Warren Buffett: “Stop Coddling the Super-Rich” (2011)
nytimes.com
nytimes.com
I've been in finance long enough to believe that this is true.
The problem is that the rich have the ability to take their income in alot of different ways.
Tax income more, they'll take it as dividends.
Tax dividends more, they'll take it as capital gains.
Tax capital gains, they won't realize their capital gains until they can offset them with realized losses or they'll just get bank loans again't their stock holdings.
Tax assets on death and they'll pass them o n in trusts.
Some will move money off shore if they think they can get better returns that way.
The problem is that no tax code can close all loop holes because you just can't foresee the creative ways people will out maneuver the tax code.
Who would have thought 25 years ago that companies would buy other companies in different countries, not to acquire their products or markets, but to acquire their headquarters address to lower the tax paid in the US.
Admittedly it is pretty simple example but my point is the loopholes are not on accident, it's by design.
Such people don't have to work in "money", they can pass shares or bonds or IOUs.
Edit: fix stupidity
Bonds have a cash value, tax that.
If they start only using IOU's hit them for unauthorized creation of currency under the National Bank Act of 1863 and the Legal Tender Act of 1862.
The loopholes aren't there by design, but the complications of the taxes are in there by design. We wish to encourage education and business (both education and business expenses are deductable). We want to encourage renewable energy (solar taxes, net metering, etc. etc.). We want to encourage home ownership (mortgage deductible), charitable giving (church donation deductibles, etc. etc.).
Taxes aren't complicated if you just fill out a 1040EZ. Taxes become complicated when you want to make sure you got all of the money back from deductibles and credits.
Buy a laptop for $1,000:
* That comes out of money you've been paid, presumably, so in 43 US states, you've paid income tax already on it, and your company has paid payroll taxes.
* 45 US states charge sales tax, so you pay sales tax.
* If you paid with a credit card, a cut of your transaction goes to the credit card company, who pays taxes on their profits from that transaction.
* The money is transferred to a bank account, and that bank is taxed on the profit that they make from that deposit.
* The laptop company pays taxes on the profits that they make from that laptop (depending on where they're located, but if it was sold in the USA, they pay taxes).
* Any shipping company involved moving that merchandise around paid taxes on the profits they made.
* The company that brought the laptop into the USA pays the import taxes/tariffs associated with it.
Just at a glance, every time something changed hands, it is taxed. And this doesn't get into things like excise tax, which are even more fun.
Gifts are taxed only if they are above $10,000. When you give money to your buddy to help pay for a meal, that isn't taxed (money changed hands, didn't it?).
Furthermore, there are lots of taxes out there that do not involve the movement of money. Property Taxes are when a municipality agent comes to your property, they make up a number that "sounds right", and then start charging you for it.
Furthermore, you aren't taxed when you buy or sell stocks or bonds. (Bernie Sanders wants to change that... cause he doesn't know how bad of an idea that is). You only are taxed on your GAINS: dividends and capital gains.
If you buy a stock at $100, then sell it for $110, you are taxed 15% on $10. Not on the $100 or $110 individual transactions. (In contrast, the Financial Trade tax Bernie proposes would be a tax on both the $100 AND $110 transactions)
He is demonstrating a point here people. "Simple taxes" are unfair. Taxes are complicated because real life is complicated, and we wish to be fair.
Tax 0,1% of net worth of those whose net worth exceeds say $10 million. Such people have to get assessment of their net worth and then pay their tax.
Of course they have incentive on doing slightly funny things with their net worth, but it is difficult to race them to the bottom in view of very large fines for crossing the line.
Of course people will skip citizenship then; but as long as they do business within country it is solvable too.
Nobody in the USA has the balls to propose or implement this.
It does make sense though. Why tax the guy making money? You should tax the guy hoarding it!
Call it all wealth and throw a % on it. Make it progressively increase up and 0% on anything less than $X. We could call it a Robin Hood tax.
This will also have the incentive of causing the wealthy to invest in riskier things. Ex: 5% growth doesn't make sense with a 6% wealth tax.
EDIT: Moved some sentences around.
I've never understood why the capital gains tax rate is lower than the rate for normal income. Capital gains are basically money you earn for having money and not being an idiot with it. It's one of the major ways the rich get even richer just because they are rich and how the wealth gap widens.
From a 10,000 foot view it seems like it should be taxed at a higher rate than normal income, since theoretically the person had to actually work for their normal income which directly helped the economy and the country as a whole.
This is called 'investment'.
It takes a lot of effort and time to be good at it.
Also as long as inflation exists, one will need investments.
This is the Labor Theory of Value in another guise. Efficient allocation of resources is extremely important, and the LToV discounts that to having no value.
Market does assessing net worth pretty good today.
I haven't said a word about making tax code harder. You can remove a LOT of tax code with this change.
You could start added loopholes to your "block loopholes" law, like "If you reside in the property, it's tax free", but then you hit problems like parents given their kids properties as tax shelters, and the like.
IMO, you would need a much higher number. A 0.5% wealth tax AMT would = a 25% tax on a 2% ROI or 8.3% on a 6% ROI.
From an economic standpoint this is actually a good idea. People with lot's of unreolised income are often stuck with unproductive assets because selling them incurs a large tax bill. With this you can sell a reasonable chunk of your assets without incurring extra tax.
If there are unlikely seniors on fixed incomes with houses worth more than $10M, then they may pay this tax with shares in said house.
When their heirs come into possession of that house, they have to buy those shares back. 15 years of tax will be 1,5% market price.
It would either generate additional revenue or have them move to an area with cheaper houses/properties to avoid paying it, which would make space for young professionals who otherwise would not be able to afford it.
I'm also venturing to speculate that a lot of seniors are NIMBYs, facilitating the lack of affordable development and re-zoning, in which case that's another argument to get them the hell out of their expensive suburbia.
Think about what that'll do to your retirement. Presumably you're saving and such, and want to get to a point where you can live comfortably (not extravagantly) when you retire: a trip a couple times a year, the ability to take your grandkids to get ice cream, etc. A tax bill can be devastating to your retirement savings & therefore lifestyle.
Even in the US this is true, except to a less extreme extent. The systems the current seniors have put in place make sure few of the current workers will retire.
So why do they deserve it ? They voted in governments that fucked us, so why wouldn't we get to fuck them ?
Any policy that would cause people to be forced from their homes just because should be viewed as a failure.
I have a really really hard time feeling bad for people who bought homes in the bay area in ~1980. They won the lottery. Their home grew 10% y/y for 30 years outpacing inflation by a significant margin. They got a 30 year tax break while their income likely outpaced inflation as well because they live in an extremely good job market. That house they bought for 100k is now worth 1.7 Million. They can sell the home, move basically anywhere else in the country, and retire on the remaining gain. Yeah, I'm having a hard time feeling too bad for them.
On the other hand, the person who moved to SF in 1980 and decided to rent, I feel bad for them. Unless they found a rent controlled apartment, they've seen their rents grow 10% y/y, and if they found a rent controlled apartment they probably got evicted when the owners of the property sold it, and the new owners decided they wanted to redo the property as condos.
Lets just call it what it is, rent control for rich people. Then maybe we'll talk about it sensibly and realize that it's a horribly thought out plan.
>>On the other hand, the person who moved to SF in 1980 and decided to rent, I feel bad for them.
Instead of punishing people for being successful. The latter people should ponder on their foolishness, instead of blaming other people for being more intelligent.
Last time I check making good decisions about one's future is not a vice.
In real world, you can always bootstrap your way to a decent nest egg, whether its a retirement fund or a home. It takes time, and it takes hard work. But is very possible and a lot of people do it.
If you can't, then evaluate your spending patterns seriously. I haven't met any person yet who didn't have wasteful expenditure that couldn't be eliminated.
More often than not its not the means/resources, its lack of resourcefulness. People in general don't have the motivation to take steps towards solving a difficult problem, and the discipline to suffer through a grind and see it through to the end. This of course is a very different problem, the responsibility of which starts and ends at a individual alone.
People who are poor or improvised deserve to live a life that also allows them to have something enjoyable, including hobbies. It shouldn't beconsidered a lack of discipline that an impoverished person could maybe enjoy their life once in a while. It's depressing how much one can expect a life of misery of they're poor.
No, not really. Especially given housing prices now.
You have now to choose between growing your house value or nurturing your career.
Taxation is (ab)used, IMO, to promote normative ideas far too much. It should simply be a way to pay for government, nothing more, nothing less.
If it could be deployed to promote normative ideas cheaply, and there was general consensus about what norms to promote it'd be different. But there's too much ardent BS from both sides to trust this mechanism - it would be much more honest to withdraw from it.
This is doable, with tools from economics but using norms to derive other norms is a good way to end up with entangled and bizarro systems. Just getting people to agree on Coase's interpretation of externalities seems nearly impossible. We have partial technocracy, with ideological shims rather than stern empirical underpinnings.
Calling the Wobblies the lunatic fringe is accepting propaganda uncritically. The labor movement, and the IWW was a key institution of the labor movement, was radical, but not fringe and has been persistently defamed for decades.
> Taxation is (ab)used, IMO, to promote normative ideas far too much. It should simply be a way to pay for government, nothing more, nothing less.
What is the role of government? Everything the government does is normative.
> This is doable, with tools from economics but using norms to derive other norms is a good way to end up with entangled and bizarro systems. Just getting people to agree on Coase's interpretation of externalities seems nearly impossible. We have partial technocracy, with ideological shims rather than stern empirical underpinnings.
You are being far too optimistic believing there could be a technocracy without ideology. That kind of thinking only can give you a blind spot for your own ideology. Technocracy these days usually means the kind promulgated by neoliberalism, but it has also been pushed as part of authoritarian command economies like the USSR. What exactly is a "full" technocracy supposed to be?
> Just getting people to agree on Coase's interpretation of externalities seems nearly impossible.
And irrelevant. Coase theorem only applies when transaction costs are minimal. They are not minimal in real life. They can't be. Coase theorem theoretically nice and practically useless. Coase's most substantial contribution to economic theory is how people organize in the presence of transaction costs, not how nice everything would be without them.
Alleged "Soviet" technocracy just wasn't - it subsumed all science to the One True Theory which was Communism. Indeed, it's the poster child for what I'd be against. I mean Lamarckianism? It has to be real science.
The Coase theorem explicitly excludes consideration of transaction costs, in the same way constants get dropped in differential equations.
But my native tendency is to underplay externalities anyway, because it's too hard to get intersubjective agreement on them. This goes to this peculiar property of norms to get weird when attempts to stack them on top of each other occurs. How was it that "state's rights" led to lynchings anyway? Because they linked "Southern Honor" and States Rights in this incoherent manner to produce Jim Crow. Sixth-graders - most of them - could argue that away.
Finally, what is the role of government? To enforce and modify law. The minimal role is to enforce land claims, prosecute criminal acts and enforce contracts. Actions of government should not create norms. Anything you can manage beyond that should be a source of skepticism.
2) Factors other than the tax system. Correlation != causation, IOW. The U.S. had (something approximating) the only standing industrial infrastructure in the world post-WWII. It's also worth noting that the Kennedy tax cuts probably released a lot of pent-up economic energy. Similar tax cuts under different circumstances may not have the same effect - there had been widespread privaiton in the US from 1929 until the '50s, and this sort of acted as a "second stage" booster.
3) A general cultural civic-mindedness. I recently listened to a presentation of Devon Energy's CEO, and his father started a fund in energy and wanted it structred as a registered security , one of the first , and was told "you don't need to do that" by the SEC, but he persisted because he felt that was better.
He then contrasted that now with people spending lots of money to avoid SEC regulation. That highlights the level of culture shift since then.
The other problem with higher tax rates on investment is one winds up with less money to invest. There's a non-trivial economic cost to that as well.
Not all bridges and roads are equally valuable. And in some areas, the dominant method of financing new roads is through tolls. I once estimated the number of man-years per day lost to congestion on I75 in Dallas around 1985 . It was quite the figure.
The rich will always try to dodge taxes, but we can make it harder, say for example by spreading it out over different forms of income and consumption.
We should also be looking at the international stage to diminish the value of tax havens, offshore companies etc. I think many countries are beginning to realise that ever lower taxation rates are a race to the bottom.
If we didn't have that, taxation rates would be a race to the top.
I think it's good that countries compete on things like tax rates and good governance. No person or company should be beholden to any one government.
The hard part is figuring out how to calculate land values. The good news is that we can find an algorithm to agree on and then put it in force, avoiding all the jiggery-pokery that goes on with taxes and accounting regulations.
Worth reading: http://kaalvtn.blogspot.co.uk/2013/01/r-farmers-will-all-go-...
This is refuted by the existence of tax free municipal bonds. Tax rates most definitely affect investment choices and strategies.
It's really a question of political will.
Just think about the amount of resources the US spends on the "war on terror" or the "war on drugs" compared to the "war on tax evasion."
If the US gov wanted to reform the tax code and enforce everyone paying their fair share, they most certainly could.
The real issue, in my opinion, is that certain people have disproportionate influence in the legislative and rulemaking process, alas, we have the system we have.
Not sure if you're trying to be sarcastic but many consider the "war on terror" and the "war on drugs" complete failures and a poor allocation of resources.
I'm just saying that the US gov has tremendous financial resources. Take a small drop ($10B) of those misallocated resources and you can triple the IRS' annual enforcement budget.
I was curious so I looked it up.
2016 IRS budget: $10.6 billion [0]
2015 DEA budget: $2.0 billion [1]
[0] http://thehill.com/policy/finance/263767-irs-scores-year-end... [1] https://www.justice.gov/sites/default/files/jmd/legacy/2014/...
What if this is the entire tax code:
All US citizens must pay a tax of 40% of all the money they receive from any other entity for any reason.
I haven't thought through the wording completely, but if we replace the convoluted tax code with a MUCH much simpler one, lots of these problems would go away.
*Progressive as long as you ignore the primary sources of income for the wealthy.
There's nothing new about offshore tax havens - cf Switzerland.
http://techcrunch.com/2011/08/15/screw-the-rich-heres-how/
"Buffett calls for an increase in all types of taxes – income, dividend and capital gains. That would be a nice triple layer of protection against any newcomers, and still preserve all – 100% – of the $47 billion he’s accumulated until now."
If Buffett was really willing to pay more taxes, he could just stop using loopholes to avoid paying hundreds of millions every year. Or stop litigating with the IRS to get to pay less. He doesn't want "the rich" to pay more taxes. He wants other (less) rich people to pay more taxes.
Rich people are not comfortable with the fact that it should easy for others to get rich, how useful would their current position be, if it were?
Point is, the money is literally chump change to them.
http://www.forbes.com/sites/paulroderickgregory/2012/01/25/w...
Edit: maybe that source isn't as good as I remember, but other sources seem suspicious over the factual accuracy of Buffet's claims.
http://www.politifact.com/truth-o-meter/article/2011/sep/21/...
http://www.factcheck.org/2011/10/shes-no-buffetts-secretary/
Is it me, or does that not make any sense? The average tax payer of that percentage makes that amount, therefore she must make that amount? Am I supposed to believe this man doesn't know how averages work? Because the alternative is he's being very disingenuous.
Given that you'd only pay 35% tax on the money earned above $379,151, so it'd take a pretty darned high income to bring your total tax rate up to 34%.
1: https://www.tax.ny.gov/pdf/current_forms/it/it201i_nys_tax_c...
"Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent. "
So unless his secretary is sending in extra voluntary donations, it's hard to to imagine how both of these things can be true.
If you're single and your AGI is $60,000, your taxable income is $49,700 (or lower, if you itemize deductions). You'll pay $8218.75 in Federal income tax, $3081.40 in social security, and $720.65 in Medicare, for a total of $12020.80 (24.2%). If you include the employer share of social security and Medicare, it comes out to $15,822.85 (31.8%).
He probably should have mentioned it if that's what he really did, but those taxes are real. Ask someone who's self-employed.
I took home 66% of my gross income.
I bet there were people in the 1850s saying the exact same thing.
Even then, STFU. You have no right to dispose of the lives of others.