A Proposal for Mr. Buffett

I have a proposal for Warren Buffett and his fellow billionaires like Bill Gates: Pool your tens of billions, and give that money to the U.S. government to reduce the federal deficit. Taken together, you may breach the $100 billion mark – a significant chunk of change, even when talking about the deficit.

Do it IMF-style, where there are conditions. I.e., if the government takes the money, it has to use it to pay down the debt rather than spend it. Like the IMF, disburse it in tranches, so that if the government isn’t living up to its commitment, then you can withhold the remaining funds.

Of course, you always could give your tens of billions without conditions, given that you seem to have a lot of faith in how the federal government spends its money, based on your campaign to raise taxes. But I would think that even you would realize that that’s like putting your money down a black hole (which should make you think twice about your eagerness to raise taxes).

Isn’t it obvious even to left-of-center people like yourself that the more money government takes in, the more it spends as opposed to pay down debt? That’s why I would think you would be reluctant to give your riches to the government without conditions. (And that reintroduces the irony of why you’re so eager to surrender your money to it through taxation.)

It’s telling that you are admirably giving so much of your wealth to charity, instead of to the federal government. You must think that charities are better stewards of money than the federal government. Why are you so willing to surrender your – and other folks’ – wealth to the government through taxation with no strings attached, but you don’t seem to be willing to give to it voluntarily? It must mean you don’t totally trust the government with your money – you have much more trust in private foundations and/or the private business sector. So why the campaign for higher taxes? It doesn’t make sense. Or if it does, please explain.

You should at least be demanding better accountability from the government in exchange for pledging your support for higher taxes. You have some great leverage – why don’t you use it? Or, are you satisfied with how the government is currently spending your money? If so, then why are you making your donations to private charitable foundations rather than to the government? It’s quite contradictory.

If I were a billionaire (keep dreaming, bub), I would try to set up a deal where I’d pledge my money to the federal government in exchange for it using that money to finance Social Security reform where the program is transformed from a spending program into a savings program via personal savings accounts (PSAs). But I understand that the likes of you and Mr. Gates, being left of center, probably aren’t too thrilled with government-sponsored PSAs. (Plus you’d get beaten up by your friends on the left, who’d accuse you of being handmaidens of Wall Street PSA money managers.)

But one thing you are in favor of is reducing the national debt, correct? So let me repeat: Pledge your billions to the federal government in exchange for it committing to using that money as seed money for paying down the debt, and committing to using its tax revenue (in addition to grants from you) to pay down the debt.

I doubt right-of-center billionaires would go for this idea because they don’t have as much trust in government being a good steward of money. But you seem to have more trust based on your willingness to raise taxes. So see what your left-of-center billionaire friends think of the idea. Who knows – it may even be the beginnings of the U.S. government getting its fiscal house in order.

If you’d be worried that imposing conditions would be perceived by the general public (especially the Left) as plutocratic, i.e. billionaires telling the federal government how to spend its money, then pledge the money with no conditions. Of course, in that case, two-thirds of the money would go toward redistribution, and most of the money redistributed wouldn’t be going to the poor.  (I.e., two-thirds of federal government spending now goes toward redistribution rather than toward traditional government services, and most of the recipients are middle class or rich.)

In that sense I could see why you’d rather give your money to charities rather than to the government.

And that should make you reconsider your desire to raise taxes on the wealthy.

Mr. Buffett, Come Clean On How Much Your Secretary Makes

Here’s an article of mine on rich guilt, positing that Warren Buffett perhaps (emphasis on perhaps) could harbor that emotion. He famously says that his tax rate is lower than that of his secretary. My instinct was to give him the benefit of the doubt on that, because based on what I’ve read about the man, he seems of high moral character.

But in researching the article, I looked into his claim. First there’s the well-known observation that if you take his corporate taxes into account, his tax rate is a lot higher than that of his secretary. Technically he’s referring to individual tax rates so we’ll put that aside for now.

But who is this secretary that he talks about so much? He doesn’t say. Is that her or his official title? Or is it “executive assistant” or something along those lines? If the latter, why doesn’t he refer to her or him as “my executive assistant”?

In any event, in order for her or him to have an effective tax rate higher than Mr. Buffett’s claimed 17.4 percent rate, the secretary must be one very highly paid secretary – much more highly paid than a typical secretary.

Mr. Buffett’s reportedly said that his secretary makes $60K a year. But as Chris Edwards at the Cato Institute points out, at that salary it’s difficult to see how she can be paying a higher tax rate than Mr. Buffett. Could it be that she’s married to a high-earning spouse?

A typical secretary in the U.S. makes on the order of $30K-$40K a  year. So when people hear Mr. Buffett and President Obama talk about Mr. Buffett’s “secretary”, they naturally think that her income is modest. The title “receptionist” also has been used in Mr. Buffett’s tax rate comparison, and people certainly associate receptionists as people with modest pay as well.

So Messrs. Buffett and Obama are leading Americans to believe that $35K-a-year secretaries and receptionists are paying a higher tax rate than billionaires.

But the effective tax rate on people making that salary is very low; near zero in many cases. Here’s what the left-leaning PolitiFact had to say:

Most secretaries don’t make that much. Salary.com put the average salary for an entry-level secretary at $33,249. The top marginal rate for the secretary would be 15 percent, and then typical deductions and exemptions would reduce the tax burden even more. If the secretary had children and no other income, the likely income tax burden would be zero.

In order for Mr. Buffett’s secretary to pay a higher effective tax rate than him, she would have to be earning on the order of at least $100K to $200K a year. And at that rate, she’s almost in Mr. Obama’s infamous “top 1 percent” – the folks who Obama wants to tax more based on Mr. Buffett’s secretary tale!

Mr. Buffett, you do realize, don’t you, that when you talk about secretaries, the vast majority of Americans think you’re talking about people making on the order of $30K-$40K? They are therefore being misled into believing that Americans of modest incomes are paying higher tax rates than the wealthy.

For example, MoveOn.org made an “I’m Warren Buffett’s Secretary” ad in which someone saying they have three kids and make $40K a year has a higher tax rate than millionaires and billionaires, which is clearly false. (That’s particularly false vis-a-vis millionaires, many of whom pay more income taxes than dividends or capital gains taxes.)

You’re a man of high moral character, and I can’t imagine that you deliberately would want to leave Americans with this misconception. So I recommend that you state exactly how much your secretary earns, his or her exact title, and whether his or her salary is vastly above what typical secretaries in America make.

Bill Clinton: Don’t Raise Taxes Now

Even Bill Clinton disagrees with Obama’s desire to raise taxes now. In a Face the Nation interview, he indicated that we shouldn’t raise taxes when the economy is so sluggish. He said to wait “a year or two” for economic growth to return, and then tackle the deficit by raising taxes.

The best plan of action is to not raise taxes at all across the board, or if you’re going to raise taxes, do so by closing loopholes like the mortgage interest deduction (which drives up interest rates and penalizes renters). And close loopholes in exchange for an across the board rate cut, which will help spur economic growth. Economic growth is the biggest generator of tax revenue.

Lest there be any doubt that tacking the deficit is best achieve through spending cuts and not through tax increases, two Harvard economists analyzed 107 separate attempts at fiscal reform in OECD (developed) countries from 1970 to 2007. The goals in each case was to lower debt-to-GDP ratios.

Their study confirmed the obvious: Instances that failed mainly relied on large tax increases and only modest spending decreases, if any.  Instances that succeeded mainly relied on large spending decreases and only modest tax increases, if any.

They also found that instances that relied on spending cuts rather than tax increases are less likely to create recessions.

Obama is setting us up for failure yet again.

The country needs a new CEO. Fast.

Explaining Econ 101 to a Big Labor Fan

In a mass-recipient e-mail that I received today from a labor union advocate, the writer lamented that employers don’t pay employers more. I e-mailed him back shedding light on why employers can’t pay their employees more than they or the writer would like.

An employer hired an employee to make widgets. The employer paid her $11 per hour. But he found that the amount he was paying her was more than the revenue he was generating from the widgets. So when she quit, he decided not to hire a replacement, because paying someone to do it would be the same as giving away money. Why not instead give away money to charity? Meantime, the employer just resorted to making the widgets himself.

Why not just charge higher prices to customers in order to cover the salary of an employee and hopefully have a little left over for the employer, one may ask. Well the employer already charges $13 for a widget, and customers already think that’s too high, especially when they want a lot of them. Were he to charge a higher price the customers likely would disappear and his revenues would be even less. (This is based on a real-life experience. Names have been changed to protect the innocent.)

So that’s a microcosm of why employers can’t pay more money to employees than they or labor union advocates would like.

The writer of the e-mail also lamented that welfare benefits aren’t higher. I replied that that would be tough now because the federal government is borrowing over 40 cents of every dollar that it spends, up from a historical average of about 15 cents, pre-Obama. That’s just not sustainable. Raising taxes wouldn’t help much because even confiscating all of the top 1 percent’s earnings would net about a trillion dollars, which wouldn’t even cover a year’s deficit. And a 100 percent tax rate wouldn’t be workable in any event because no one would work if they couldn’t keep any of their earnings. In fact, economists are saying that we’re headed for a 70 percent marginal tax rate (i.e. marginal tax rate is the rate on the additional income you earn, e.g. if you earn $50,000 per year and decide to work a little extra harder to make an extra $1,000, you’d have to pay $700 of that in taxes.) Few people would be willing to work that additional amount, and tax revenues would be way lower than projected, and you’d still be $14 trillion or more in debt.

People are only willing to pay so much in taxes before they either 1) find loopholes to avoid those taxes or 2) refuse to work because the tax rate makes it not worth it to work. So jacking up tax rates won’t result in much additional revenue, if any. And certainly not enough to even make a dent in the deficit and debt. For that, you need to cut spending. A good place to start is to reduce or eliminate the welfare benefits (i.e. government payments to individuals, including entitlements) that go to the upper middle class and rich. Often Republicans try to reform that (“means-testing”), but it always gets shot down by Democrats.

For example, instead of giving rich people Social Security and Medicare money, how about phase out that system so that they finance their retirement and medical benefits out of their own savings – where they’d be mandated to set up a Social Security and/or Medicare savings account during their working lives. (Oh but we can’t have that! That would be “privatization!” – the anti-reformers would howl.)

It’s a tragedy, and a gross injustice, that the Social Security and Medicare contributions of low-income workers are being transferred to middle-class, upper-middle-class, and rich retirees. Instead, the latter should fund their own retirement through their own savings. They tried fixing that a few years ago, but too many people howled “privatization!” so it never got anywhere.


All (Revenue-Generating) Corporations Pay Taxes

The other day I heard TV and newspaper commentator Juan Williams complain that half of all corporations don’t pay taxes, a refrain that I’m sure is common among the left.

Sounds ominous, but actually it’s not. A very large percentage of corporations (I don’t have the exact percentage) are S-corps, or Subchapter S corporations, also known as pass-through entities. They don’t pay any corporate taxes at all. Instead, the earnings (if there are any) are passed through to the owner(s), and the owner pays income and/or payroll taxes on those earnings.

C-corporations pay taxes on earnings before they’re passed through to the owner. But lots of those don’t pay corporate taxes because they don’t have earnings – i.e. their expenses exceed their revenues.

And even if S and C corporations don’t pay corporate taxes, if they have employees, they pay a lot of payroll taxes – the employees pay half of the Social Security and Medicare taxes, and the corporation pays the other half. There are tons of other types of taxes they pay as well, such as unemployment taxes and various state and local taxes.

What’s a corporation? A building with lots of office furniture, computers, and equipment inside? Can a building pay a tax? Does a corporation experience consciousness? Can it feel pain? Does it have feelings?

A corporation is another word for a group of people working together. All of those people pay taxes (unless you’re the owner and you’re losing money).

So no, Juan, you’re wrong in your allegation that half of corporations don’t pay taxes. Corporations are groups of people (or even just one person, if it’s a single-member corporation), and assuming all of those people get income from their work, then all corporations pay taxes.