mansions, yachts, private jets, expensive jewelry, etc. The EITC, and so on.
I don’t buy the argument that a consumption tax will lead to all sorts of horrible loopholes, which we already have. Get rid of them! That’s way easier after you abolish the income tax, as the public would be much more outraged by the rich escaping all taxes, than just escaping some.
Regarding wages, Brendan and DR have it wrong, read my answer above. I’d love to see total wages rise as a share of GDP.
Jim Glass, Very interesting information.
Vivian, I don’t agree. I am using the economic definition of income, which is far more sensible than the tax code definition.
11. February 2012 at 07:34
Krugman has replied to the BusinessWeek thing here. Some commenters actually mention Scott (“that Bentley U guy”) in a very favorable way.
11. February 2012 at 08:25
Scott,
as dwb said: in many European countries the 90% of the public which are just employees, never fill out any income tax forms. All they ever pay is payroll tax, automatically deducted from their paychecks (as all other mandatory insurances too, pension, health, unemployment etc). Investment income taxes are often also directly paid at the source (banks deducts them from interest and they’re “final taxation”: no more tax after that). Income tax forms are an exception, to be filed only if there’s reason to believe that summing income and losses would lead to _lower_ total tax. Very efficient. Downside: most people in many European countries never realize how much tax they pay. The only ever saw their net income.
Addendum to Buffett and Gates: Jim Glass is spot on. As one very wealthy friend once told me, they give away their fortunes to foundations mainly to avoid the estate tax. A charity often benefits the children to some extent, and inasmuch as it does work as a true charity it still allocates capital under the control of the original owner (until his demise). Come to think of it, a lot of (non billionaire financed) NGOs works along a similar principle, to benefit chiefly the employees.
Last but not least: the foundation principle works for non charity businesses too and this has been explored by the wealthy in high tax Europe for a long while. Examples, Bosch (tools) and IKEA (furniture) are both foundations (under control of the founder or the family).
11. February 2012 at 08:34
Scott, looks like you are getting a free ride from Businessweek. Why do they like you?
11. February 2012 at 08:37
Scott,
one more thing, the luxury taxes you propose are also a European staple, and for decades already. From France to Sweden through Austria, all sorts of luxuries have been hit by extra taxes: large cars (highly progressive VAT on cars, or just a high VAT, or highly progressive road taxes for large cars), jewellery, second homes (that tax was a big spat in France during Mitterrand), of course VAT on yachts (that was a very big EU issue a few years back), you name it. These taxes face a couple hurdles: 1- they’re often bypassed by fraudulent ownership declarations (second homes belong to the wife / brother in law / etc), 2- flight (yachts declared somewhere else, from Monaco to Panama), 3- luxury goods also owned by the foundations (very common), 4- technology (large engines heavily taxed? -> development of powerful small turbo engines), 5- compensation through goods instead of money (company car etc., necessitating complicated tax rules to account for that).
In the end such luxury taxes have only made European tax habits extremely fraudulent and hypocritical, IMHO.
11. February 2012 at 09:39
“Vivian, I don’t agree. I am using the economic definition of income, which is far more sensible than the tax code definition.”
1. It is clear to me that you were using some variant of an economic definition of “income” and applying that to the tax imposed under the individual income tax. I wrote:
“Essentially, what the quote suggests is that we should use a different concept of “income” for purposes of the personal income tax. ”
What part of that do you not agree with?
2. If use of an “economic definition of income” is “more sensible”, are you therefore suggesting we should amend the income tax code to tax individuals on their “economic income” by, for example, marking their assets to market and taxing the result?
3. I would have thought you would be in favor of taxing consumption rather than any sort of “income” concept; however, in that case, it is not clear to me that “economic income” would be any more sensible a measure than “income” as currently defined and taxed under the Code.
11. February 2012 at 10:59
@Nick
“What I am against is giving Buffett kudos for advocating a tax that will be (predominantly) borne by others and avoided by him. His stance is morally neutral at best.”
By that logic, only people who don’t give to charity should have the right to advocate higher taxes.
11. February 2012 at 11:07
ssumner:
“What matters is consumption. That’s exactly my point.”
We do agree, mostly. I remain skeptical of relying too heavily on consumption taxes for one reason only – wealth is not consumption, it’s future consumption, and future laws change. This is why US corps are holding hundreds of billions in offshore profits, because they are waiting until a friendly administration comes along and changes the laws. Expectation of policy changes creates all sorts of dynamics.
Once you bring in multiple jurisdictions, real world taxation becomes very complicated. Having said that, we do agree that (on balance) the country would benefit substantially by shifting more toward a consumption tax base than we are right now.
11. February 2012 at 20:05
Jim Glass might be correct that many gifts to charity are really self-serving ways of passing on income tax-free to future generations.
That, however, is clearly not true for Buffett, who donated massively to Gates’ philanthropy. Nor, for that matter, is it true for Gates. His philanthropy is ruthlessly data-driven.
The idea of Warren Buffett as a crony capitalist is hilarious beyond belief. Some people here are drinking way too much of the kool-aid.
11. February 2012 at 20:13
BW, yes, the big difference is that the Gates-Buffett Foundation is transparently-managed. This is allegedly not the case for the Stichting INGKA Foundation, which owns most IKEA outlets (the IKEA franchise and trademark are said to be owned by a separate entity) and is comparable in size with the Gates-Buffett Foundation.
11. February 2012 at 20:35
I know of three main arguments for worrying over high income inequality. As it happens, the second and third arguments apply even if consumption inequality is much less.
1) “median standards of living could be higher if the top 1% weren’t taking so much.” – this one, as you point out, is reduced insofar as the top 1%’s extra share is being invested rather than consumed. Of course, the post-1970s extra inequality now accounts for a foregone increase of about 25% in the median household’s income. So there would have to be a *lot* of extra investment by the rich going on before the shift in consumption shares became insignificant.
2) “Power follows money, and a society with an outsize share of money held by the 1% will tend to have subpar government and ultimately subpar growth.” You can argue with this as a historical claim, obviously, but the inequality it relates to is inequality of political donations. And political donations inequality seem to if anything increase *more* than linearly with income inequality.
3) “Inequality isn’t a problem per se, but it’s an indicator of something gone wrong.” Here income inequality is just being used as a marker for other problems in American politics or economy, rather than as grounds for 90% tax rates on incomes over $1 million per year.
In fairness, people often talk like they mean #1, in which case lower consumption inequality is relevant. If the rich are just investing all their added money, then taxing it, while holding societal investment constant, is just replacing government debt issuance with higher tax burden on the top 1%, with no consumption increase for the middle class except insofar as a lower government debt burden enables better macroeconomic management and better long-term income growth. Have I got that right? I think I have.
But is there actual good data on consumption by the top 1%? I was under the impression it had taken some work just to identify income shares, let alone spending shares. The CBO report I found explicitly says the data do not adequately capture consumption at the top.
How can we tell people not to use income data about the top 1%, if good consumption data for the top 1% isn’t even available?
12. February 2012 at 07:27
Thanks Anon.
mbk, You said;
“Downside: most people in many European countries never realize how much tax they pay. The only ever saw their net income.”
So American progressives who defend the current income tax are their own worst enemies. It keeps total taxes low. Some might reply that progressives favor tax simplification. But the investment income withholding described by you must be a flat tax, isn’t it?
Gordon, They like me because I’m a great guy! Seriously, I have no idea why I was included in that picture. I haven’t actually defended either side of that debate. I’ve claimed they are both wrong to some extent.
mbk, Some of those problems are easy to overcome. Most US states already have sales taxes on new cars. Just make the tax rate progressive. No need to address engine size. We already have taxes on houses, just make those progressive. Wives are no problem, as I believe all adults should be treated as individuals by the government. The government should not recognize marriage.
Yachts are trickier, but this tax flight problem also occurs with an income tax. People earn income off shore. So if we started with a consumption tax and proposed moving to an income tax, I’d get the same objections.
Bottom line is the best solution is government spending of only 15% or 20% of GDP (like Singapore and HK.) Then you can have low tax rates and less cheating.
Vivian, Obviously I favor abolishing the income tax, but that has no bearing on this post. I was making a moral argument. Lots of people think Buffett was calling for much higher taxes on his ACTUAL income, but he wasn’t.
Statsguy, If you really did shift to a consumption tax, you might want to do this compromise with progressives:
1. Impose a fairly significant one time levy on all capital, including offshore profits, and allow the rich to pay that levy over a specified period of years.
That takes care of all previous “unfair” capital accumulation, which was never taxed at all. But that would take a level of trust between the various political groups that would make it a nonstarter in the US. Only in places like Denmark could that happen.
BW, I agree.
anon, That sounds right. In Europe it would be illegal for a wealthy person to do what Gates and Buffett did, you are not allowed to give away more than 1/2 of your fortune.
Daniel, I agree on point one, and that it’s actually a point that refers to consumption, as you say.
I am not sure I agree about power. Income got much more equal in the 1930s than the 1920s, but governance got much worse. I still think income is the wrong variable. Wealth inequality would be a better metric. But wealth (properly measured to include human capital) should be highly correlated with consumption.
It’s true that if the government taxed Gates and Buffett heavily, then they would have the power to decide where all that charity goes. Instead of curing malaria in Africa they might want more foreign aid to Egypt, Pakistan and Israel. I rather have the rich allocate charity.
Studies show that spending on advertising has very little impact on election outcomes.
I mostly agree on point three. There may be flaws in our intellectual property rights regime, plus flaws in finance regulation, which boosts inequality. But I doubt it’s the main problem.
I think consumption inequality has gotten a bit worse, but now where near as much as income inequality.
12. February 2012 at 07:54
“1. Impose a fairly significant one time levy on all capital, including offshore profits, and allow the rich to pay that levy over a specified period of years.”
ISTM that this is less of a problem with a real consumption tax, which will tax future consumption from accumulated capital. It is a bigger issue with a progressive payroll tax. Additionally, some folks argue that rent on land and similar resources is actually a sizeable fraction of GDP, when one properly accounts for business-owned land/resources. I’m not sure about this argument, but if true it makes sense to tax land rent more, even while leaving capital investment generally untaxed.
12. February 2012 at 11:58
@StatsGuy
That’s not logical at all. Anyone can advocate anything, and I’m in favor of that. What I am against is the *reaction* to Buffett’s position that goes something like “What a wonderful selfless man – he wants to raise his own taxes for the good of the nation!”. He may be advocating something that is, in fact, best for the nation, and he may even believe it. But it is also undeniable that higher taxes on high incomes benefit his portfolio (until such day that he advocates eliminating the tax advantages that he and his firms take advantage of, e.g. death benefits). We can have an honest disagreement about the motivations that drive him to publicly advocate such a position – one can believe that the major motivation is that he truly believes it is best for the country, I happen to think he is mainly motivated by what is best for his portfolio.
But it is not a tenable position to hold that his motivation is to advocate what is best for the country even though it is detrimental to his portfolio.
12. February 2012 at 18:40
Scott,
“So American progressives who defend the current income tax are their own worst enemies. It keeps total taxes low. Some might reply that progressives favor tax simplification. But the investment income withholding described by you must be a flat tax, isn’t it? ”
Correct on both counts. In Europe it’s the progressives that fought transparency over how much tax is paid. Hence, say, the division into “employer” and “employee” share of some deductions. If the employer pays (pre-“gross” salary), it doesn’t look like a tax, it looks like that scoundrel boss just pays low wages. In a parallel issue, oftentimes the public doesn’t know what their medical treatments cost: in any place they’re paid for by vouchers, the patient has no idea how much it cost.
The investment withholding I know of is a flat tax. I know of 25% in Austria, e.g. , payable on all interest or capital gains. You think you’d pay less if it was a part of income tax? Demand a full income tax assessment and you’ll be given one. If you’re correct you’ll get a refund of some of the withholding.
12. February 2012 at 21:01
I just can’t believe what I read here.
You and your supporters will make any argument, how ever stupid and transparent, to argue to give rich people more money.
That Buffett comment is off the charts inane. As is the guy who says that giving to charity is self-serving. As is the comment on the tax rate on bonds for that matter. No matter how much disingenuous misinforming bullshit you try to throw it, the tax rate on capital gains and dividends is 15%
The ridiculousness of the arguments here just boggles the mind.
How do you even keep your job?
You’re a one-man open-and-shut case against tenure.
13. February 2012 at 06:36
anon, I agree with everything you say.
mbk, Thanks for that info. I had thought Austria had no cap gains tax, is that wrong, or was it changed recently?
RN, Actually I do understand tax theory, and the tax rate on bonds is over 100%. I see that you don’t understand this stuff, but ignorance doesn’t give you an excuse for throwing out insults like a 4th grader. Try actually explaining to me why you think the real tax rate on bonds is less than 100%. It might be more effective. If you are not able to do so, then I’d suggest trying a different blog.
The 15% figure you quote isn’t even correct. And if it were, it would still be 15% too high, as it represents the double taxation of wage income that is saved.
13. February 2012 at 07:17
Scott, Austria has had a capital gains tax for a long time, at least since the 90’s, from bank interests to investment incomes such as mutual funds etc (whether dividend bearing or reinvesting). It initially had the sensible rule that only gains realized in a short time period (<1 year) were taxable. Effectively this made it a very generous 401k-like thing with just a 1 year road to tax freedom. What's new of 2011, sadly, is that this cap has fallen and now any interest or realized gains are taxable at the source when they occur regardless of time frame. Part of the scramble for areas where there's still "room for taxation" (yes, this was the wording used in public discourse) since the left regained power a few years back.
For what it's worth the US does withholding too on some non tax residents. I was taxed a 30% withholding by the US IRS on profits from shares sold over eTrade because I had previously been a US tax resident. I was told I could trade this tax paid with income tax due in Singapore that year. Sadly that particular year I was just starting out here and had no taxable income. So Uncle Sam just kept my money with no recourse.
14. February 2012 at 17:22
mbk, Thanks for that info. Sounds like Austria made a foolish decision.