At some point earlier this year I lost count of the number of CNBC/Fox Business specials Warren Buffet had done. Somewhere in the last 60 years the famously socially awkward Buffet has transformed himself into a gregarious and approachable grandfather figure to the investing class. One of the major mantra’s running throughout the series is that taxes need to go up on rich people like him. While lower taxes generally spur economic growth, he probably has a point. The very rich are getting richer at a rate that we haven’t seen in over a hundred years. A very small percentage of the population is using the size and complexity of modern capital markets to make fortunes and barely paying for the privilege of doing so. Celebrities of dubious social value pay tax at the same rate as the small businessmen working hard just keep everyone employed.
One of the main arguments of supply side economics make is that tax policy can be used to influence private sector behavior. Just to prove to you that I occasionally read an academic article, an interesting study to bring to point is that of post-WWII Britain. After six war-swept years where they wondered whether they would control their own country in a few years time, B-Ball Barry’s favorite economist John Maynard Keynes convinced the government to tax capital gains at a higher rate than ordinary income. A sort of false prosperity ensued. The rich, who just a few years back wondered whether they were going to be alive, decided not the invest their money under such a confiscatory scheme. They wanted to spend it. Every country gentlemen suddenly owned a Rolls-Royce. But once the money was spent up, demand plummeted and a decade of economic stagnation ensued. Even nearly ruined Germany managed to get back on her feet. An important lesson was learned. People need to be incentivized to take risk.
Today, we know that all net job creation comes from small business. The largest businesses in America generally eliminate as many jobs as they create. Ford and GM have similar revenues today as they did in the middle of the previous decade but have shrunk their workforce by large magnitudes. Robots have replaced human hands. The days when every middle manager had a secretary are long gone. Only small business, where new disruptive ideas are most often nurtured, are jobs being added on the whole. The capital gains rate has been kept low to encourage investment in these endeavors. These are the folks we need to reward. They are the ones that deserve lower tax rates for taking risk with their capital.
Smart people know a good thing when they see it. Investment managers convinced Congress that since capital gains are good, and they facilitate capital gains, why shouldn’t their income be taxed that way as well? The manager receiving income from how well the partnership performs now also gets capital gains treatment, commonly called "carried interest." Their income comes not from their own capital but for the work they do for the partnerships they control. The corporate executive builds a company and creates economic value while the hedge fund manager buys a flips a stock with the click of the mouse. For his hard work, the private equity executive pays about 42% of the taxes. Fund managers should be taxed just like every other wage earner.
The second potential revenue generating change is to differentiate Joe the Plummer from Jennifer Aniston. The current top marginal tax rate is 35% on income above . It doesn’t seem to make sense that a successful Dentist with a family should be paying the same income as Angelina Jolie who can afford to adopt whole African nations. Their ought to be more tax brackets. Leave the existing rates where they are but create three more rates at $1MM, $3MM and $10MM of income, perhaps topping off at 50%. I’m sure Wall Street traders and Hollywood celebrities can afford to let a few more of the Benjamin's back into the government’s hands.
Raising taxes on the ultra-rich won’t hurt the economy. Lower capital gains rates will remain for those who truly risk capital, as opposed to being third party fee generators. New tax brackets won’t deter hard work but would capture revenue from those who can afford to pay it. Cutting spending alone won’t fix our structural deficit. The politicians need to be honest with themselves.
Aside from his recent program of strong-arming the world's billionaire's to donate large sums of their life's work to charity, I tend to agree with most of what Buffet has to say. I wrote a paper in grad school discussing many of the issues you brought forth above, especially Buffet's philosophy of "hitting the ovarian lottery" - in other words, would he or many of his contemporaries been able to enjoy such success had then been born in just about any other country or economic system.
ReplyDeleteI believe it was in Berkshire's 2002 or 2003 annual report where he made a great point stating that if merely 250(and I'm paraphrasing)corporations paid the same tax bill as Berkshire in that given year, there would be no need for any other American to pay a dime in any type of federal income tax. Granted, Buffet is certainly no stranger to leveraging tax loopholes when convenient, it does offer a very valid point that if those who have been blessed with the most success, should be required to pay a little more back for the sake of nation as a whole.
While I'm certainly not suggesting we return to feudal, post-WW2 marginal tax rates that eventually reached 90%, you are absolutely correct in that there is a need to differentiate between a dentist, small business owner, or 2 income household earning a couple hundred grand, with much of that post-tax income being reinvested or spent in their businesses or local economy; and, the corporate executive or hedge fund manager clearing an income well north of 7 figures. The new tax brackets you suggested are good benchmark's for truly taxing someone based on the true economics associated with their respective income bracket.
Going along with your line of thinking, couple these tax increases with aggressive tax credits back to business to incentivize real growth. Instead of Obama's initiative to offer tax credits only for hiring the unemployed, consider tax credits for not only hiring, but retaining employees, ie. for every employee who has been with the firm for more than 5 years, a credit of X is offered back to the company. If the credits are done right, employers will, in turn, be forced to share that wealth retaining employees that adopt the culture long term growth. This will certainly not eliminate the short-sighted behavior of many companies that brought us into this financial mess, but it at least incentives will be there for those who are or are trying to do the right thing.