Taxes, Warren Buffett, and Paying My Fair Share | Hacker News Reader

Taxes, Warren Buffett, and Paying My Fair Share

freakonomics.blogs.nytimes.com

34 pointssfk29 comments

While I have great respect and awe for Warren Buffet as a businessman and investor, I often feel like he publicly says little anecdotal things like this that are blatantly misleading and people just assume the validity of his premises in an ad hominem fashion. ‘Well, he is Warren Buffet!’

Wikipedia says [1] that the top 0.1% of gross earners pay out almost 20% of total federal revenue, the top 1% almost 40%, and the top 5% almost 60%! The bottom 50% of earners pay 3.3%.

So while Buffet may be paying a smaller percentage than his secretary, it’s fifth grade mathematical knowledge that percentages are normalized values. When you look at the total magnitude of taxes paid, the rich are paying a massively disproportionate share. The Wikipedia article says that when the percentage of revenue from each bracket is compared with the wealth distribution rate, it lines up very closely. That is, the top 5% pay 57.1% of the taxes and have 57.2% of the wealth. Lining the two curves up in such a way would seem, to me, a reasonable approach to taxation.

[1] http://en.wikipedia.org/wiki/Taxation_in_the_United_States#T...

The Wikipedia article says that when the percentage of revenue from each bracket is compared with the wealth distribution rate, it lines up very closely.

See below - one could argue that the bottom 50% numbers are extremely divergent, which is very significant, affecting half of the population (though almost none of the wealth).

Lining the two curves up in such a way would seem, to me, a reasonable approach to taxation.

It all depends what you mean by "reasonable." The numbers given by Wikipedia are here:

Top 1%: 36.9% of tax, 32.7% of wealth Top 5%: 57.1% of tax, 57.2% of wealth Top 10%: 68% of tax, 69.8% of wealth Bottom 50%: 3.3% of tax, 2.8% of wealth

(with the note that this "top/bottom X%" thing is a truly awful way to present this type of data, something I would rectify if I had time, but knowing these data sets, it's probably presented in an even worse format in the reference, so...)

One argument would be that these are all pretty close, so everything's just right. Except for the super-rich, everything is within 1%.

Another argument: this is an extremely progressive tax system, because it's measured against wealth, not income, so in effect, those that have done the "right thing" and put money away are being effectively punished for it, paying far higher taxes per unit of income than their more wasteful peers that haven't been saving.

And another: the .5% out of 3.3% overpay at the bottom 50% of the curve is massive, proportionally speaking, and really amounts to the bottom 50% paying about 20% more than their "fair share" of taxes. Worse, these people make up the bulk of the population, are actually hurt by this overpayment, and the amount of money it brings in to the government is fairly negligible.

Taking things further, we could try to work out how much each of these taxes actually "hurts" people in each bracket, i.e. how much utility it deprives them of. For instance, taking 10% of a billionaire's wealth away from him clearly "hurts" him less than taking 10% of someone with a $20k/year job; typically people assume some sort of logarithmic money -> utility mapping. Under any such mapping, even a slight one (and I think most people would accept a significant money -> utility discrepancy) the current curve (wealth vs. taxes) becomes regressively skewed.

The other thing to consider is that "fair" has other meanings when you're living in a democracy, as well - at least indirectly, we should expect "occupancy rates" at each tax bracket to determine the rates that they pay. By this logic, the people near the hump of the income distribution should be best off, and people making the most should be worst off (people in the middle would not choose to shift too much of the tax burden down to the lower classes because there's just not too much burden that it can absorb, with the lowest 50% of the population in control of only a couple percent of the total wealth).

I've done some modeling of democratic influence on tax rates, and one of the main conclusions I came to was that under what we figured were fairly reasonable assumptions (and there are a lot of them), a self-interested body of people democratically figuring out tax rates will generally come up with a very progressive system (more progressive than ours under most assumptions). In order to come up with a system closer to ours, you need to make the "fairness factor" weightings very high (i.e. assume that even the poor are highly offended by disparities in tax rates), or assume that the number of "votes" a person gets has some dependence on their wealth, or some combination of the two. In reality, it's probably a combination of the two (many people feel, for better or worse, that a flat tax is "fair", and those at the higher end of the wealth curve have increased influence than their numbers would suggest) that lets our tax rates stay at the current distributions.

Anyhow, I'm not trying to suggest anything in particular from this (I'd probably tend to agree that the current system is at least within spitting distance of a reasonable compromise, obviously with some edge cases and loopholes that could be improved upon), other than that there are pretty reasonable arguments that pretty much any tax rate curve is fair or unfair, including some very extreme ones.

You've obviously thought about this a lot more than I have. I readily admit that it is an extremely complex issue when analyzed with due consideration of the subtleties involved, and I certainly don't profess to be knowledgeable in any meaningful way on tax policy. My point was mostly that Warren Buffet in particular sometimes seems to over-simplify issues such as this one in a way that I think is specious, albeit while at the same time making him look super-populist and folksy.

Thanks for pointing out so many things in such an objective fashion without getting into any political rhetoric. I definitely agree that no matter which way you do it, pretty much any taxation scheme is going to be unfair from one perspective or another, and I largely concur on all the issues you bring up. That's why I hate to see Warren Buffet make these simplistic claims that people can rabidly latch on to, rather than a real discussion of the constraints and trade-offs involved like you've done.

This reply in itself is worthy of it's own Wikipedia article. Seriously, I don't think I've ever seen a response to what could have been a seriously trollish thread become so succinct in it's content and professionalism.

Nice work ewjordan.

It gets boring to repeat this comment so often, but: Buffett's income is mostly in the form of capital gains and dividends. These are paid out of the taxable income of corporations. So he pays a direct 15% tax on something that's previously been taxed at 35%--a low rate, if you ignore the 35% part.

It would be like claiming that the average worker's income tax is zero, since federal withholdings essentially mean that their employer keeps the money and remits it to the government. (Obviously, people make this mistake when they pretend that half of social security taxes are paid by employers, not employees--as economists have long since realized, the economic effect of a tax is, discounting transaction costs, independent of which party in a transaction gets taxed.)

And the local 7-11's income is paid out of the taxable income of its customers, who have previously been taxed at their normal income tax rates. And those customers income is coming from an employer that takes its income from customers that have already been taxed at normal income tax rates.

There's nothing nefarious going on here, income tax has always been collected at every hop. The exception is that businesses can deduct expenses against earnings, so some B2B transactions are "immune" from income taxation.

Sure, I'd be all for a system that taxed held wealth each year instead of income, I think it would be a hell of a lot more fair (both the pain you feel by paying taxes and the benefits you receive from living in this country scale with wealth a lot more closely than income), but that's another matter. As things stand, every dollar that anyone sees has already been taxed many times before, and it will be taxed again every time it's used. I see no reason things should be any different because money is coming in from an investment as opposed to work.

The difference here is that it's the same kind of income. If Warren Buffett personally owned a soft-drink company earning $1 billion each year, he'd pay ~40% of that in income taxes. If Coca-Cola earns $1 billion, it pays 35%, and then he pays 15% to see any of it.

It's essentially a tax on liquidity. Another way to look at that is that it's a big subsidy for people with enough concentrated wealth to take something private.

I just wanted to point out that neither dividends nor share price require taxable income. Corporations with zero taxable income can both pay dividends and have share price go up. In that case, the investor is only paying 15%, not 35% x 15%.

They can only pay dividends out of money they've raised or money they've earned. If it's the former case, they're just shuffling money from all investors to equity investors, and giving the government a 15% cut (so investors lose). In the latter case, the general taxable-income argument applies.

Actually, the general taxable income argument may still not apply depending on how previous loses are carried forward. Which really ties into another point I was going to make that companies are quite adept at minimizing tax exposure. The GAO reports the average corporation pays an effective tax rate of 25.2%. http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_Sta...

But obviously, mileage may vary: http://www.bloomberg.com/apps/news?pid=20601110&sid=a6bQ...

I believe the point was that Buffet was comparing two things as if they were equivalent, while in fact one has an additional level of taxation between when it provided value to a consumer and when it got into the hands of the person providing the value.

A corporation's income does not include money paid out in salaries (as it obviously shouldn't).

15% of 35% is still lower than 35% of 35%.

Why do you think so many CEOs like Steve Jobs have a $1 salary? Do you really think it is because they want to pay more taxes?

Dividends are paid out of taxable earnings; salaries are paid out of pretax earnings

Why talk about dividends? As you should know, Warren Buffet isn't a fan of dividends, and brk pays no dividends. There are quite a few tax benefits by using stock options which I cannot be bothered to list them all.

The most important benefit is that the company can use the money saved to invest right now instead of paying it upfront in taxes. The employee also saves by being able to decide which tax bracket he falls in and when to liquidate and incur taxes (likely when a Republican is in office).

http://hbswk.hbs.edu/archive/2233.html

http://www.nytimes.com/2007/06/07/business/07tax.html

Those are good theoretical arguments, but Buffett's income is much more likely to be in the form of dividends and taxable gains than stock options. He does own non-Berkshire stock (or at least did fairly recently; there are SEC filings indicating that he had a substantial personal stake in USG in 2006.)

They are not theoretical. It's amusing how you think you are smarter than these billion dollar corporations in saving money.

Your conjectures on the other hand, are theoretical. If you actually knew what you were talking about, you would know that USG hasn't paid dividends since Feb 21, 2001. And interestingly this happened shortly after the first SEC filings that showed Buffet bought USG.

They're not trying to save money; they're paying a tax to raise money from the capital markets.

I'm aware that USG doesn't pay a dividend; it's probably not Buffett's only stock. Your argument is that Buffett gets most of his income from stock options (which he publicly condemns) not from dividends and capital gains (even though he does have his own portfolio).

Why would they pay a tax to raise money from the capital markets when according to you, they save money by paying a regular salary? And if you were really aware that USG doesn't pay a dividend, then why did you bring it up as evidence that it applies to Warren Buffet?

So far the burden of proof lies on __you__ to prove that Buffet gets most of his income from dividends since all the evidence points otherwise. Not the other way around.

This is basically what you are saying:

Buffet probably earns a lot through dividends in his personal stocks instead of the massive holdings he has from Berkshire, but I have absolutely no evidence. I will also ignore all evidence that the stocks he holds pay out no dividends, and the fact that he has publicly denounced dividends and doesn't pay them in his own billion dollar company Berkshire.

Prove me wrong beyond a resonable doubt.

Why would they pay a tax to raise money from the capital markets when according to you, they save money by paying a regular salary?

Historically, companies that need to raise lots of money have found it easiest to do so by being publicly traded. Even though there are tax disadvantages, it can still be net beneficial.

I am not arguing that he just gets his income from dividends. I assume capital gains are part of the mix. Your claim is that he receives stock options, right? (If he trades them, the capital gains treatment is not so friendly.) But who is giving him these options? And why?

My argument is just that he's more likely to make money from dividends and capital gains than from stock options. Obviously, that's not his only source of income. He's traded copper futures. Maybe he gets speaking fees. Maybe he has an eagle-eye for dropped change, and tracks down the droppers so he can file a 1099 and report the income he earned from them.

My argument is just that he's more likely to make money from dividends and capital gains than from stock options.

Then this is something that you will have to prove with cold hard facts since all the evidence points otherwise...and not just because you don't like what Warren Buffet is saying.

I pay a very low federal income tax bill for my gross income because I choose to pay higher local taxes (through both property and sales tax which are both deductible in TX since we have no state income tax).

The federal income tax hits non-property owner singles by far the hardest. As wealth increases people are generally no longer single nor renters. If you start to factor in FICA people making around the ~$104k limit of social security probably pay the highest total federal tax bill percentage wise.

We won't ever fix this system though because the poor, even if you took all their money can't pay for anything and the rich have the money to help shape policy. This leaves the upper middle class responsible for the majority of the burden percentage wise.

The "I'm not an American" question: Why does the IRS allow you to write off mortgage interest? That seems like a lot of tax lost for not much benefit to the government. Was it enacted to boost property ownership or something?

The same story as every other one-off in the tax code: it was slipped in to placate an interest group who would monetarily benefit from the deduction, on the theory that the deduction rewards socially valuable behavior. (The official position of the American government for over a generation now has been that increasing home ownership is, ipso facto, socially desirable. It is a cornerstone of the "American Dream" -- our consensus idealized version of an idyllic middle class existence. )

Mortgage interest is a bit different than other one-off tax code hacks in that the group which benefits is much, much larger than typical. It is also essentially impossible to repeal, as the mortgage interest deduction essentially makes mortgages cheaper which makes property values higher, so repealing it would have the immediate consequence of making half the country poorer and also breaking their monthly budgets in an extraordinarily visible fashion.

A similar middle-class entitlement is the essentially limitless access to education loans. That also has some negative consequences (it underwrites the continual tuition inflation in higher education) and will also never be meaningfully reigned in.

[Edited to add: A common misconception, even among Americans, is that the IRS sets tax policy. The IRS does not set tax policy. Congress does, via legislation. The IRS just implements Congress' directives -- however vague, contradictory, and ill-advised they may be. My apologies if you already knew this and were just being imprecise in language.]

It's quite interesting in Australia - Home mortgage interest is not deducted but Investment Property interest is considered a business expense and is thus deductible. (Which makes sense to a degree - purchasing an income-generating asset is deductible for any other business, why not in RE).

Same in the UK. However, there's a loophole, of sorts, that lets you claim a percentage of your mortgage interest in the UK if one room or area of the property is dedicated to your business.

The IRS does not set tax policy. Congress does, via legislation. [..] My apologies if you already knew this and were just being imprecise in language.

It's roughly the same here in the UK (though the tax man can choose to "interpret" the laws in his own special way) but I was being more pragmatic than accurate - the tax authorities are the "face" behind these sorts of policies, even if the law makers came up with them :-)

No only in USA, it is like that everywhere.

I am from Brazil, and it is even worse.

My wife is German, and the rich in Europe simple change their home to Monaco to simple don't pay the income tax at all.

[2008]

And besides that it's pure trolling to get the percentage vs. absolute tax payment argument kickstarted.

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