Tuesday, August 16, 2011

Tax the Rich

Most of the economic news these days tends to be on the depressing side, especially from the US.

So I did smile when reading Warren Buffet's statements on tax rates on the richest Americans.
While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks
- Warren Buffet

Buffet claims that his average tax rate was just 17.4%. Whearas other people in his office (on much lower incomes, paid between 36-41% in tax). The reason is that those in ordinary employment have payroll taxes. Whereas 'investors' don't pay these income taxes.

He also makes the point that higher tax rates are not such a disincentive to work as some claim.

I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.
Original article at NY Times - Stop coddling the rich

The US has seen a large increase in income inequality in past few decades. The number of millionaires has soared, and yet the tax rates on the highest earners has fallen.

It is an important intervention as in the US, there is this almost religious intolerance of contemplating any tax increases. (religion of tax cuts)

Maybe Warren Buffet is being altruistic, maybe he is thinking of own self-interest. The US needs a budget realignment not just from spending cuts but also tax increases. If the US is unable to take reasonable steps such as increasing taxes on the richest, if will adversely affect economy in long term.



sacapuce said...

Ok, but. We often hear that high taxes would reduce investment. What is the evidence that it does or not. Are there any correlations between investment and tax rates? Did investment peak when the conservative government abolished 80% tax rates?

Anonymous said...

I'm sorry but this is an idiotic "article" on a couple of different fronts. First, to Warren Buffet, you are right. Nobody has ever steared clear of making an investment because of the cap gains tax rate. Instead, they shy away from disposing of it. This prevents capital from flowing to its best use. I've got clients that have wanted to sell MSFT for a decade but will hold until death due to the cap gains tax. I disagree with their logic, but they have not sold, plain and simple. Capital is tied up in this stodgy old tech firm. Why? Taxes. Second, comparing one long period of jobs and taxes versus another long period of jobs and taxes is absurd. The economy has literally thousands of variables and you want to look at two of them? Please. Bottom line - the theory that taxes reduce production is sound, "all else held constant." You think technological shocks might have had something to do with the time periods Warren quotes? Right. Finally, the "religion" of low taxes is based on sound economic theory and I don't need a "correlation" or econometric model to know it. The implication is that those that believe lower taxes are stimulative are a cult is simply an ad hominem attack with no counter theory to support the claim that society would be better off with higher taxes. Pointing to Warren Buffet's erroneous (lack of) analysis is a rhetorical device known as the "appeal to authority" which supposes Warren Buffet, an expert at buying undervalued companies is somehow also an expert in tax economics. Therefore, the claims made in this article are unsupported by any heavy thinking.