Warren Buffet Proposes Minimum Tax On Highest Income

By Justin Gardner | Related entries in Democrats, Republicans, Taxes

Before we get into the details…Buffett points out the single biggest logic flaw of all the arguments from those who oppose higher taxes for the wealthiest. And it’s stupid simple.

Here we go…

Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

In other words…people want to make money. And whether their profits get taxed at 15% or 25%…they’ll still want to keep making money. Duh.

This also goes back to my firm belief that a lot of Americans DO NOT understand how our progressive taxation system works. Granted, this is based on non-scientific evidence, but I bet you that if you asked 20 people how we were taxed, at least 5 would say that when you earn over a certain amount of money…it’s ALL taxed at that rate, not just the amount that goes above that threshold. I was shocked at how many of my friends and colleagues didn’t understand something this basic, but they didn’t. And that’s what the Norquists of the world have been preying upon.

Anyway, back to Buffet’s proposal…

The Forbes 400, the wealthiest individuals in America, hit a new group record for wealth this year: $1.7 trillion. That’s more than five times the $300 billion total in 1992. In recent years, my gang has been leaving the middle class in the dust.

A huge tail wind from tax cuts has pushed us along. In 1992, the tax paid by the 400 highest incomes in the United States (a different universe from the Forbes list) averaged 26.4 percent of adjusted gross income. In 2009, the most recent year reported, the rate was 19.9 percent. It’s nice to have friends in high places.

The group’s average income in 2009 was $202 million — which works out to a “wage” of $97,000 per hour, based on a 40-hour workweek. (I’m assuming they’re paid during lunch hours.) Yet more than a quarter of these ultrawealthy paid less than 15 percent of their take in combined federal income and payroll taxes. Half of this crew paid less than 20 percent. And — brace yourself — a few actually paid nothing.

This outrage points to the necessity for more than a simple revision in upper-end tax rates, though that’s the place to start. I support President Obama’s proposal to eliminate the Bush tax cuts for high-income taxpayers. However, I prefer a cutoff point somewhat above $250,000 — maybe $500,000 or so.

Additionally, we need Congress, right now, to enact a minimum tax on high incomes. I would suggest 30 percent of taxable income between $1 million and $10 million, and 35 percent on amounts above that. A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours. Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.

It is simple enough in theory, but does anybody think it’ll fly with Congress? Seriously doubt it. Especially when the House is still under GOP control.

Still, there have been signs that Republicans are willing to work on this and ignore the Norquist pledge. But they’ve said that income tax rates can’t be touched. Revenue must come from other sources. Is that a sign that they’ll agree to up the payroll tax and hike the capital gains tax?

At this point, I’m not really sure what we’re going to be seeing with regards to a grand bargain, but I like Buffet’s plan.

What do you think?


This entry was posted on Monday, November 26th, 2012 and is filed under Democrats, Republicans, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

45 Responses to “Warren Buffet Proposes Minimum Tax On Highest Income”

  1. David P. Summers Says:

    While the issue of where the top tax rates should be is a real one, Buffet’s article is flawed enough, in its ignoring the element of risk, to provide little support for that position.

    Why do the lower interest rate investments, that Buffet is so dismissive of, exist in the first place if they are such a bad alternative? This is because the higher rates ones don’t guarantee returns and can even lose money. (Ask anyone in market in 2008 if they wouldn’t rather have been in a low interest account). Adding taxes puts another burden on these high risk investments pushes people toward other one. Investments like new technology, new products, and new businesses.

    Taxes will distort investment and policies that ignore risk will inhibit the kind of investments that can provide the most growth to our country. It maybe that top investors like Buffet can do well no matter what taxes are like, but this isn’t necessarily true of all investors and eventually some will decide that all that time they put in (inspire of the snide remark about “lunch hours” many investors put in long hours) is better spent getting a seaside home to spend with the family.

  2. Tillyosu Says:

    I was watching an old YouTube clip of Frank Caliendo doing a great impression of John Madden in which he pokes fun at Madden for constantly stating the obvious, and prompting the constant response “And?…”

    I feel the same way when people make arguments based on the belief that income inequality is a priori bad. I feel like responding “Yes, income is very unequal….AND?”

    I think there’s a very good argument to be made that income inequality is a good thing. In fact Richard Epstein makes just such an argument here. Now, he may not be as smart as Warren Buffett (and I’m not being snarky here, as someone who studied finance for 6 years, I have a great deal of respect for Warren Buffett), but I still think he’s a pretty bright guy.

    But let’s assume Epstein is dead wrong, and income inequality is a bad thing. The argument that Buffett and Justin and the entire Left makes is that that capital is better put in the hands of a couple hundred employees of the Federal Government to spend how they see fit, than in the hands of the millions of investors and entrepreneurs who created that capital, and who have a personal interest in seeing it employed in the most efficient and profitable way possible. I think that’s a very tough argument to make.

    But let’s further assume that income inequality is bad and that capital is better left in the hands of the federal government. Why not tax capital gains and dividends at 99%? After all, Buffett’s main premise is that taxation has no effect on investment. If that’s true, then his position is much easier to swallow (some might call it “stupid simple”). But then, Buffett is a sophisticated investor, and somehow I suspect he knows that investors have other places to put their money than in savings accounts or under their mattresses.

  3. Jim S Says:

    Tillyosu, why do you and so many conservatives make purely binary arguments? They’re so stupid. No one is making the argument that all levels of income inequality are bad, just that like so many things in life, too much of it is bad. The 99% tax rate argument is equally foolish. They are the kinds of arguments that gave me the idea that the GOP motto should be “Simple answers for simple minds.”.

  4. Angela Says:

    I’m really beginning to wonder if the $600 billion in tax cuts made during the Bush administration served its intended purpose of fueling investment enough to make a difference, or if it caused more harm than good.

    David, I understand the argument you are making, but the question I have is where are those tax savings being invested? If American companies are doing poorly (lets face it, extra capital doesn’t always inspire demand for a product/service, its consumer spending that does), than the alternative is either bonds, or foreign investment. More than that, what good does it do if individuals invest dollars in a company that puts that money to work in such a way that it doesn’t benefit our economy. What Ron Reagan did in the 80′s, inciting growth by cutting taxes, wouldn’t work the same these days. “Trickle down” becomes “Trickle out”.

  5. Angela Says:

    I don’t think the only question is if increasing taxes for the wealthiest will hinder investment. The other question to be asked is, if tax cuts for the wealthiest remain unchanged, where is the bulk of that money being invested?
    It would be better to effect demand and consumer spending, making up 2/3 of the economy, when investment capital is not working efficiently.

  6. Angela Says:

    Also, For goodness sakes, why would a company invest money in more employees when demand for their product is down? Do they have conferences and meetings and decide that if they hire more workers, they’ll sell more stuff?

  7. Angela Says:

    We’re in a downward spiral (economists won’t tell us that of course because its too frightening). It started with allowing foreign goods to be sold at prices that we couldn’t compete with. In my view, anyway.

  8. Tillyosu Says:

    @JimS

    Perhaps your criticism is better leveled at Justin. His argument is that taxes have no effect on investment incentive, therefore taxes can be raised without affecting investment. My 99% comment was meant to show that the issue isn’t so “stupid simple” after all. Clearly you missed that.

    Simple minds indeed.

  9. Tully Says:

    But they’ve said that income tax rates can’t be touched.

    You can increase tax revenues without changing tax rates simply by limiting/capping deductions and exclusions. And you can have that burden fall on those at the top of the income ladder if you like. In fact, capping deductions and exclusions at $50,000 would raise just as much revenue or a bit more over a decade as increasing rates on the over-$250K/yr crowd, and the increase would fall entirely on the top tier of filers.

    Doesn’t matter much if you don’t control spending. To sustain current levels of federal spending overall tax revenues across the board would have to double, meaning that taxes on the middle class would have to double as well, and the poor would also have to cover a bit. And of course, as soon as the books started to balance the pols would spend even more borrowed money, if history is any guide.

    BTW, Buffet himself has avoided openly investments due to marginal tax rates. He’s talking out of both sides of his mouth. He himself is a grand master at tax avoidance. The very reason his own Berkshire Hathaway does not pay dividends is that ordinary dividends are taxed at regular income tax rates, while capital gains are taxed at lower rates.

    I’ve been saying this for years, but the eat-the-rich crowd never believes it — you cannot have Euro-style Big Government without Euro-style taxation. The Euros tax the holy living crap out of absolutely everyone, rich or poor or middle-class, through both income taxes and high consumption taxes. And they still have to borrow to sustain their spending.

  10. Jim S Says:

    Nowhere did Justin or Buffett say that taxes have absolutely no effect no matter what the level. It is, however the argument being presented by your side of this debate that any tax increases of any level will have a negative effect. For one person to say that increasing taxes as part of an ongoing debate that includes modest rate increases and then have a “reply” of “Why not tax capital gains and dividends at 99%? After all, Buffett’s main premise is that taxation has no effect on investment.” is not some kind of subtle argument. It’s a dumb binary argument in place of a rational debate no matter what you claim.

  11. Jim S Says:

    Tully, I have no real argument with people following the law. But I would say that for Buffett to really be talking out of both sides of his mouth he’d have to be like so many others who spend big bucks on lobbyists and schmoozing lawmakers to manipulate the law. The question about Buffett is what would he do if taxes went up? Accounts in Switzerland, the Caymans or some other offshore tax haven? I tend to think not. If you know something that would prove that wrong, please post it.

  12. Angela Says:

    @Tillyosu

    “who have a personal interest in seeing it employed in the most efficient and profitable way possible.”

    Most efficient and profitable way doesn’t necessarily mean that our national economy reaps the most benefit.

  13. Tillyosu Says:

    @Jim S

    Obviously, you didn’t read Buffett’s opinion piece, so I will reproduce the relevant part for you here:

    So let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.

    Forever. And Justin’s response?:

    In other words…people want to make money. And whether their profits get taxed at 15% or 25%…they’ll still want to keep making money. Duh.

    Clearly the argument that both of them are making is that investors will continue to pursue investment opportunities, regardless of what they take home. As long as they take home something. But that simply is not true. It’s a stupid, facile argument that makes raising taxes much easier to swallow. So I pointed out its absurdity.

    Now, let’s run through a modest, nuanced example, since that’s what you demand. Let’s take Justin’s example. Let’s say that I have an investment opportunity with a risk of X. Looking at the rest of the market, I know that in order to invest in this opportunity, I would demand a return of Y. However, if taxes are increased from 15%-20%, I’m not going to get Y. I’m going to get Y less some amount. So what do I do? The investment only returns what it returns, but I need a return of Y. Obviously, I need to pay less up front for the investment, in order to achieve a return of Y.

    What does that mean? Asset values across the board are repriced, and wealth is instantly destroyed. And why? Because the idiotic left wanted to soak the rich because…well, just because. Because “too much” income inequality is “bad”. And because capital is better left in the hands of Washington. I’m sorry, but to me, that is a simple argument, which you’ve obviously not put a lot of thought into.

  14. David P. Summers Says:

    David, I understand the argument you are making, but the question I have is where are those tax savings being invested? If American companies are doing poorly (lets face it, extra capital doesn’t always inspire demand for a product/service, its consumer spending that does), than the alternative is either bonds, or foreign investment. More than that, what good does it do if individuals invest dollars in a company that puts that money to work in such a way that it doesn’t benefit our economy. What Ron Reagan did in the 80?s, inciting growth by cutting taxes, wouldn’t work the same these days. “Trickle down” becomes “Trickle out”.

    I’m not sure I understand the question. It seems to imply that I’m arguing that higher taxes on investments reduces investment because the taxes have pulled money out of the pool. The point I was making is that reducing the return by taxes (investors “do the math” and figure out what they will get after taxes, that is why munibonds can have lower rates) discourages investment. Higher risk investments need higher returns to attract investment.

    I think you also argue that investment is not always useful. I’m not sure what the argument here is, it seems to be a mixture of “there is no demand for products” and “it will go overseas”. Not, my original point was to address the points made in the article, which were different than these. But to touch on them, investment hires people to do the work the company needs to carry out the investment and produces products at lower cost which helps stimulate demand.

    Foreign investment is a whole complicated issue in itself. You can argue about various protectionist schemes but you still need domestic investment which will be hurt by policies that generally discourage investment.

  15. Tully Says:

    The question about Buffett is what would he do if taxes went up?

    What he has always done, despite his recent op-ed, avoid investing or pull out of existing investments where the marginal return on investment is substantively diminished by the increased marginal tax rate. As will those who invest with him. He will, in other words, avoid new investments at the margins and dump marginal investments that are moved below his required return by the tax hike. As will any rational investor. (As I have done myself, even though a rate hike on over $200-250k/yr wouldn’t reach me directly. By changing the perceived risk/reward ratios the market effect of a rate hike goes beyond individuals and right into the market pricing models, reducing stock prices. You don’t have to be hit by rate hikes personally to be hurt by them.)

    Change the rates, the margins move. Increase them, and you get less investment. Right NOW investment is pulling out of the markets in anticipation of higher tax rates and their effect not just on personal taxes paid but on overall stock prices. As David points out, this is an unambiguous effect that affects both markets and employment. The higher the rates, the more markets (and investors) move to lower-risk investment which in turn means less growth. QED.

    ALL tax structures are trade-offs between growth and revenue. We need fundamental tax reform AND serious spending discipline. My beef is what it has always been, namely that regardless of party in charge all “grand bargains” on taxes and spending coming out of Congress generally consist of new taxes now and spending “cuts” that aren’t really cuts and/or only take place in the misty future, which never arrives. And piles of new special exemptions and exceptions and benefits slipped into the bills, all of which go to the truly deserving, of course (tongue in cheek).

    for Buffett to really be talking out of both sides of his mouth he’d have to be like so many others who spend big bucks on lobbyists and schmoozing lawmakers to manipulate the law.

    Um, he does. He’s certainly spent plenty of time Schmoozing Obama. Berkshire Hathaway spent $2.5M on lobbyists to fight off FAA moves that would have boosted taxes on NetJets. They spent millions on lobbyists warding off new rules on required-collateral holdings for institutional derivatives investors. Buffet himself went and testified/lobbied Congress on that one in 2010. B-H spends millions every year lobbying for their wholly-owned railway, Burlington Northern. They are consistently one of the biggest railroad lobbyists. In fact, B-H lobbying expenses went up several-fold once Obama reached the Oval Office.

    So yes, by your own criteria he’s talking out of both sides of his mouth. Throwing his personal weight around counts as lobbying as well. My question is, what’s in it for him? I doubt he’s doing it out of sheer patriotic altruism.

  16. Angela Says:

    Thank you David. What I meant to say is, if reducing or cutting taxes for the wealthy spurs investment and growth, one would think that the $600 billion in tax cuts which was put in place during the Bush administration would have had a more positive effect on our economy. I know there are some who argue that were it not for these tax cuts, our economy would have fared far worse than it did, if thats possible. That may, or may not, be true. I’m simply saying that things are different now. We are part of a global economy, I would guess more investments are being made overseas. I can only conclude then that tax cuts do not have the same positive effect that they did, say, 30 years ago, given the advancements in doing business overseas.

    My comment on demand for products is to bring to the fore that investing in stock when the outlook seems grim for American companies would be just as stupid, if not more, as considering an investment that is taxed at 99%. Given all the layoffs, and since so many have dropped out looking for a job, and also, so many qualify for some type of assistance, I can only conclude that consumers are not spending as much, or if they are, are basing their choices on best prices, unfortunately, the bulk of which are not American products. I can only surmise that an investor, considering these conditions, would move toward foreign investing or investing in bonds.

  17. David P. Summers Says:

    Thank you David. What I meant to say is, if reducing or cutting taxes for the wealthy spurs investment and growth, one would think that the $600 billion in tax cuts which was put in place during the Bush administration would have had a more positive effect on our economy. I know there are some who argue that were it not for these tax cuts, our economy would have fared far worse than it did, if thats possible. That may, or may not, be true. I’m simply saying that things are different now. We are part of a global economy, I would guess more investments are being made overseas. I can only conclude then that tax cuts do not have the same positive effect that they did, say, 30 years ago, given the advancements in doing business overseas.

    I’ve never been a big fan of looking back and seeing if something helped the economy. There is always so much else going on that you never can really say anything at all. In politics each side cherry picks the examples that work for them, saying even less. (For example, does the weak economy prove that Obama’s stimulus didn’t work at all or was it just “not enough” by itself).

    I will say that if you look at any specific activity, and you make people who engage in that activity, give you money to do, people will generally do less of it. Now you can argue whether taxing investment doesn’t let you reduce other taxes, or whether worry over the deficit isn’t a bigger problem, etc. But the argument that taxing investment won’t affect whether people invest is hard to justify.

    My comment on demand for products is to bring to the fore that investing in stock when the outlook seems grim for American companies would be just as stupid, if not more, as considering an investment that is taxed at 99%. Given all the layoffs, and since so many have dropped out looking for a job, and also, so many qualify for some type of assistance, I can only conclude that consumers are not spending as much, or if they are, are basing their choices on best prices, unfortunately, the bulk of which are not American products. I can only surmise that an investor, considering these conditions, would move toward foreign investing or investing in bonds.

    Well, my French friend comment on this point by saying “God forbid Amercians ever try and sell anything overseas”. There certainly are market opportunities overseas. And even in our weak domestic economy people have been able to invest money and succeed. The investement in the iPad paid off in the current climate.

    But, in the end, even if demand is the overriding problem, their is still a catch-22 because if you fix demand, you still need investment to get more jobs (even taking old factories and starting them back up requires money).

    Now maybe you can raise taxes and still have “‘enough” investment. I don’t know but the article above didn’t address that issue.

  18. khaki Says:

    @ Tully: “Buffet himself has avoided openly investments due to marginal tax rates. He’s talking out of both sides of his mouth. He himself is a grand master at tax avoidance. The very reason his own Berkshire Hathaway does not pay dividends is that ordinary dividends are taxed at regular income tax rates, while capital gains are taxed at lower rates”

    This is a regurgitation of “If you want higher tax rates, go ahead and write a check to the IRS. Who’s stopping ya?? Nya, nya, nya, ”

    And regarding the “eat the rich” comment – more raspberry.

    Seems like these comments are placeholders to fill the void of where actual policy debate could be. Actual debate: The “rich” pay too little compared to everyone else. Progressive taxation makes perfect sense. The playing field is not currently level. Bush tax cuts should expire on those who earn over $250K or maybe over $500K (up for debate, and suppose $500K is probably a better threshold.) A minimum tax of 25% ,30% or 35% (up for debate) should be created for those who make about $1M or more (I pay somewhere around these levels btw and make ..oh… a lot less.). The highest incomes should pay rates at least commensurate with the rates of middle class people, for heavens’ sake. It is fair for them to do so considering the outsized benefit the wealthiest reap from the infrastructure and security our great country affords them and considering that history shows that reasonable levels of taxation (not 99% – don’t go crazy now…) , does not in any way inhibit job creation or hamper growth. So as you can easily see by my comments I am definitely advocating that we eat rich people. Touché. And also .

  19. Tillyosu Says:

    The “rich” pay too little compared to everyone else.

    From 2010:

    Top 5% paid 59.1% of all taxes
    Bottom 95% paid 40.9% of all taxes

    Top 5% paid an average rate of 20.64%
    Bottom 95% paid an average rate of 7.27%

    Now, explain to me why this is not fair.

  20. khaki Says:

    Good. Your point is misleading, but at least it’s not a raspberry. For that we thank you. I will quote this article from the Baltimore Sun in response:

    “…It does not matter that the top 1 percent of taxpayers pay 38 percent of income taxes. What matters is what percentage of their income do they pay in taxes — and not just income taxes, but all taxes.” http://articles.baltimoresun.com/2012-05-22/news/bs-ed-rich-taxes-letter-20120522_1_income-taxes-tax-fairness-federal-taxes

    Also, what percent of the total wealth in the country does the top 5% hold? I suspect it’s an amout at least proportionate to % of all the taxes they pay, if not greater. I hardly feel sorry for the 5% that has enjoyed the greatest income gains over last 25 or so years (81% of gains according to the Economic Policy institute http://www.epi.org/publication/large-disparity-share-total-wealth-gain/). If you got most of the cash, you’re probably gonna pay most of the tax, ain’t ya?

  21. Tully Says:

    khaki, wake me up when you have something intelligent to say that actually addresses the subject and indicates the ability to grasp basic math and deal with reality, rather than just blowing raspberries and changing the subject to another mindless regurgitation of emo-rhetorical partisan talking points. Suggestion: Try using your own neurons rather than cut & paste of the opinions of others.

    Tillyosu, the word “fair” is entirely subjective. It means whatever the other person wants it to mean, even when they haven’t a clue what they really mean. It’s a buzz-word used to avoid grappling with the issues on an objective basis.

  22. Tillyosu Says:

    @Khaki

    Two responses. First, I just showed you that the top 5% pay more than double the rate of the bottom 95%. So, your argument that “The highest incomes should pay rates at least commensurate with the rates of middle class people, for heavens’ sake” would require that we lower their rates. Is that what you’re saying?

    Second, I love how, when faced with inconvenient facts, you switch to talking about wealth. I thought we were talking about income inequality, not wealth inequality. Are you now advocating a wealth tax? Putting aside the fact that it’s probably unconstitutional, it’s also a very bad idea. But I’d love to hear your argument for it.

    The bottom line is that the argument that the rich are not paying their “fair share” is demonstrably false. The argument that the rich are not paying as much as the rest of us is demonstrably false. And the argument that the rich are paying lower rates than the rest of us is demonstrably false. If you have some other reason for advocating raising their taxes, you should have the courage of your convictions and be explicit about it.

  23. khaki Says:

    Here’s what I’d like to know:

    As a percent of income, how much does each income bracket pay for all taxes (not just Federal Income taxes). I believe (as does a majority of the American people according to recent surveys) that these rates should be at least equal (let’s start there) and really should graduate higher in reasonable increments for upper incomes.

    “Lies, damn lies, and statistics.” I’d like to see numbers that don’t obscure and obfuscate.

    Regarding my switch from wealth to income. Fair enough. My mistake.

  24. Tillyosu Says:

    Ok. So when we include payroll taxes (which is completely irrelevant because nobody is talking about payroll taxes here, and the very nature of the safety net programs argues for a more equal tax structure), the numbers don’t change all that much:

    Top 5% pay an average of 22.25%
    Bottom 95% pay an average of 9.6%

    However, since we’re including payroll taxes which affect lower incomes more than higher incomes, we should also include corporate and estate taxes, which affect higher incomes more than lower incomes:

    Top 5% pay an average of 27.7%
    Bottom 95% pay an average of 12.85%

    I mean, the numbers pretty much speak for themselves.

  25. khaki Says:

    State, city, gasoline, sales…

    Also, aren’t the numbers skewed by the high number of people who pay no Federal income tax (for another debate, although I tend to agree that the growth in the number of people exempt from federal income tax has grown by way too much.)? That’s why I’d like to see it broken down by income level, rather than lumped into the “95%”. My guess is the middle class is getting sqeezed harder than the “rich”. I’d like some help proving or disproving that. Your 12.85% factors in the elderly, the indigent, and the poorest of the poor, the military who are exempt, etc.

  26. Tillyosu Says:

    From the same report:

    This analysis does not include federal excise taxes on products like gasoline, diesel fuel, tobacco products, airline tickets, and alcohol, which disproportionately impact lower-income taxpayers, who devote more of their income to consumption, or state and local income, property, and excise taxes. Including those taxes would flatten the progressivity of the tax system somewhat, but it would not fundamentally alter the basic conclusions of this chart deck.

    Emphasis added.

    You’re right though, the numbers do get dragged down by the first two quintiles (40% of the population – ) which have negative income tax liability. So if we strip those out and focus just on the “middle class” (40% of the population – $59,486 to $103,465) versus the “rich” (5% of the population – $210,998 and up), we get the following numbers for all federal tax liabilities:

    Middle Class: 14.65% effective rate
    Rich: 27.7% effective rate

    The rich still pay almost double what the middle class does. And when you consider only the very rich (0.1% of the population – $2,178,886 and up), whose incomes are probably largely from capital gains and dividends, they’re still paying an effective rate of 32.1%.

    Now, I know it’s hard to feel bad for the rich and the very rich. But you can imagine how frustrating it must be for these people, who provide almost 60% of federal tax receipts, even though they only make 34% of the national income, to hear over and over that they’re greedy, they’re not paying their fair share, or shouldering enough of the burden.

    Look at the numbers Khaki, is it really that hard to admit that those arguments are wrong?

  27. khaki Says:

    Thanks for the rational conversation. I’d still like to see income broken down in more granular increments for the top 5%. I wouldn’t consider $210,998 in income “rich” (I’d call that comfortable – assuming one can keep the pace), and it’s certainly not super rich. How do the comparisons look by income level? $50k, $100K, $200K, $500K, $1M, $10M, and above? (Sorry, I’m not a research wiz.) I think this kind of data in increments will give us a more accurate picture.

    Still, for the sake of argument, I’ll concede. Perhaps there is parity. Perhaps the rich are not given proper credit for their contribution and perhaps guys like me light my hair on fire too often and call the “rich” greedy too quickly. (If so, consider the record set straight.) Still we have to agree to what are facts, and what aren’t, and I still think it’s appropriate once done to discuss what tax thresholds are fair and what aren’t. You know, for guys like me its tough when the party of rich white people nominates a guy like Romney – 14% marginal tax, Cayman Islands, undisclosed tax returns. What are we supposed think? He “earned it”, he’s a “job creator”, or more to the point of this post, “He’s an outlier”? All I’m saying is I don’t think 14% is appropriate when you have more money than God. I suspect that sheltering wealth from taxation is a sport that the rich have become very good at. Finally – I also think that I trust Warren Buffet’s opinion on damn near everything.

  28. cranky critter Says:

    Rich will continue to be a pointless word to use until we decide whether it’s norm-referenced or criterion-referenced.

    If we decide the former, then 210k per year is rich in sense of “more than almpst everyone else.”

    If we decide the latter, then we have to decide what the criteria are.

    My personal sense of the word is that folks usually think that rich means “has enough wealth to live pretty much as they please, in grand style, even if they never work another day.” And that has to do with assets, not income.

    It’s quite true, as Justin suggests, that people with money will invest their money if they can make more, based on their own standards. But so what? As Tully, David, and Tilyosu point out, rate changes have demonstrable consequences, substantiated by data, that simply can’t be dismissed.

    People like to simplify and winnow their arguments until they become so simple that they are incontrovertible. Unfortunately, applied real-world utility seems to decline in direct proportion.

    What the dissenters to Justin’s argument do so well is to point out just where his oversimplification falls flat. He said:

    In other words…people want to make money. And whether their profits get taxed at 15% or 25%…they’ll still want to keep making money. Duh.

    Simple and true. It’s also simple and true that if tax changes adversely effect you ability to make money, you’ll adapt by making different choices.

    I support restoring the previous top bracket rate. But I don’t pretend there will be no consequences. As a matter of fact, we’ll all be making a major leap if we become willing to stop pretending that our pet policy changes will bring only positive consequences.

  29. Sebastian Says:

    > Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.”

    I think taxes should probably be a little bit higher, but the argument doesn’t capture all of it. If there’s an investment that you project will go bust 90% of the time, but return 12x 10% of the time, it makes triple your money on average with no taxes.

    Say you make 10 investments of $100 each.

    Nine go bust. You get $0 for them.

    One returns $1,200.

    So you made a great return.

    Now, imagine the tax rate is 30%.

    Now when you’re returned $1,200, $1,100 is taxed at 30%.

    That’s $330 in tax.

    So $1,200 – $330 = $870.

    So this kind of risky investment now loses money because it’s taxed when it gains, but you’re not paid back by the government when it loses.

    That means some riskier things don’t get funded, even though they could be good — genetics companies, for instance, would be highly risky right now.

    Worth considering, even if taxes could be higher.

  30. Tully Says:

    we’ll all be making a major leap if we become willing to stop pretending that our pet policy changes will bring only positive consequences.

    As I’ve argued for years, when you advocate a policy you own ALL of the predictable results of said policy, not just the ones you want. Head-in-sand denial of the facts does not produce ideal results. To grab an example froma totally unrelated subject, I have yet to hear an anti-abortionist admit that a near-complete legal ban on abortions will not have some very severe and predictable adverse consequences, as are easily seen in other nations that have such bans. As far as they’re concerned those utterly certain adverse consequences simply don’t exist, or are somehow not their responsibility and can therefore be ignored in the name of righteousness.

    It’s also simple and true that if tax changes adversely effect you ability to make money, you’ll adapt by making different choices.

    Bingo. As Buffet has consistently done throughout his investing career, making his current rationalization pure unadulterated BS. There can be valid reasons to support such a policy, and they’re open to factual debate. But his “it won’t change investor behavior” line is 100% Krakatoa-grade hot flowing crapola, and Buffet knows it.

    The mathematical truth is that to achieve real deficit reduction here in the real world without major bad consequences, there must be some combination of both revenue increases and spending reduction. We simply cannot sustain our current spending levels (much less the much greater levels that the O admin has demanded and our current entitlement structure dictates) without taxing the entire income ladder down through at least the middle class AND restraining spending growth to levels lower than GDP growth. These are mathematical facts.

    Obama’s own deficit reduction commision, Simpson-Bowles, detailed such a plan, it received bipartisan praise in Congress, and the administration and the Congressional Dem leadership wanted nothing to do with it. The “fiscal cliff” would actually be a huge step in the correct direction, and despite the short-term pain would in the long run much less destructive of our economy than the admin’s demands and current path.

    The idea that we can somehow get out of our current predicament by taxing “the rich” and continuing to spend in ways that would make drunken sailors blush while not taxing the holy hell out of everyone else as well is pure fairy-tale thinking. Personally, I would be delighted to pay Clinton-era tax rates if they came with Clinton-era spending levels.

    There are no magic wands. There is no pain-free path out of the spending trap. No matter what we do it will hurt. The question is, do we want that pain to lead to improvement, or farther downhill?

  31. Angela Says:

    Tully, exactly what cuts would you make and how? Entitlements: Welfare 12%, Health 22%, Social Security 20%. You cannot reduce or cut these categories in one sweeping motion without negatively impacting the economy, if not communities, and individual lives.

  32. Angela Says:

    How about all those seasonal workers who get unemployment every year for 3-4 months and lie on their UC forms about looking for work, and all those state workers who turn a blind eye and let it be. How about those school administration officials who make bloated salaries and have been ineffectual for the last 30 years. How about those rich folks covered by medicare? What about railroad employees who get big pensions in addition to their social security.

    My goodness, if there are going to be cuts, lets cut in the right places.

  33. Angela Says:

    How about those pharmacies upping their prices when uncle sam pays. How about all those useless studies we’re funding. Can we take a look at the pork? Can we do a cost/benefit analysis on the pork?

  34. Angela Says:

    Sorry, I hope I didn’t offend anyone here, it wasn’t my intention. Having a stressful one.

  35. Tully Says:

    Angela, yes, and so what? That will happen ANYWAY, regardless. And in deeper and more painful ways if we do not reform our government’s spending habits, or make the situation worse by going along with the admin’s pipe dream of accelerating spending growth and piling up even bigger deficits playing Santa Claus to the masses … and their cronies.

    As I’ve said, I would be reasonably happy with Simpson-Bowles, or even the fiscal cliff. Either would be a huge improvement over the current trend. The GOP counter-offer is not unreasonable. Obama’s “offer” is worse than the DOA budgets he’s sent to the Senate the last few years, none of which could get a single YES vote from his own party. Indeed, t’s worse than what they offered (and the Dem-controlled Senate soundly rejected) just last year. (If I had to guess at the White House’s response to the counter-offer, I would bet on ramped-up demagoguery with no real changes to their proposal.)

    And I repeat: No matter what we do that moves towards solving the problem it will have negative impacts that affect everyone. Pain will be involved — for everyone. There is no free lunch. There is no magic wand. But if we do not rein in the federal government, the pain will be much much deeper and the only “resolution” will come about through economic collapse or near-collapse. For how bad that could get, just look around Europe and South/Central America.

  36. khaki Says:

    @Tully: “No matter what we do that moves towards solving the problem it will have negative impacts that affect everyone. Pain will be involved — for everyone. ”

    Couldn’t agree more. But it’s only been since this last election that the GOP has even hinted that they would be willing to take a little “pain”. Until recently Grover Norquist’s grip has been unflappable.

  37. Tillyosu Says:

    Has anybody ever stopped to think that maybe the Obama administration’s spending binge is absolutely purposeful? Think about it.

    Since the 70′s and 80′s conservatives have tried to reduce the size of government by depriving it of revenue. This has done very little to slow the growth of government, and instead has blown up the deficit.

    But what if Obama is trying to do the exact opposite? What if your aim is to grow the size of government, and redistribute wealth? It seems that spending on your priorities, putting it on credit, and creating a debt crisis that must…MUST be solved with more “revenues” would be a very effective way of doing that.

    So Obama has racked up trillion dollar deficits every year – mostly to democratic constituencies (the stimulus is a perfect example of this) – and now that the bill is due, who should pay? Why the “rich,” of course. And conveniently, republican constituents.

  38. cranky critter Says:

    Not fully true, khaki. Republicans understand that budget cuts involve pain, too. They understand that adjustments to social security and medicare involve pain.

    Any of those cuts will also conceivably involve fewer available resources for everyday people, which effects both them and people downstream from theie now reduced spending. It’s not reasonable to simply presume that republicans have no appreciation of this.

    The notion that the wealthiest can afford to contribute more in order to bridge the gap is popular. And I don’t disagree on principle.

    But everyone needs to understand that the best we can actually do is to ask the wealthiest to contribute more in order to be one fraction of bridging the gap. The nature of our debt is that the primary problem is overspending, and growth in that overspending, primarily related to medicare and social security.

    In both these cases, evolving demographics (basically, people living longer and consuming more resources) is driving these trends. They operate a orders of magnitude that are higher than marginal tax rates. We just can’t simply keep taxing rich people more to pay for the extra social security and medicare money we’ll need as life expectancy goes 78.79.,80, 981, 82 … . The number just wont add up. There aren’t enough wealthy people or enough wealth to finance it. The costs are too big and the trends too powerful.

    That means that spending reductions and program reforms are necessary. Hate the GOP all you want. I’m no fan. But for a long time, I’ve watched what congress does as a group. Every time revenue-expenditure gaps come into conversation, they are followed by agreements which raise taxes while promising to eventually make cuts. And then the cuts never happen, because real cuts will cause real pain.

    We’re at the point where the forecast calls for real, honest to goodness, unavoidable pain. Not theoretical pain, not future sacrifice, not kicking the can. Both parties are making this an ideological issue and framing it along partisan lines. But it’s a math issue. And that become more obvious with every passing day.

    The real question is this: will enough people understand that it’s a math issue in time for us to solve it before the solution becomes excruciatingly painful. And the answer seems to be “probably not.”

  39. Tully Says:

    Um, no, khaki. Better go check the transcripts of last year’s budget negotiations. The real ones, not the party-propaganda versions. Pay attention to Simpson-Bowles, which is loaded with tax increases.

    The Dem’s/Obama’s insistence on rate increases when the same amount of revenue can be raised (and from the same upper-income sources!) by limiting deductions is somewhat puzzling. Why, one would almost think it had more to do with partisan politics and hidden agendas than with actually bringing government finances back into balance…

    And pardon my noticing, but why are the Congressional Dems standing away from Obama and forcing Congressional Republicans to negotiate with the White House, when it is the Dems in Congress who are supposed to be doing the negotiating? Because, you know, it’s their job?

  40. Tillyosu Says:

    The Dem’s/Obama’s insistence on rate increases when the same amount of revenue can be raised (and from the same upper-income sources!) by limiting deductions is somewhat puzzling.

    That is puzzling Tully, considering these two somewhat conflicting statements:

    “What we’ve said was give us $1.2 trillion in additional revenues, which could be accomplished without hiking tax rates, but could simply be accomplished by eliminating loopholes, eliminating some deductions, and engaging in a tax reform process that could have lowered rates generally while broadening the base.”
    -Obama, July 2011

    “And unfortunately, the speaker’s proposal right now is still out of balance. You know, he talks, for example, about $800 billion worth of revenues, but he says he’s going to do that by lowering rates. And when you look at the math, it doesn’t work.”
    -Obama, December 2012

    So we could raise $1.2 trillion a year ago by closing loopholes and limiting deductions, but we can’t raise $800 billion a year later by doing the same thing? Puzzling indeed. I’m just waiting for the folks over at MSNBC to rehash that quote…

  41. khaki Says:

    @cc: “Hate the GOP all you want. I’m no fan. But for a long time, I’ve watched what congress does as a group. Every time revenue-expenditure gaps come into conversation, they are followed by agreements which raise taxes while promising to eventually make cuts. And then the cuts never happen, because real cuts will cause real pain.”

    1. I don’t hate the GOP by any means. I just don’t trust this particular crop. I would love to see and would support a conservative party that actually demonstrated fiscal responsibility. I liked Bush Sr. This bunch – fiscally responsible? It’s a complete and utter mind-boggling joke.
    2. Do I completely trust the Dems? Not completely, but generally, yes. They have given us a lot of reasons- Clinton’s surplus chief among them. I think Obama is honest and I think in general they have a fealty to arithmetic.
    3. Couldn’t agree more with you that we have to really, really, truly have to address entitlement spending. That and military budgets are the biggest turkeys in the room. So, we can’t just kick the can. But I’ll go back to “trust”. We just came off of a year of listening to the leader of the GOP propose his solutions. He wanted to give the military a trillion dollars more than they were asking for. Not responsible. The GOP has just made a counter offer to Obama’s proposal with a tax CUT for the wealthy. Not responsible. Vouchers for Medicare, Privatize S.S. Please. So, if it’s incumbent on me to read through the Simpson Bowles transcripts to find some responsible proposals from the GOP, then we need to be talking about what an abysmal job they are doing getting their message of truth-worthiness and mathematical accuracy out to swayable moderate-information voters like me. Oh, right, they just lost a Pres. election with 8% unemployment. So, yeah, they’re message team must be pretty bad.

  42. mdgeorge Says:

    How do we reduce medicare spending (growth)? One way is to just stop paying it and just tell everyone, “sorry you’re on your own, we just can’t afford it any more.” Or, we could make efforts to reduce the gargantuan amount that we’re wasting, by investing in preventative care instead of emergency care, by reducing the management overhead of our ridiculous insurance system, we can promote best practices, pay for outcomes instead of procedures, etc.

    If you truly believe that our system can’t be made more efficient, then yes, repealing Obamacare, raising the retirement age, and capping spending growth irrespective of cost growth (i.e. vouchers) make perfect sense. But if you look around, we’re paying vastly more than other nations for significantly worse outcomes. So I question the premise that pain must be involved to reduce spending. I don’t see why we can’t improve quality while reducing spending, and I see Obamacare as a stake in the ground towards doing exactly that.

  43. mdgeorge Says:

    Sebastien points out something I hadn’t understood, which is that negative income is not treated uniformly. What would happen if we did treat investments that lose as negative income? In the example, you would have made -$100 on each of the nine investments, so you would get taxed -$270, which when added to the $330 you were taxed gives $60, which is 30% of your $200.

    Under this scheme, changing the rate wouldn’t change the payoffs.

    I guess it would if there was also a transactional cost.

  44. mdgeorge Says:

    Ah. The problem with that scheme is it makes exactly zero revenue, since all of the taxes on the recipient must go to the payer. I guess there would be a net profit for the gov’t if someone buys something and then sells it for more than they bought it for (for example by improving it). Sorry for my mumblings…I’ve never really studied economics before.

  45. Tully Says:

    tillyosu: I posed the question rather tongue-in-cheek as a political perception test, because I think the answer is somewhat obvious. Robert Samuelson nailed it. Simply put, higher rates with loophole-ridden tax structures facilitate corruption and influence-peddling in Washington, while real tax reform closes loopholes and limits breaks even while raising the same or greater amount of revenue. But real tax reform diminishes the political power and corruption potential available to Washington. Real tax reform reduces power for politicians.

    Not surprisingly, spending is also driven to large extent by influence-peddling and corruption. The feeding of special interest groups keeps the money and power flowing to the Hill.

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