Tuesday, January 31, 2012

Worst Excuse Ever For Opposing Buffett Rule

Is the Buffett Rule -- that rich folks should pay at least as much in taxes as the middle class -- a good idea? I'm sure there are reasonable arguments pro and con. But you won't find any good ones in Douglas Holtz-Eakin's Bloomberg column today; it's an advanced class in hackery (via Wonkbook).

I'll start right off with a brilliant piece of misdirection Holtz-Eakin puts at the center of his case against the Buffett rule: that comprehensive tax reform is better. This is, even if you accept every benefit that he claims for tax reform, about the worst excuse I've ever heard for opposing a tax change. Here's the thing: comprehensive tax reform is really, really hard to get done. Impossible? No; after all, we do have one case of it happening, although that was 25 years ago and most of it unraveled rather quickly, which is why it's supposedly needed again. That's because comprehensive tax reform eliminates lots and lots...and lots and lots and lots of particular benefits in favor of general benefits. And that's something that a Madisonian political system doesn't do very well (nor, for that matter, do other democratic systems, but the US is perhaps especially prone to that one). So "comprehensive tax reform would be better" is a dodge. You don't get that choice.

And at any rate, the Buffett rule is hardly something that would make future tax reform more difficult. The essence of bipartisan-style tax reform is to eliminate deductions and lower rates. The Buffett rule doesn't exactly do that (and it's not revenue neutral), but it is, essentially, anti-deduction, isn't it?

So what else does Holtz-Eakin have? Well, he claims the problem "doesn't exist" because the millionaires are already paying, on average, a 30% rate. That, of course, hardly shows that the fundamental unfairness (as Barack Obama argues, at any rate) of some millionaires paying low rates doesn't exist; it just means that not all millionaires do so. So nothing there.

He also notes that the Buffett rule would be, in effect, a new Alternative Minimum Tax, and that the AMT we have has been a constant source of trouble because it's not indexed for inflation. True! Solution: index the Buffett rule for inflation. That wasn't tough! And again, he throws the "comprehensive tax reform would be better" attack at a permanent AMT fix. Now, it's true that an AMT fix would be heavy lifting and would be a waste of energy if comprehensive tax reform was on the menu, but the AMT fix is heavy lifting only because it's a revenue loser (at least the way CBO scores these things). The Buffett Rule, on the other hand, is a revenue raiser, so it doesn't have that problem at all.

Which brings us to yet another specious argument: that the Buffett Rule wouldn't balance the budget. Holtz-Eakin complains that it would only bring in $35B a year, which is, he points out, under 3% of recent deficits. Of course, the answer here is: so what? Again, he's trying to frame the question as either-or (that is, either the Buffett Rule or comprehensive tax reform), but there's just no good reason to believe that tax reform is going to happen anytime soon, or that passing the Buffett Rule this year would delay it in any way. Beyond that, saying that something wouldn't eliminate the deficit is hardly a reason to oppose it.

And then, finally, Holtz-Eakin argues that cutting entitlement spending for rich people would be better than the Buffett Rule. Perhaps so: but it's hard to see why the one would rule out the other. We should cut spending isn't an argument against the fairness claim that Buffett, and Barack Obama, are making.

Again, I'm not arguing here for or against the Buffett Rule. But if that's the best the opponents have, I'm guessing the case really boils down to Rich People Want Money, and that's not much of a case at all.


  1. Josh Barros argued that it will curtail investment. Is he suggesting that rich people will put their money under their mattress and make no money off of it rather than pay taxes on the money they make? Buffett himself said that he has never met anyone that let taxes affect their investment decisions. More "Rich People Want Money".

  2. I doubt there are any "reasonable arguments" that the rich should pay taxes at a lower rate than do people making considerably less money.

    Plus, I think you want to be vewy, vewy careful about endorsing means testing for "entitlement" programs, a/k/a social safety net programs. While it sounds "reasonable," I am pretty sure the right's purpose in making this case is to turn the most popular social safety-net programs -- Social Security and Medicare -- into programs for "the poor." Once you do that, those major programs lose the bulk of their popular support. Dubya was not able to privatize Social Security because millions of ordinary Americans oppose it. Ditto the unpopularity of the Ryan Road to Oblivion. But with means-testing, these big programs become "handouts" for "lazy" people. Oh, and white people aren't lazy. Don't think that just means-testing out the super-wealthy would avert the possibility of losing popular backing for the programs. Once you start means-testing, there will be a never-ending effort to means-test downward. I'd fight any means-testing tooth-&-nail. It's the gateway to a huge con. Beyond the gate lies a steep, slippery slope. And there's no safety net at the bottom.

  3. "Is the Buffett Rule -- that rich folks should pay at least as much in taxes as the middle class -- a good idea?"

    I think you have no business accusing anyone else of hackery when you start your post like this. The rich pay far more in taxes than the middle class. The 'Buffett Rule' has to do with what rate of tax you pay.

    1. It's blisteringly obvious to everyone with functioning synapses that "pay at least as much" IS, in this context, a reference to the tax RATES, and not the dollar totals, being paid by the respective parties.
      So you're either pretending to be so stupid as to be unaware of this, or you're truly that mentally deficient.
      For clarity's sake, pls share w/ us which it is?

  4. Actually, Holtz-Eakin's AMT argument is quite a good one, with the blithe "index to inflation" reply missing the problems arising from a measure like the AMT, or its logical cousin the Buffett Rule.

    First, Buffett's "income". I recall reading a while back that Buffett's salary, or ordinary income, was something like $150 K/year. Most of his vast wealth is contained in unrecognized gains of Berkshire stock, which of course pays no dividend. What is Buffett's secretary's salary? Given the importance of her job, I assume its pretty close to his $150 K, with her higher tax rate a reflection of having fewer available deductions than her boss.

    But what does that difference in tax rate amount to? A few grand per year? Is that what liberals are looking to claw back, a few grand from Buffett? Also consider Steve Jobs, whose "salary" was $1/year; presumably his family lived on the north of $50 M in annual dividends he got from his Disney shares. Should we make an exception to the current 15% rate for dividends for the Jobs clan, forcing them to pay ordinary rates on all their dividends? Are all their dividends actually income? (Probably not).

    Thus, clawing back enough dough from a Buffett or a Jobs to make an impact on our deficit requires either taxing unrecognized capital gains (Buffett) or making exceptions to dividend tax rates (Jobs). Either solution is fraught with peril; to Bajsa's open, of course either solution will disincentivize investments, because the government will overdo and miss the mark on either (as they did with AMT), with the result, at least on the dividend side, being less payout and more cash hoarding, about the last thing our economy needs right now.

    Maybe Holtz-Eakin didn't make his arguments in the most elegant manner. Nevertheless, it seems to me he's basically right.

    1. I'm sorry, but DHE didn't base his piece on tax rates on different kinds of income, and didn't make the argument you make here about investment. Had he done so, I wouldn't have responded, because I don't have the expertise (I have an opinion, but that's a different story).

    2. I may be giving Holtz-Eakin too much credit, but it seems that he uses the inflation argument as an illustration of how a simple idea (the AMT's "tax rich people more" strategy) ends up becoming in reality hopelessly complex.

      He should have been clearer that the problem with the Buffett rule is not specifically an inflation indexing one. Still, the emotionally gratifying class warfare idea that we are going to extract more taxes from rich people grossly underestimates the complexity of defining wealth and income for that class of Americans, and more importantly, constructing effective social policy to clawback whatever-that-thing-is that is defined as "rich guy" income (which bears very little resemblance, in both size and character, to what's on the W2s of we the little people).

    3. "Still, the emotionally gratifying class warfare idea that we are going to extract more taxes from rich people grossly underestimates the complexity of defining wealth and income for that class of Americans..." - CSH

      Interesting trick in argumentation. The reason to remove a special tax rate is not to generate revenue, but to "gratify" the desire to stick it to rich people. What if it's not class warfare, but math?

      Elsewhere, you imply that a tax that can't make a big impact on the deficit shouldn't be enacted. But closing the deficit will take a lot of spending cuts and tax increases, many of them too small to pass the "impact" test. That is not a reason not to enact them.

      @CSH, maybe you win the prize for second worse excuse ever for opposing the Buffett rule, or maybe you've unseated Holtz-Eakin.

    4. @ModeratePoli, it seems to me that at a certain level, you've made Holtz-Eakin's argument (as I understand it) much more effectively than he did in his inelegant piece in Bloomberg. Start with Buffett.

      Assume Buffett's ordinary income is about $150 K, and further that he pays around 20% of that to the Federal government. The rest of his wealth accumulation comes from unrealized capital gains of Berkshire stock; taxing that would be incredibly, er, "taxing", since there is, to my knowledge, little recent historic precedent for taxing unrealized capital gains.

      But still, getting Buffett from 20% to 30% on his AGI, assuming its around $150 K, would be worth an instant 15 grand, and you could do that with the snap of your fingers, very easily. In the Jobs case, I'm guessing he probably didn't pay any federal tax on his $1 of ordinary income; so there again with the snap of a finger, another 30 cents.

      So we're up to $15,000.30, and we didn't have to do hardly anything at all. Of course, that total shores up about 1/100,000,000th of the structural US deficit, and so while we'll take it, it hasn't gotten us very far toward solving our problems. Making a material dent in our deficit with guys like Buffett and Jobs requires us to open the Pandora's Box of AMT-like legislation, breaking with tradition and taxing unrealized capital gains or figuring out how to treat Jobs' dividends.

      Not that that's bad either, mind you, but if we're gonna start up that mountain, I think I agree with the conclusion of Holtz-Eakin's piece, it seems a whole lot smarter to focus our energy on comprehensive tax reform, rather than wasting a whole bunch of time coming up with a precarious metric for how to treat something like Steve Jobs' dividends.

    5. @CSH, "Assume Buffett's ordinary income is about $150 K..."

      I think that is a very wrong assumption for a billionaire. Start again with at least 8 figures. Actually, don't start again. You've made three crappy posts already. A fourth in unnecessary.

      Barney Frank said it best. Arguing with you would be like arguing with a table.

    6. ModeratePoli, here is the Wikipedia page for Warren Buffett. In the profile section to the right, you will find a link from Forbes Magazine that Buffett's annual salary was, in 2006, $100,000.

      I get the sense that this conversation upsets you, and for fear that Wikipedia/Forbes may be deemed crappy resources, I'll try to keep this short:

      Yes, Buffett has a lot of money, $39 billion according to the next line down on the wikipedia page. But no, he doesn't "make" a lot of money, which should be rather intuitive when you realize he still lives in the same house from 1959 and doesn't have an extravagant lifestyle.

      Again, as a policy matter, getting from incremental taxes on "what Buffett makes" to incremental taxes on "what Buffett has" is a devilishly difficult task, but that's what the politicians need to achieve to make a material difference with the 'Buffett Rule'.

      Since they're gonna have to roll up their sleeves and dive into a morass anyway, why not go all the way to comprehensive reform, per Holtz-Eakin?

    7. To the people who are interested in seeing argumentative tricks unmasked. This is not an issue of Buffett's wealth, as CSH would have it, but his income:

      "Warren Buffett has called himself mega-rich, but now he's revealing how much money he made [in 2010]: $62,855,038."-- USA Today

      I agree with what Scott Monje says below. He uses 14 words to do it. @CSH can use all the words he wants to argue against it, but it is a relatively simple and fair change.

    8. but it is a relatively simple and fair change.

      Interestingly, your linked article gives us enough information to roughly test that hypothesis, though we won't be able to do so in 14 words, unfortunately. Like all of us, Buffett's income is some mix of ordinary income and investment income, which includes a myriad of things like long-term capital gains, dividends, etc. Though you might not, most folks would agree that while recapturing tax on ordinary income is fairly easy to do; investment income is a nightmarish AMT-like situation waiting to happen.

      Conveniently, the top marginal tax rate on ordinary income, 35%, kicks in at ~$300 K; we can pretty safely assume Buffett pays 35% on virtually all of his ordinary income! So Buffett's tax rate is a combination of the two; let x=ordinary income, and let y=all the other complex stuff, and you get 0.35x + 0.15y = 6.93844 (his taxes paid in 2010). We also know that x+y=39.8M (his taxable income). With two equations in two unknowns, we can solve for both!

      It turns out that Buffett's "ordinary" income (the easy stuff to solve) is somewhere in the ballpark of $5 M; his "other/investment/not easy stuff to solve" income is around $35 M.

      I suppose I can't disabuse you of the idea that recapturing tax from that portfolio is no big deal; after all, some people probably still feel that the AMT was an effective piece of public policy, and it certainly does take all kinds.

    9. @CSH, you have demonstrated once again your refusal to LOOK AT the 15% tax rate. That's the number that needs to change. You continue to be as difficult to talk to as a table.

      But you are actually worse than a table. You should stop pretending that I ever said we should capture (confiscate) money from his portfolio. But yet you keep pushing the argument that way.

      To sum up:
      1. You ignore that discussion on changing the 15% rate.
      2. You pretend that the discussion is about taxing holdings. My entire discussion has been about taxing the income from those holdings.

      This is about as clear as I can make it.

    10. you have demonstrated once again your refusal to LOOK AT the 15% tax rate.

      Actually, ModeratePoli, I've done no such thing. I wouldn't swear by every last thing I write in this stream of consciousness format, but on several occasions in this discussion I have endorsed Holtz-Eakin's call for comprehensive tax reform instead of an arbitrary 30% net rate on the rich. Perhaps I should have been clearer, but "comprehensive tax reform" is, at least in part, code for "looking at the 15% tax rate".

      My issue with your argument remains the notion that "looking at the 15% tax rate" would be a relatively simple task. It pretty clearly won't be. On so many levels, not the least of which is that the 15% rate only applies to long-term capital gains and dividends, under certain circumstances, with a myriad of other situations governed by a chaotic series of rates.

      What Buffett and his supporters are more or less advocating is taking a broad brush over that byzantine quilt and making it all wash out to a floor of 30%. Like Sisyphus rolling his boulder up the hill, that's the kind of thing that can be made to sound easy in discussion but turns out to be nightmarish in real life. Indeed, that's probably the same kind of approach that animated the AMT, which turned out to be another gross underestimation of tax complexity. (Actually, even if it were technically easy to do from a math perspective - itself a moot point - one must still overcome the immense lobbying and influence-peddling in DC that got us to this place).

      So we're in violent agreement here; we both advocate for 'looking at the 15% rate', and indeed, making needed updates to its place in the US tax code. Where we disagree is the ease with which that can be done, and also the appropriate scope for that exercise.

    11. @CSH, Congratulations on your endless supply of weasel grease. I have two simple points.

      1. There is no need to wait until a thorough reform of the tax code to increase the 15% tax rates, though you assert that we should. Perhaps we can give it to the Pentagon, as they seem to handle complicated logistics quite well.
      2. Despite how complex you say it is to raise tax rates, Congress was able to lower them without a complete overhaul in 2001 and 2003. I'm calling bullshit on the "it's so complex" argument. It's not a reason, it's a gum-up-the-works excuse that charlatans use.

      And we aren't in "violent agreement," unless we agree that you are a sophist. You aren't charming, so drop it. Turn off the lights when you finally leave.

    12. Hey MP, thanks for the tip on the lights. I'll go ahead and turn them off in a second.

      First, though, I'd easily concede that, at a certain level, its not complex at all to make Warren Buffett pay 30% of his income in taxes. Its incredibly trivial: you just say, hey Warren Buffett, your income was $39.8 M in 2010, and you only paid 17% of that in federal taxes, so you owe us another 13%, or about ~5M more. That would be incredibly easy to do!

      Just between us, though, we're pretty sure that the overwhelming majority of his income is governed by things like long-term capital gains and dividends, since his blended rate is much closer to the 15% applied to those investments than his 35% ordinary rate.

      (Caveat:) I'm pretty sure that this legislation will be given some vogue name like the Warren E. Buffett Fairness in Taxation Act. Aside from Obama occasionally stoking class warfare embers by encouraging rich folk to pay their fair share, everything about the Buffett Act will be discussed at a very high level, it will just be a very simple adjustment at the bottom of the tax return, where if a rich guy's percentage of income paid in federal tax equals something like 17%, the IRS just tops that up to 30. Totally painless.

      But here's the problem, MP: if I'm a rich guy (other than Warren Buffett), it won't at all feel like The Man just put an innocent topper on my taxes; it feels like my long-term capital gains and dividend tax rates just about doubled, since that's probably where most of my income flows. Let me quickly re-emphasize that no one in the government *officially* doubled the tax rate on my investments; *officially* this is the Warren E. Buffett Fairness blah blah blah Act. I'm simply arguing that to me, the (hypothetically) rich tax payer, it would feel that way.

      Finally, as a rich guy, there's disproportionate likelihood that I can influence the capital decisions of large corporations; suddenly my (essentially) 30% tax rate on dividends makes dividends a lot less attractive. And so I will seek to use my outsize influence in corporations to affect these capital decisions; ultimately rendering this change not minor at all.

      And bringing us full circle back to Holtz-Eakin's poorly-articulated point: its much smarter to approach these issues via comprehensive tax reform than an arbitrary top-up at the bottom of the tax forms of rich citizens.

      Because, in reality, the Warren E. Buffett Fairness in Tax blah blah blah Act effectively *is* comprehensive tax reform, only its of the worst kind, its unintentional.


  5. Certainly, eliminating a separate rate for capital gains is precisely what they're talking about.


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