Tuesday, August 23, 2011

The Oracle speaketh

Warren Buffett, the oracle of Omaha, took to the New York Times last week to lament the ridiculously low amount of money he pays in taxes each year:

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

It appears that while middle class wages have stagnated, the uber-rich have been doing exceedingly well. While the unevenness of the gains is lamentable, the very odd part of it is that tax rates on the super rich have actually fallen significantly over the last 20 years. Buffett is right to point out this anomaly. As he explains, his tax rate is lower than you might imagine because the rich often receive most of their income from capital gains (i.e., selling appreciated real estate, bonds, or stocks). Since politicians believe (wrongly, according to the Oracle) that high capital gains taxes discourage investment, they tax capital gains at a lower rate than ordinary income (which is the main income source of most Americans). BUT, as Buffett states, the economy did quite splendidly in the 1980s and 1990s when capital gains (and ordinary income) taxes were much higher than they were today. No matter how the money is made, it does seem askew that someone with an income of ~$40m/yr would be taxed at a lower rate than someone making ~$100k/yr, especially when the latter has to do it by putting in 40 hours a week.

The fallout from this op-ed was as you might expect. Someone at Fox News called Buffett a socialist (hilariously mocked in a Jon Stewart piece). Liberals largely cheered Buffett. No matter what part of the political spectrum you belong to (and hopefully it changes depending on the issue), raising taxes makes sense as part of any debt reduction plan. It is quite nuts that tax rates during the go-go days of the 1990s are seen as economy-killing by today's congress. In the chart above (from wikipedia), the large gap between tax rates here and in other rich countries is clearly evident and has even been exacerbated in the last 10 years. Budget-fixing tax increases here wouldn't need to bring us anywhere close to average levels of rich-world taxation. While having something of a taxation gap here isn't necessarily a bad thing (if you don't mind paying for college, health insurance, and most of your retirement), the trend is certainly baffling considering the recent giant income gains going to the top 1% of earners in the US.


  1. Baffling until you see who is donated to campaign contributions...

  2. But I digress. I love Warren Buffett. He is such an odd mix of modern business savvy and my depression-era grandpa who has driven the same car for 20 years and reuses sandwich bags. My favorite quote of his:
    "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing"