

Taxes, Warren Buffett, and Paying My Fair Share - sfk
http://freakonomics.blogs.nytimes.com/2008/05/01/taxes-warren-buffett-and-paying-my-fair-share/

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codyrobbins
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...](http://en.wikipedia.org/wiki/Taxation_in_the_United_States#Tax_distribution)

~~~
ewjordan
_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.

~~~
codyrobbins
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.

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byrneseyeview
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.)

~~~
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._

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.

~~~
byrneseyeview
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.

~~~
bwh2
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%.

~~~
byrneseyeview
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.

~~~
bwh2
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...](http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States)

But obviously, mileage may vary:
[http://www.bloomberg.com/apps/news?pid=20601110&sid=a6bQ...](http://www.bloomberg.com/apps/news?pid=20601110&sid=a6bQVsZS2_18)

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bretpiatt
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.

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petercooper
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?

~~~
patio11
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.]

~~~
whatusername
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).

~~~
petercooper
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.

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pinhopro
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.

------
yread
[2008]

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

