August 20, 2011

Taxes, Debt and Welfare Queen States

Last Sunday, billionaire investor Warren Buffet caused a significant stir with an opinion piece he wrote for the New York Times entitled "Stop Coddling the Super-Rich".  In it, he noted that, since his income is generated through capital gains, even though he made nearly $41 million last year, he was taxed at an effective rate of only 17%.  Meanwhile, everyone else in his office - who performed actual labor - was taxed at an average rate of more than twice that much.  Mr. Buffett then went further, directly confronting the long-held, but factually unsupported talking point that somewhat higher taxes will broadly discourage investment:
Tax Burdens in the Developed World
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If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine - most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. 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.
Mr. Buffett is completely correct.  Americans not only have one of the smallest tax burdens in the developed world, that burden is lower now than it was in 1965.  In fact, the entire notion that "confidence" about the regulatory and tax landscapes coupled with free cash flow create jobs is utter nonsense.  Demand is what drives the economy and spurs employment; always has been and always will be.  Investor confidence about regulation and taxes can tweak demand, but it can't drive it.

Federal Taxes Minus Spending
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But with regard to taxation, not only is there great disparity between economic classes, there are significant geographic differences in the flow of public funds.  Twenty-two states effectively support the other 28, sometimes to the tune of hundreds of billions of dollars.  Over the two decades from 1990 to 2009, for instance, New York paid nearly a trillion dollars more to the federal coffers than it received back.  Virginia, on the other hand, took in almost $600 billion more than it contributed.

Origins of U.S. Debt
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Of the 28 states that ran a transfer of tax funds deficit during this period, two thirds of them voted for John McCain and Sarah Palin in the 2008 election.  Assuming those ballots were cast because voters approved of Republican tax-cut policy and deficit spending, and opposed Barack Obama's "socialism", given the orgy of unfunded expenses incurred under President George W. Bush, perhaps there is a simple solution to the "debt crisis" which has become the obsession of both the political and chattering classes.

Maybe we could just take that whole issue off the table by having those states with a declared preference for "self-reliance" and an aversion to "government interference" pay their own way for a change.  That would free up cash flow to use in parts of the country that understand that there is a role for government in the economy - especially during recessions.

And no, this is not a serious policy proposal.

I'm kidding.


On Thursday, in a truly outstanding segment, Jon Stewart ripped into the nonsensical idea that the rich are under siege, and thoroughly exposed the accounting double standards used by those advocating spending cuts and defending the failure to raise taxes on those who can afford it.

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