Topic: Tax and Budget Policy

Warren Buffett’s Tax Rate Rhetoric

Billionaire Warren Buffett is campaigning with presidential candidate Hillary Clinton, and he is echoing her class warfare rhetoric. In Nebraska the other day:

As Mr. Buffett introduced Mrs. Clinton, he outlined statistics showing that the richest 400 Americans saw their incomes rise sevenfold between 1992 and 2012, the most recent year IRS data were available. During that period, their average tax rate dropped by about one-third, he said.

Buffett is referring to this data published by the IRS. The sevenfold increase Buffett refers to is not adjusted for inflation. The IRS provides a column with inflation-adjusted income, but Buffett decided not to use that data.

But the main problem with Buffett’s statement is that the one-third tax rate drop is explained by 2012’s lower capital gains and dividend tax rates. Buffett probably wants people to believe that nefarious loopholes caused the drop, but the real reason was a serious policy change widely supported by economists and tax experts.

Under the income tax, dividends and capital gains are generally taxed at both the corporate and individual levels. That double taxation creates serious distortions, such as inducing U.S. corporations to become excessively indebted. The capital gains and dividend tax rate cuts under George W. Bush (now rescinded) partly fixed the double taxation.

In the following table, I roughly recalculate the 1992 and 2012 tax rates for the Top 400 excluding the reduced-rate dividends and capital gains. (Capital gains had a reduced rate both years, and dividends had a reduced rate in 2012).

Without the reduced rates on capital gains and dividends, the average tax rate for the Top 400 was virtually unchanged—25.6 percent in 1992 and 25.4 percent in 2012.

So Buffett’s complaint about the tax rate on top earners is really a complaint about tax reforms for capital gains and dividends. Rather than trying to inflame liberal voters with out-of-context data, Buffett should provide his economic arguments about the proper treatment of capital gains and dividends in the tax code.

I provide the arguments for reduced capital gains tax rates here. Just about every developed country has reduced capital gains tax rates. In 2012 the average tax rate across the OECD was just 16 percent. So Buffett should explain why he thinks all those countries are getting it wrong on capital gains.

There are other interesting things about the IRS data on the Top 400. Buffett, Clinton, Sanders, and the rest would have us believe that this is a permanent group of the wealthy aristocracy. Actually, there is huge turnover in the Top 400, as I discuss here. Most reach this top group for only a single year, often when they are selling their family businesses and realizing a capital gain. The IRS table shows that 68 percent of all income of the Top 400 is capital gains.

Finally, the IRS data show that the share of overall federal taxes paid by the Top 400—even with the reduced capital gains and dividend tax rates in 2012—rose from 1.04 percent in 1992 to 1.89 percent in 2012. Buffett is quoted saying of the Top 400, “the game has been stacked in their direction.” But if the Top 400 are paying a higher share, the game is clearly stacked against them.

Finland to Break New Ground with Basic Income Experiment

Despite some of the breathless headlines, Finland is not adopting a national universal basic income. That is, Finland is not scrapping the existing welfare system and distributing the same cash benefit to every adult citizen without additional strings or eligibility criteria. Finland is moving forward with one of the most extensive and rigorous basic income experiments in decades, which could help answer some of the lingering questions surrounding the basic income. The failures of the current system are well documented, but there are concerns about costs and potential work disincentives with a basic income. Finland’s experiment could prove invaluable in trying to find an answer some of these questions, and whether it is possible some kind of basic income or negative income tax would be a preferable alternative to the tangled web of programs in place now.

The Finnish Social Insurance Institution (Kela) will lead a consortium of think tanks, universities, and businesses in surveying the existing literature, analyzing past experiments, and designing different models to test in Finland. They will present an interim report next March, where the government will decide which models to develop further. The consortium will present a final report in November, after which the government will choose which models to actually test. The experiment will begin in 2017 and last for two years, after which the consortium will begin to evaluate the results.

One of the most important issues with any basic income proposal is deciding whether it would replace the current system or be added on to the existing structure. (The latter, of course, does not have much appeal from a limited-government perspective.) The consortium is considering multiple models, as Kela’s presentation shows: 

Inequality Delenda Est

One of my favorite journalistic tropes is when a reporter goes on a vacation with his ideological enemy and tells us what he learned from the experience. The reporter invariably returns with his ideology unchanged but a modicum of respect for the people on the other side, at least on a personal basis. The New York Times recently sent David Brooks (that David Brooks) to spend time with their enemy du jour--the evil one percenters, and he dutifully followed the script.  

The event was a 21-day around-the-world luxury trip that cost a cool $120,000 per person. The group went from locale to locale on a private jet, stayed in luxurious suites in top hotels, and had every single arrangement taken care of for them, to the point that the tour leader handed them spending money in the local currency at each destination.

Brooks admitted that he was initially skeptical of such a trip, assuming that he would have little in common with the sort of person who can afford such luxury and that being insulated from the day-to-day vicissitudes of travel would take some of the meaning out of travel. But he quickly came to realize that complaining about excellent service is petty and churlish, and that the people weren’t so bad either.

He also discovered was that his fellow travelers did not inherit their wealth–most of them had started their own businesses and worked hard to earn their money. What’s more, none of these people seemed truly rich. While a $120,000 vacation isn’t a middle-class excursion, this trip represented a relatively large expenditure for most of the travelers and had a bit of a “trip of a lifetime” feel to it.

Everyone Must Pay Some Taxes to Limit Government

Even failed candidates sometimes had good ideas. So it was with Louisiana Gov. Bobby Jindal. He sharply challenged conventional wisdom when he proposed a tax reform plan that ensured everyone paid at least some income tax.

His bottom rate was just two percent. But he would have killed most of the deductions and credits that allow those with low incomes to pay nothing.

Jindal’s idea should outlive his dismal candidacy because other GOP presidential wannabees propose going in the other direction. Former Gov. Jeb Bush would double the standard deduction and figured that another 15 million Americans would “no longer bear any income-tax liability.”

Billionaire turned populist Donald Trump would do much the same. He figured that the percentage of households paying no income tax would rise from 36 percent to 50 percent, knocking 31 million households off of the rolls. In fact, the Tax Policy Center figures that already 45.3 percent of American households—77.5 million out of 171.3 million—won’t pay any income tax this year.

The idea of reducing taxes to nothing, especially on those who don’t earn much, is superficially attractive. But it’s actually dangerous for a democratic republic, especially one based on limited government and individual rights.

As Jindal explained, “We simply must require that every American has some skin in this game. If we have generations of Americans who never pay any taxes, it will be very easy for them to turn a blind eye to absurd government spending.”

His point was simple but powerful. If government programs don’t obviously cost you something, there’s no reason to be against government programs. Even stupid ones, so long as you perceive some possible benefit from them.

More Dishonest Data Manipulation from Tax-Happy Bureaucrats at the OECD

The Organization for Economic Cooperation and Development is a Paris-based international bureaucracy. It used to engage in relatively benign activities such as data collection, but now focuses on promoting policies to expand the size and scope of government.

That’s troubling, particularly since the biggest share of the OECD’s budget comes from American taxpayers. So we’re subsidizing a bureaucracy that uses our money to advocate policies that will result in even more of our money being redistributed by governments.

Adding insult to injury, the OECD’s shift to left-wing advocacy has been accompanied by a lowering of intellectual standards. Here are some recent examples of the bureaucracy’s sloppy and/or dishonest output.

Deceptively manipulating data to make preposterous claims that differing income levels somehow dampen economic growth.

Falsely asserting that there is more poverty in the United States than in poor nations such as Greece, Portugal, Turkey, and Hungary.

Cooperating with leftist ideologues from the AFL-CIO and Occupy movement to advance Obama’s ideologically driven fiscal policies.

Peddling dishonest gender wage data, numbers so misleading that they’ve been disavowed by a member of Obama’s Council of Economic Advisers.

Given this list of embarrassing errors, you probably won’t be surprised by the OECD’s latest foray into ideology-over-accuracy analysis.

Everything You Need to Know about Deductions, Loopholes, and Special-Interest Tax Provisions

Why does the tax code require more than 10,000,000 words and more than 75,000 pages?

There are several reasons and none of them are good. But if you had to pick one cause for all the mess, it would be the fact that politicians have worked with interest groups and lobbyists to create myriad deductions, credits, exclusions, preferences, exemptions, and other loopholes.

This is a great deal for the lobbyists, who get big fees. It’s a great scam for politicians, who get lots of contributions. And it’s a great outcome for interest groups, who benefit from back-door industrial policy that distorts the economy.

But it’s not great for the American people or the American economy.

Universal Savings Accounts (USAs) Introduced

I have proposed that America adopt a Canadian-British innovation to encourage greater household savings. Canada’s Tax Free Savings Accounts (TFSAs) and Britain’s Individual Savings Accounts (ISAs) are revolutionizing savings for moderate- and middle-income families in those countries.

Now Americans may get a chance to save in a similar tax-friendly vehicle. Senator Jeff Flake (R-AZ) and Representative David Brat (R-VA) are introducing companion Senate-House bills (S. 2320 and H.R. 4094) to create Universal Savings Accounts (USAs). The accounts are like supercharged Roth IRAs.

Here are some of the features of the Flake-Brat USAs:

  • Americans could save without the restrictions, confusion, and penalties associated with other savings accounts.
  • Anyone 18 years of age or older could open a USA, contribute up to $5,500 after-tax a year, and use the tax-free withdrawals for any purpose at any time.
  • Funds would be invested in bonds and equities, and grow tax-free.
  • USA accounts would allow individuals to decide what to use their savings for and when, without Congress micromanaging their choices, as they do with other accounts.

Flake and Brat cite data showing that only 53 percent of adults could currently cover an emergency expense of $400 without selling an asset or borrowing, and most Americans do not have the recommended three to six months of income in their current savings accounts.

As Ernest Christian and I have noted, USAs would help solve these sorts of problems for many Americans by giving them a savings account that maximized liquidity and flexibility, while zeroing out taxes that eat away at returns. Flake and Brat are right that their USA accounts would encourage more savings by Americans at all income levels.

House Speaker Paul Ryan is known to admire these sorts of accounts, and numerous Republican presidential candidates have pro-savings features in their tax plans. So if the next president is a Republican, we should have a good chance at making these pro-family, pro-growth savings accounts a reality.