Mankiw is right. Buffett is wrong.

Welcome to this blog. Well, let’s hit the ground running because there are things to be said.

Unless you have been living in under a rock for the past 3+ years, you at some point in time have heard about Warren Buffett’s claim that he pays less in taxes than his secretary. More specifically he claimed that he paid 19% of his income in taxes while his secretary paid roughly 33%, (the exact numbers change all the time) the difference being accounted for his revenue being from “capital gains” which are taxed at 15% while his secretary is paid a wage which are taxed at a much higher rate. (Even at relatively low income levels) This has since become for liberals a symbol of an unfair and inequal society while conservatives have largely been complaining about job-destroying-class-warfare. Everyone has been playing their role to perfection with the latest stunt being Michelle Obama inviting Buffett’s secretary (Debbie the Secretary? Or are we done with “[firstname] the [job]” titles?) to listen to the State of the Union with her where the “Buffett rule” came up. (look it up, it changes every five minutes)

But what about economists? Were they doing their jobs? Well, Greg Mankiw was. In a column in the New York Times, he pointed out that Buffett’s numbers are misleading because he forgot about all those taxes he paid indirectly by being a shareholder of Berkshire Hathaway which pays significant amounts in taxes. Greg Mankiw argues quite reasonably that the profits belong to the shareholders and therefore, if you tax the profits, you tax the shareholders.

This obviously did not sit well with some people. And by some people, I mean LOTS of people. An argument I have now read over and over again is that it is unfair to assume the burden of the corporate tax falls on shareholders only. After all, it also depresses salaries, prices paid to vendors, etc… That is true. That is also besides the point.

The problem is that once again people are confusing tax incidence with tax collection. The difference is simple: If you make a gasoline company pay $1 for every gallon of gas they sell, the tax collection is a burden of $1 per gallon of gas on the gasoline company. But the tax incidence is very different since the gas company will raise their prices by some amount. So if they raise their prices by 90 cents, the tax incidence is 90 cents on consumers and 10 cents on producers. However, most people will stop at who wrote the check to the IRS. This is a basic mistake that people make all the time and teaching people about tax incidence is a job that every economist takes on when they talk about taxes.

But what’s the mistake here? Isn’t it true that the burden of the corporate tax is born by both shareholders, vendors and consumers? Well of course, but we need to choose what we’re talking about and stick to it. If we talk about the incidence of the tax, we need to remember that the income tax paid by Buffett’s secretary creates a burden for both her and her employer. It’s quite obvious that Buffett and Obama are not talking about the burden of taxation. Otherwise, Mr Buffett could not get his numbers by glancing at his tax return and his secretary’s tax return. He has to perform a complicated analysis which is unlikely to be completed in his life time. So they must be talking about tax collection at which point it doesn’t make sense to talk about the burden of the corporate tax on consumers, employees and vendors.

“But wait!” I hear you say. “Mr Buffett doesn’t actually write a check to the IRS for Berkshire Hathaway’s taxes. So obviously Greg Mankiw is looking at tax incidence (and doing a poor job at that) which means we can ignore him and return to Buffett’s numbers.”  No. You can’t. Taxes are applied against people, not things. When you pay your property tax, you pay the tax. Not your house. So you have to attribute the corporate tax collection to somebody. That person should be the shareholders.

Imagine that you are self-employed. Every year, you earn $100,000, pay 35% in taxes and have $65,000 left in your pocket. Now you form a corporation. $100,000 goes into the corporation. There is a corporate tax rate of 25%, so that leaves $75,000 which you pay to yourself as a dividend which are taxed at 15% which leaves you roughly $65,000. So sure, you could say that your tax rate was 15%, but that would be nonsensical. Nothing of significance has changed. What about if you get a partner and the corporation earns $200,000 paying $65,000 to each of you? Well, what changed? Nothing.

The bottom line is that if you want to look at the effects of tax policy by looking at tax collection, Buffett pays a share of Berkshire Hathaway’s tax bill and his original numbers are wrong in the way Mankiw said. If you want to look at tax incidence, the picture is very messy and Buffett’s numbers are definitely wrong.

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142 Responses to Mankiw is right. Buffett is wrong.

  1. Pingback: Om den så kallade Buffet-regeln | Public Good

  2. tjjivehour says:

    I know it’s off topic of this specific posting, but I can’t help but feel people are missing a big piece of the puzzle here: Buffet didn’t get to where he is by being an idiot. This is as good a PR campaign as I have ever seen put together on his behalf, and he knows damn well he’s doing it. Maybe a post regarding his significant exploitation of the tax code (particularly taking advantage of the Estate/Death, whichever you want to call it, tax) is in good order?

    Great posting, I hope to see more of this caliber in the future!

  3. I think Buffett is even more fundamentally deceptive than this…….. he is calling “income tax” what his secretary pays in what we commonly call income taxes plus her portion of FICA taxes plus the employer’s portion of FICA taxes paid on her behalf. So to get to 35.8% she is paying an income tax rate of 20.5 plus her 7.65% in FICA plus the employer’s 7.65% in FICA.

  4. Chad says:

    I don’t follow your logic about shareholders. We tax entities. People are entities. Corporations are entities. If there weren’t benefits to being a corporation, then we would just have partnerships. Their taxes are part of being a separate entity clearly apart from the shareholder that causes their tax.

    • Alex says:

      Both corporations and people are taxed, but corporations necessarely are owned by someone. Suppose you own some part of a company that earned $100 before the corporate tax. If you own 100% of the company then you pay 35% of that income. If you have 1% of the same corporation, it means that you earned $1. After taxes you will have earned 0,65 and payed 0,35, that is your tax rate would have been 35%.

    • willam occam says:

      Chad,

      Most public companies are C Corps which get taxed at federal rates. As a shareholder of a C Corp your share of its profits are taxed at the corporate level every year typically at the rate of 35%. If you then sell your shares or receive dividends you pay further taxes.

      If you were a shareholder in a S Corp your share of the profits would be recognized on your personal tax returns every year

    • PrometheeFeu says:

      Well, there are many different ways to go about this. One way to think about it is that what we care about is not money, it’s the enjoyment that can be derived from money. So corporations can’t enjoy the ice-cream that can be purchased with profits. Only the shareholders can do that.

      Another way to think about it is that you can specify much of the corporate form by contract. You might have a mortgage for your house. In your mortgage, it is usually specified that if you don’t pay, the bank can take the house, but not your car. That’s a form of limited liability. But when you pay property taxes, you still count those as your taxes.

      Ultimately the corporate form is just a way for people (shareholders) to do things as a group. For that reason, it makes sense to attribute both the profits of the corporation and the taxes it pays to shareholders.

      • Nicodemus Boffin says:

        The “corporate form” may just be “a way for people to do things as a group” but as Mitt Romney informed us, “corporations” are people. And people have rights. And people have responsibilities. Therefore corporations have rights. And thusly, corporations have responsibilities.
        My nephew can be sent off to war. My nephew can be mugged leaving a restaurant. My nephew might get too drunk at my niece’s wedding and spend the night in the city lock-up. My nephew may serve jury duty. My nephew might die a painful death because of a misdiagnosis. Bain Capital and Berkshire Hathaway can’t do any of these thing. But what they can do is pay their taxes like the rest of us without water-carrying gits like PRMTHF decrying the faux-burden of double taxation on the investor-class: it is all sound and fury signifying selfishness.

        • Greg says:

          From a legal standpoint, a corporation IS a fictional person. This isn’t Mitt Romney’s opinion, it is a fact of law, going back to the middle ages. It is a “person” in the sense that it can own property, enter into contracts with natural people or other corporations, pay taxes, have their activities regulated, and be sued in court, etc. A lot of the examples you cited about being rights / responsibilities of “people” are actually rights of citizens. Don’t confuse the two. The advantage of a corporation is that its actions are considered independent of the actions of the owners (shareholders). If a corporation does something wrong, it has to pay for it rather than the individual shareholders being held personally responsible. (They pay, but in the form of lower profits and increased risk the company goes out of business.) Where the whole thing can break down is when there is a disconnect between the corporate officers and the shareholders. From a practical standpoint, shareholders are not really treated like owners and often have a lack of any independent information on what’s going on within a company other than what the officers choose tell them. Laws like Sarbanes-Oxley were written to address some of that missing accountability, by making the officers personally liable for false statements. If you want to reform how corporations are managed, look at governance and accountability between the shareholders and the officers. This accountability would go a long way in preventing most of the abuses seen by big corporations.

          • Vasilis says:

            “From a legal standpoint, a corporation IS a fictional person. This isn’t Mitt Romney’s opinion, it is a fact of law, going back to the middle ages.”

            That’s patently false. The personhood of corporations in the US is a relatively recent “invention” of the Supreme Court, in a majority decision where the best legal arguments where made in dissent.

          • Greg says:

            Vasilis: the long and historical roots of the corporation are well established. In addition, under our system, when the U.S. Supreme Court issues a ruling, it is the law, regardless of our opinion of it. Unless changed either by a new ruling or a Constitutional Amendment, it is no longer an opinion but settled fact. The fact that corporations ARE, legally speaking, fictitious persons is more recent than the Middle Ages, but the concept has its roots in the medieval guild system. Even the legal status of such an odd entity is not new. At least as early as 1819, the Supreme Court ruled that corporations were legal persons. This has been expanded and elaborated in subsequent decisions.

            You can argue all you want about whether you’d like a corporation to be seen as a “person” with regard to how it’s treated by Federal or State Governments, the extent of its “rights,” and whether there are abuses.We can discuss the implications all day long and would probably find much to agree on. But I’m not talking about my preferences or your interpretations. I’m talking about settled law going back almost 200 years.

        • dhlii says:

          The shareholders of a corporation can get drunk, spend the night in lockup, serve on juries, die because of misdiagnosis, ……

          Bain, Berkshire, …. are all just a particular way people gather into groups for a common purpose. They are no different except for their purpose than charities, labor unions, ….
          Except that corporate ownership is strictly voluntary, and corporations have no right to initiate force, corporations are no different from government. And most of us grasp that governments are people.

          There are two reasons the quite real double burden of taxation matters, the first is that fairness you lefties are all ranting about all the time.
          But the more important reason is that when you tax something you get less of it.
          Less profits from investment means less investment – is that really what you want ?

          You can either implement your faux-fairness, class-warfare taxes on capital and we can all get poorer together, or you can listen to one of your own – Christine Romer, and note that each dollar of taxes on capital reduce the economy by atleast two dollars.
          So if you manage to raise $600B by taxing capital, you will have killed off atleast $1.2T in investment and new business. That is jobs – I thought you guys were all about jobs, and the poor.

          • Steven says:

            Actually, businesses deduct wages and most capital investments, so they don’t get taxed. This actually makes the marginal benefit of investing another dollar higher than the marginal benefit of taking another dollar as profit. Taxing profits (not income, profits) does not discourage companies from hiring or expanding.

            We are a fan of jobs. We’re also a fan of collecting taxes from people who make millions/billions using the infrastructure we all paid for to do business.

  5. Ed says:

    This digging deeper into of how a person is taxed makes me wonder if there are not other dynamic effects occuring. For instance, if the company (and therefore the shareholders) know their profit is reduced by taxes, then will they not consider raising the price of their goods or services. If that is the case, then do we not all pay additional taxes based on this…and wouldn’t some of Buffet’s additional corporate taxes merely be offset by higher prices to consumers.

    • PrometheeFeu says:

      You are absolutely right. The corporate tax that is collected from Buffet is partially offset by higher prices for his consumers, lower salaries for his employees etc… That’s the tax incidence which could be broadly defined as the effects of the tax when you account for the change in behavior of the parties involved.

      And if you ask me, tax incidence is what we really need to worry about when we are discussing tax policy. I don’t really care much about who writes the check. Who bears the ultimate burden is what really matters.

      What I was reacting to here an inconsistency in responses to Mankiw. Obama and Buffet were talking about tax collection. Mankiw simply corrected them pointing out that if you are talking about tax collection, Buffet’s tax bill is properly computed to include his corporate tax rate. One can’t at that point respond that Mankiw is wrong because the incidence of the corporate tax is split between consumers, shareholders, employees and vendors since 1) that’s not what Mankiw was talking about and 2) that’s not what Obama and Buffet were talking about.

      If we want to talk about tax incidence (as I believe we should) Buffet’s original numbers will have to be completely different (both his and his secretary’s) and I have no doubt Mankiw will count the corporate tax rate as being a burden shared between consumers, vendors and employees.

      I think the reason we’re not having that conversation is that while you can easily glance at your tax return, computing tax incidence is a complicated exercise in counter-factuals. Basically, you need to estimate the elasticity of demand of the taxed products. Given that Berkshire Hathaway is a gigantic corporation selling thousands of different products and services, with many different types of employees and shareholders, estimating the burden to shareholders of the tax is an enormously complex problem and so neither Obama nor Buffet would be able to point at an exact number and say: “There! See! Lower taxes for the rich!” It would sound more like: “Well… Depending upon the assumptions you make, the rich bear between a much higher and much lower tax burden than the poor.” Hardly a good slogan.

      • Eduardo Weisz says:

        PrometheeFeu, seems to me you are making a huge mess. Taxes are a legal issue. So what? You ask me. They obviously have an economic meaning. I agree with you on the issue but still, Warren Buffet is a physical person just like you and me and this has a meaning once Warren earnings are different from his company’s earnings.
        Berkshire Hathaway is a juridic person and has to pay its taxes as any other person which. Warren Buffet is a person which has his personal earnings declared to the government and taxed as the person of right that he is: a individual and not a company. The percentual value of taxation in his earnings is actualy smaller than his secretary’s. So far it is Aritmethics.
        The problem with your line of thinking is, in my understanding, that you are not considering that we are talking of three different people: Buffet, his company and his secretary. Capital is not being taxed, what is being taxed is everyone’s net earnings. When you say that Mr. Buffet has actualy payed more taxes than his secretary, you are denying this fact and transforming two people of right in one (Buffet + Berkshire Hathaway = Buffet) and this is not right when considering the legal aspects. Is Mankiw sugesting to throw the entire legal system in trash and start over with different identities? That’s would be ok for for meu. But while it is not the disussiom, it seems to me it is a confusion in the definition of companies and people in the eyes of law. What do you think?

        • Thank you for saving me the trouble of having to write this.

        • Eco Nomics says:

          I don’t get why people make a huge deal out of the “corporations are people” idea. They have the legal capacity to enter contracts as a person, but they are obviously not really a person…it’s just said for illustration. People are just twisting that whole idea to try to skew the issue into something it is not.
          We are concerned with who (a real person) ends up paying the taxes. Since people own corporations, those shareholders own that particular share of the profits and taxes paid. It still all comes down to tax incidence, which means (Buffet +Buffet’s ownership of Berkshire Hathaway=Buffet) for these purposes.
          It’s not really a legal issue at all. I think PrometheeFue makes the correct analysis. Just because a corporation has the ability to enter contracts as a person, doesn’t mean that the taxes they pay don’t apply to any “real” person. Otherwise why not jack up those taxes to 100%, because it wouldn’t have any effect, right? Make sense?

          • Greg says:

            Without familiarity with what is meant by the whole corporate concept, it’s easy to get twitchy at the idea of a company, however good or evil, as having the same rights as a human. Many act as though this is a new concept being shoved on us by some evil imperial horde trying to take away our God-given rights. A corporation is not a citizen, does not have inalienable rights, and only exists as a legal contrivance that allows owners to create a paper “person” that can carry out a limited subset of human economic activity, allows for the dilution of ownership (millions of shareholders, potentially), has a perpetual existence, and provides for the limitations on the personal liability of individual owners. That’s really all there is to it, aside from nuance.

        • C-LLC says:

          Lets say that BRK is an LLC…then what will be Buffet’s income and his tax? Changing LLC to C corp doesn’t change the total income and the total tax paid. So Mankiw and PrometheeFeu are correct…unfortunately my favorite “bearded economist” is just obfuscating to advance his “big govt is not bad” agenda.

        • Dano says:

          If PrometheeFeu, is making a mistake combining 2 people into one, isn’t Buffett making the same mistake by adding the portion of FICA paid by the firm to his secretary’s tax bill? The that tax is paid by the firm not the secretary, so he’s combining 2 people into one.

      • Jack Davis says:

        Excellent analysis. And you’re right to say ” I have no doubt Mankiw will count the corporate tax rate as being a burden shared between consumers, vendors and employees.”
        He’s said that many times before in his blog that tax incidence is generally divided fairly evenly between the two, although it varies a bit depending on the elasticity.

        Well… Depending upon the assumptions you make, the rich bear between a much higher and much lower tax burden than the poor.” Hardly a good slogan.”

        No, it wouldn’t be a political winner:)

  6. happyjuggler0 says:

    It is worth noting that the incidence of taxes on Warren Buffett is now 0%, and there isn’t a blessed thing the government can do to change that, short of becoming a communist country.

    He has long had more money than he will ever spend on himself and his family, therefore all new income (however one wants to define that word) of his goes somewhere other than spending on himself and his family. Therefore while Buffett is writing the tax check to the government, none of the pain of that taxation falls on him; 100% of that tax pain falls elsewhere.

    So where does that tax pain fall then? Follow the money, what does Buffett do with the money he earns but doesn’t spend on himself or his family? The answer is simple: he invests some of it and he gives away the rest to charity. Taking things a step further, when he dies his investments are going to the charities of his choice as well. Also, the vast bulk of his investing is done in the US due to home country bias.

    If Buffett pays a higher tax rate, then he will by force have less money to invest and less money to give to charity. This means that we get less new investment in the US which is a horrible idea, especially now with our current extremely high unemployment rate. It also means that he won’t donate as much to charity, most of which seems earmarked for the Bill and Melinda Gates Foundation. Google them, and see what they donate their funds too. Higher tax rates for Warren Buffett means fewer diseases will be eradicated via the Gates Foundation, and fewer other societal ills will be alleviated by them.

    To make a long story short, it would be a truly horrible idea for Warren Buffett to pay more in taxes.

    • I have no formal training in economics, so I apologize if my thinking is not clear in this. Happyjuggler0, you have hit on something that is really bugging me about this whole situation. (Someone earlier called it a Buffett PR campaign, and I think there must be something to that.)

      When we use Buffett as an example – someone who experiences essentially no burden from the taxes he pays – why are we even listening? Even with respect to others with so much excess capital-at-work that their taxes produce no effective burden on them, what are they actually sacrificing in producing a burden for others who will actually feel it? Or said a different way, why would anyone attribute to them any notion of “sacrifice” or “nobility”… as if those were necessarily virtues in a society that requires production to exist?

      When I was growing up, my family would have described exploiting your situation, without any risk of harm to yourself, but to cause a burden on others… “evil”. I don’t think Buffett is necessarily evil, I just wonder why anybody is listening.

      For my part, I work to produce, to earn, save and invest… and I will pay my taxes. I have no fantasy of “fair share”. The more I produce, the more I expect the system will require me to pay for people who cannot, unless I wanted to go on some Ayn Rand strike. So I have to earn a surplus to carry them, and I don’t want producing the surplus to steal the hours and days of my life. You cannot speak of my tax percentage, when those around me would not have jobs if I could not produce in the first place.

      Finally, Buffett chooses to hire a secretary, because in his assessment she increases his capacity to act. He is not forced (so far, anyway) to employ her – he does it to amplify his own production. In paying her, he taxes himself… and he gets a benefit from that tax. That she pays taxes to the government… which he had to pay her first in wages… seems not to show up in the PR campaign.

      We should credit Buffett for all the taxes his production produces, and then maybe those who aspire to produce value in the marketplace won’t have to be vilified for keeping the country moving.

    • Brian T says:

      I think you left out the economic benefit of taxes. Whether or not you agree with how the government spends taxes they do return to the economy. Some of them are actually spent curing diseases and reducing societal ills.

      • Greg says:

        Taxes ARE intended to provide for the common good. There are some things that only government can do. If, let me pick on something unlikely, Spain decided to declare war on the U.S., it would not be practical for me to build an army to defend myself. A legitimate use of government’s power is to wage war when necessary. To pay for that, they need to siphon some money out of the economy. The debate shouldn’t be whether ANY taxes are legitimate, but how much to pay, when the tax burden begins to infringe on rights, and the legitimacy of what the money is being spent on. Some things, frankly, the government has absolutely no business being involved with. It is outside the scope of their role in human affairs. It is not their job to cure disease. It is not their job to make all human interactions equally fair. It is not their job to feed, clothe, or employ people unless that’s a means of advancing a legitimate role. (No problem paying a soldier, buying a uniform, etc.) It’s not their job to tell me what Church, if any, I attend and what they preach. It’s not their job to tell me what music I like or books I read. (I picked the military example, not because it’s the only legit use of government power, but as a starting point for the conversation. It is unequivocally their job and not mine as Joe Citizen.) There are a lot of things government COULD do, but we can agree that there are many things it should not do., even if it has the power. Somewhere in between the must do (military defense, regulate trade, ensure it treats all citizens equally before the law, etc) and the must not do (none of its business, can’t afford it, infringes on individual rights, etc) there is room for discussion.

        • Eduardo Weisz says:

          Greg, I liked your coment but you said that “It is not their job to feed, clothe, or employ people unless that’s a means of advancing a legitimate role” and the definition of legitimate is not clear for me. I mean, is infra-structure investment legitimate? What about over-investment as a counter-cyclical policy in the context of a depression? Your concept of legitimacy goes with Boudin, Hayek or Keynes? Or even, perhaps you would like to close with Bakunimand consider any kind of property theft? OK, seriously, what is legitimacy for you?

          • Greg says:

            I’m a simple guy. I figure that the Constitution is also pretty simple. It elegantly lays out clearly the role of the Government, how far they can go, and where there’s a hard stop. Even a cursory glance shows that individual liberties and the limits of government power are the central themes. (I’m not sure how that can be squared with Keynes, but maybe I just lack imagination.)

            Much of what our government currently does can’t really be traced convincingly to Constitutional authority. (We shove way too many things into the “necessary and proper” clause, almost as a reflex, when other, more clearly articulated, articles and amendments seem to limit that authority.) I’d suggest that a better course than ignoring the Constitution is to simply amend it. This would provide legitimacy for needed updates and, because it’s such a huge pain in the rear, would also limit some of the less rational abuses of authority.

            So, with that long-winded preamble, I’d suggest the following principles: 1) If it can’t be clearly traced to a specific provision, don’t do it or amend. 2.) If it passes the first test, then we can get into the philosophical debates. I’d suggest that common sense rules here: If you can’t implement something without going into massive, long-term debt or without raising taxes to the point where you’re crippling the economy, don’t do it. There is plenty of room for debate economic theories that do not necessarily require ignoring the rule of law. That said, I highly dislike Keynes. I haven’t read enough of Heyek and others in the Austrian school to form a firm opinion, but I like what I’ve read. I hope “I don’t know,” is enough of an honest answer. :)

          • dhlii says:

            There is only one difference of consequence between a government and any other voluntary association of people – such as a corporation.
            That is that government has the right to initiate the use of force.
            Every other distinction is derived from that.
            It follows that government should do those things that require that ability to initiate force – such as policing, providing the rule of law, and defense.
            Anything that does not require initiating force should be done privately.
            Yes, that would include infrastructure.
            Most – though not all of the things that are done today by government that we presume are the domain of government have historically been provided both privately and successfully.

        • Viking Vista says:

          “If, let me pick on something unlikely, Spain decided to declare war on the U.S., it would not be practical for me to build an army to defend myself.”

          So…you think of yourself personally as “the U.S.”? Don’t you imagine there would be other Americans involved? True, it would not be practical for you personally and all by your lonesome to wage war against Spain, but that’s hardly a reasonable consideration, and definitely not a defense of the necessity of the state.

          Or perhaps since it isn’t practical for you to build a pencil for you to write for yourself, or an automobile to drive yourself, or a shirt to clothe yourself, those things necessarily require government provision as well.

          The impracticality or impossibility of individual self-sufficiency in something is hardly proof of a need for government. In fact, your reasoning fails immediately by countless examples to the contrary.

          And it is upon such reasoning that people defend the violent manipulation of innocent peaceful citizens. I would think people would take more care before embracing such malicious conclusions.

          • Steven says:

            The difference between a shirt and an army is exclusivity. If I defend the country from invaders, everyone benefits, whether they pay for it or not. Same goes for efforts to clean the air, improve the knowledge base, etc. If you buy a shirt, it sits in your house and you can exercise a good amount of control over who has access to it.

          • Viking Vista says:

            Steven, the assertion Greg was failing to defend was that defense from foreign aggression MUST come from an internally aggressive monopoly (the government). He fails by assuming people cannot voluntarily organize to achieve ends that no one person could achieve alone. Any observer of markets immediately sees thus to be false.

            But it is just as readily seen that your more typical defense from exclusivity is false. Free markets have always prospered in the presence of so-called positive externalities. Shopping malls have nonexclusive access, insurance companies promote safer public behavior, private firearms are a disincentive to criminal invasions, etc.

            Even with national defense specifically, we immediately see that the claim that allowing so-called free riding prevents a national defense, is false. Canada did, afterall, possess a military even during the cold war. Oddly enough, so did the USA and the USSR. Although your exclusivity argument is inescapably an argument for one world government, the absence of one world government proves it false. And of course, since it is a service the government imposes, any claim that any particular citizen perceives value from it is moot at best.

            Clearly there are good cultural reasons why defense will be a government monopoly (people like you and Greg and many others insist upon it), but there is no good economic reason why it must.

            • Steven says:

              ” Even with national defense specifically, we immediately see that the claim that allowing so-called free riding prevents a national defense, is false. Canada did, afterall, possess a military even during the cold war. Oddly enough, so did the USA and the USSR.”

              These were paid for by the government … they weren’t provided by individuals who just got together and decided to chip in and pay for the armed forces. If the claim is that government provides things that people would otherwise shirk from contributing to, how does providing examples of things the government provided provide a counter-example?

              How many people listen to NPR? Do they all contribute? How many people rely on blood to be at hospitals but don’t donate blood? How many people enjoy open spaces that without government protection would have been clear-cut centuries ago? Markets are one form of organization. They do some things very well and do other things not so well. Some things they do very poorly. Markets aren’t magical solutions to all the world’s problems.

          • Viking Vista says:

            “These were paid for by the government … they weren’t provided by individuals who just got together and decided to chip in and pay for the armed forces. If the claim is that government provides things that people would otherwise shirk from contributing to, how does providing examples of things the government provided provide a counter-example?”

            Why would the Canadian government maintain a military if they could free ride off the US? Why would the US gov maintain a military if they could not exclude free riders like Canada? Your exclusivity argument is unaffected by the distinction between government and individual rivals.

            “How many people listen to NPR? Do they all contribute?”

            You think NPR is dependent upon government?

            “How many people rely on blood to be at hospitals but don’t donate blood?”

            Then how is it possible that such voluntary blood products exist?

            “How many people enjoy open spaces that without government protection would have been clear-cut centuries ago?”

            Not as many as would be the case if the government did not violently prohibut private ownership of many such spaces.

            “Markets are one form of organization. They do some things very well and do other things not so well. Some things they do very poorly. Markets aren’t magical solutions to all the world’s problems.”

            I agree entirely. But it is illogical to conclude that therefore violence against innocents (government) is a better solution.

            • Steven says:

              You can invade Canada without invading the US. Also Canada can choose to take military action independent of the US, like when they stayed behind in Vietnam without us. This is different than someone living in an apartment in New York benefiting from everyone else protecting the city limits from invasion.

              The point about NPR is that people free-ride. But since you ask, NPR gets a lot of money from the government. The less it gets from the government, the more it turns to corporate sponsors and puts adds on the air, making it less and less ‘public’. Truly commercial free public radio, like the BBC, only exists because of massive government funding.

              The red cross lists 3 sources of funding. One of them is National, State, and local government.

              People clear cut forests all the time. Google “deforestation.”

              Defining government as “violence against innocents”… maybe this is the issue. An actual definition of government is something like: “the governing body of persons in a state, community, etc.; administration.” Corporations, are a form of government.

          • Viking Vista says:

            “You can invade Canada without invading the US.”

            Either exclusivity makes provision of defense services necessarily the domain of a coercive monopoly, or it doesn’t. If, as you say, inherent exclusivity problems make defense an all or nothing proposition, then defense should not exist. If defense exists (particularly if multiple different defense organizations exist), then clearly exclusivity is not a determining factor.

            In the case of Canada, if you don’t believe they were free riding on the US military, then do you believe they had the capability of defending against a Soviet invasion? Hardly. They benefited from US defense and in spite of that, both Canada and the US had their own defense systems. Clearly exclusivity problems are not so limiting as you think. This is true at all levels, since people still buy guns and hire private security for personal protection even with the allegedly nonexclusive government protection services.

            In short, it is simply false that defense services could not exist (in the US or anywhere) due to free-riding in a voluntary society. Exclusivity is an economic argument that fails both logically, and in every day life.

            “Also Canada can choose to take military action independent of the US, like when they stayed behind in Vietnam without us.”

            That was a nonuse of defense services, not a reason FOR having their own defense services. Remember, your argument was from lack of exclusivity.

            “This is different than someone living in an apartment in New York benefiting from everyone else protecting the city limits from invasion.”

            So, are you saying there are no New York apartment dwellers purchasing private security due to the free rider problem of government city, state, and national security service nonexclusivity? Or are you saying that Canada did not free ride from US defense? Perhaps you are saying that it is impossible to defend NY without defending CA, or NYC without defending Jersey City? But you still think it is possible to defend the US but not Canada? The exclusivity argument clearly doesn’t work for defense.

            “The point about NPR is that people free-ride. But since you ask, NPR gets a lot of money from the government. The less it gets from the government, the more it turns to corporate sponsors and puts adds on the air, making it less and less ‘public’. Truly commercial free public radio, like the BBC, only exists because of massive government funding.”

            No, the point is not that people free ride. The point you are making is that because of free riding, the government must force unwilling citizens to pay for defense services, otherwise effective defense services would not exist. You claim this in spite of numerous long term effective commercial successes that maintain profitability in spite of free riding.

            I don’t know if NPR would completely cease to exist were it denied its alleged 3% taxpayer derived budget. I doubt it. Not all member-supported services in this country require taxpayer subsidies. And the distinction between existing with or without commercials is an unimportant one. Commercials are one way the market supports certain services. What defense needs to be effective, is effective force, deterrence, and diplomacy, not an absence of commercials.

            “The red cross lists 3 sources of funding. One of them is National, State, and local government.”

            So, anything the government chooses to touch is by definition something that could not exist without government? How do you know that private donations haven’t been displaced by taxes? If you agree that a blood supply could exist without government subsidy, how do you determine what the appropriate supply is, if not by the price mechanism? This is a diversion at any rate, since by any economist’s standard, blood is a readily excludible commodity.

            “People clear cut forests all the time.”

            Yep. Forests that they do not own. Privately owned forests are better managed. This is a diversion from the exclusivity issue to the tragedy of the commons. Still, just as private ownership provides a better solution to the problems of deforestation, perhaps it also provides a better solution to the problems of defense.

            “Google “deforestation.””

            Google “old news” and “common knowledge”.

            “Defining government as “violence against innocents”… maybe this is the issue. An actual definition of government is something like: “the governing body of persons in a state, community, etc.; administration.” Corporations, are a form of government.”

            I don’t define government as “violence against innocents”. Rather that is an essential characteristic of any and all forms of government by nation state. And while it is true that Nock and others use a broad notion of “government” to include wholly voluntary forms, common usage, and mine, refer only to those imposing involuntary compulsion upon peaceful unwilling citizens. That is, the modern government as nation state depends upon a credible policy of violence against innocents.

            So our discussion comes down to: can effective defense be a product of voluntary society, or can’t it? That is a complicated question, but Greg’s argument from self-sufficiency, and your argument from exclusivity clearly don’t work.

  7. SteveJ says:

    I totally agree. It’s funny: I just made this same argument to a friend the other day…using these exact numbers!

    From a sociopolitical point of view, Buffet’s behavior makes sense. In a country that is beginning to despise the rich, what’s the best strategy for the richest man? Isn’t it also to despise the rich?

    In Buffet’s case, this is a very shrewd way of “despising” the rich. In fact, it could easily be win-win for him:

    Scenario 1) If congress does not pass this “Buffet Rule” (which is the likely scenario), then he can claim he tried to bring down the rich, but Washington wouldn’t hear of it. Buffet is the hero and doesn’t lose a penny.

    Scenario 2) If Obama gets what he asked for in his SOTU address, it would include not only the Buffet Rule, but also a lower corporate tax rate that is globally “competitive”. To be globally competitive, the US corporate tax rate would have to fall significantly. This combination of a lower corporate tax and a higher income tax could lead to a wash, or even an increase in Buffet’s after-tax income. It’s difficult to argue that it would “for sure” lead to lower after-tax income for the wealthiest Americans.

  8. Dan says:

    Just a knit on terminology.

    When you say “incidence” of tax, you’re talking about the “economic incidence.” There is also a “legal incidence.” The word “incidence” by itself doesn’t imply “economic incidence.”

    So, in a case of the tax on Gasoline, the legal incidence of the tax is 100% on the person selling the gasoline. The economic incidence, as you’ve pointed out, falls partly on the gas company and partly on the consumer, dependent on relative elasticities of supply and demand.

  9. Joel says:

    As Meg McCardle points out, the Buffet’s numbers compare his secretary’s marginal tax rate(with employer contributions) to his average tax rate (without corporate tax). “That comparison is beyond bizarre.”

    http://www.theatlantic.com/business/archive/2012/01/how-rich-is-warren-buffetts-secretary/252056/

  10. Buffet is also comparing his total tax rate to his secretary’s marginal tax rate. Apples to oranges,

  11. Michael K says:

    You are of course, correct from a point of view of strict semantics. But this discussion is akin to someone saying: “there are nazis in the woods wearing yellow jackets”. You claim “no, the jackets are green” when we should be screaming “holy cow, the are nazis in the woods ! ”

    What I mean by the above is this: due to various issues with our tax code, corporations are very good at paying no or very little tax. The profits that they generate and pay out to a guy like Warren Buffet get then taxed at 15%, not at 35% which they would be taxed at if capital gains and dividends were taxed the same as ordinary income. Does it make sense to keep these taxes so low ?

    It does if we believe that taxing those profits at higher rates would deter investment by sufficient amount to lower average American’s standard of living. In that case, we should set that rate at 15% or lower.

    If, however, we believe that the impact on GDP per capita of raising capital gains and dividend taxes to 30% would be small to non-existent and that the gain from doing so would be higher because we would have more money to finance things like scientific research, education, defense, entitlements – then we should raise it. That is the point that Warren Buffet is making. Now, he may be wrong and I don’t know if he is or not, but let’s stick to the important point here, not quibble over semantics.

    • kuhlmann says:

      omg, there are stupid people in the woods!

    • Dan says:

      You know what’s funny is that Warren Buffett’s Berkshire Hathaway is ensconced in a years-long legal battle with the IRS over the IRS’s claims that B.H. underpaid its federal tax burden by more than $1 Billion. So, does Uncle Warren *really* believe he should be taxed more? If so, then he, as CEO of B.H., should just instruct the controller to cut a check to the IRS for the underpaid taxes.

      Look, the company can’t distribute money it didn’t pay tax on – that’s impossible. So, the very fact that the people like Buffett are paying 15% tax means that it was already taxed once!

      The argument that he pays a lower rate than his secretary is predicated on disingenuous math. If what you are saying is that we should throw out the argument about whether Buffett or his Secretary pays a higher percentage of income to the government altogether, then I agree. If you’re saying the argument is valid, but that we shouldn’t discuss the validity of that claim, then I agree with the guy who said, “omg, there are stupid people in the woods!”

      • Michael K says:

        I am saying, it doesn’t matter to me who said what or why. There is only one important issue here: what is the appropriate level of capital gains and dividend taxes. Is it 0%, 15% or 30% ? There is a numerical answer to this question and semantics of what exactly Warren Buffet said or did not say are irrelevant for the purpose of answering it

        • SteveJ says:

          Sir,

          With all due respect, you seem to not understand the argument being made.

          The answer to the question you ask, “What is the appropriate level of capital gains and dividend taxes. Is it 0%, 15% or 30% ?” is dependent upon the rate at which those “gains” have already been taxed.

          Buffet doesn’t just pay taxes on capital gains. The corporate tax rate which he first pays is one of the key elements to this discussion.

          • Michael K says:

            Yes it is. Of course, it is a key element. I never said it is not a key element, if you actually read what I said. There are other key elements as well. Our economy has lots of different taxes, transfers, exemptions, credits, etc.. Many of them are important, not just corporate tax. Corporate tax is part of our overall tax, legal and economic structure. What I am trying to point out to you is: Regardless of the specific wording of what Warren Buffett said, the point he is making is, conditional on everything else that is happening in the economy, 15% is too low. Is he wrong? I don’t know. If he is wrong, what is the evidence that points to that ? What is the optimal rate of taxation on capital gains and dividends.

        • SteveJ says:

          It’s not letting me reply to your final reply, so I’ll just put it here:

          If you’re saying that the corporate tax rate IS a key element, then it sounds like we’re in agreement.

          However, Mr. Buffet certainly isn’t making the point that “conditional on everything else that is happening in the economy, 15% is too low.” His argument, stated quite clearly time and time again, is that his tax rate is lower than that of his secretary. This is simply not true.

          • Michael K says:

            Yes, taken literally that is the partial wording of his argument. The op-ed he wrote in NY Times is much longer than this one sentence. If you read the op-ed, it is pretty clear that the comparison between his rate and his secretary’s rate is a folksy anecdote designed to illustrate the main point, which is that, “conditional on everything else that is happening in the economy, 15% is too low.”

        • SteveJ says:

          Good point about the NY Times op-ed piece. Buffett does make a much broader argument about taxing the rich. Point taken. *He admits, begrudgingly*

    • Jack Davis says:

      I agree with your last paragraph, although I might stop @ 25% rather than 30. The capital gains rate was 28% from 1987-1997, and 20% until 2003. I fail to recall the Great Depression occurring in that time span.

    • dhlii says:

      What part of “corporations are people” don’t you get ?
      Despite some issues inside of the law, this is not some legal fiction.

      Corporations are people freely associating for a common purpose.
      By coming together in a group they do not lose rights.

      If you tax a group of people and then tax each of them again individually – that is double taxation.

      It a corporation goes bankrupt – who is it that loses ?
      If you bought shares of Kodak, that was not charitable giving, you expect that money back – actually you hope for even more. If you get pennies on the dollar back, then you got screwed.

      If you can grasp that a corporation can not lose money – only the people who own it can, than you should be able to grasp that it can not make money, or pay taxes.

      The profits, losses and taxes of a corporation fall squarely on its owners – shareholders.

    • mwhicken says:

      I think the real question is not what the rate is, but how can we simplify the whole thing? Very few actually pay their “rate.” I would rather we talk about their effective tax rate, meaning, what did they actually pay? I have no idea what my rate is, because I typically only pay a small percentage after write-offs.

      The other question I think needs to be addressed was somewhat touched upon in an earlier comment. We can argue all day about the fairness of the current tax code but to me we must ask: Do we really want the government to get even more money?

      If he is taxed at a higher rate then his money will not be going where it is now – though I am sure his army of attorneys and accountants would do what they could to not pay a new, higher rate either. I don’t know if you have been paying attention to how they’ve been spending the money in D.C. but suffice it to say they are not efficient. Just like Mr. Buffet, and like most Amercians, I opt to take as many exemptions as I can and write off as much as possible because I believe (whether it is true or not) that I am a better judge of how my money is spent. If Mr. Buffet truly believed in how the government is spending the money then he would not be using exemptions and leaving more of his estate to the government and not to the Bill and Melinda Gates Foundation. Instead his actions have shown what he really believes, which is fine by me.

      What truly bugs me are the people that say that the wealthy who are not paying higher taxes are evil and basically keeping their money from the poor. First, not even close to every dollar paid in taxes goes to programs that help the poor. Second, most of these “evil” people pay signficant amounts to charities of their choice.

  12. Having spent his investing career accumulating enormous wealth, partially by trying to minimize his tax bill and enjoying the benefits of tax free compounding, Warren Buffet has seen the light and now thinks the rich should be paying more. (Hmmmm. It took him until he was fabulously rich and in his 80’s to figure this out?)

    Anyway if Buffet believes so strongly in the “rich” paying more taxes why has he agreed to donate the vast majority of his wealth to the Bill and Melinda Gates Foundation and effectively avoid paying over 50% of his net worth in estate taxes to Uncle Sam upon his demise? Simple. He clearly expects Bill to spend his money more wisely than the US Government…

    • Cynic says:

      You can believe government has its place, and also believe that people should be able to spend their own money. Only in crazy libertarian idea space can extreme arguments that either you want to keep all your money from the government or you want the government to spend all your money be taken remotely seriously.

      Buffet has long argued in favor of higher taxes on the rich, for decades now. Read a bio or something if you actually care about this argument. Somehow, I’m thinking you just lodged the most incendiary counterpoint that popped into your head, without caring whether it was true or not.

      • dhlii says:

        A fairly large percent of the uber wealthy are not opposed to higher taxes – that still does not make it a good idea.

        Even Gates and Buffet’s charitable giving demonstrates they have no real clue how to most effectively use their money to benefit society.

        Charities are only exceeded in their waste, failure and ineffectiveness by government.

        If either wanted to do real good with their wealth they would seek out the oportunies to invest it in creating new businesses that create more jobs and wealth for everyone.
        A 1% increase in the rate of growth of GDP doubles the standard of living and real median income each generation. There is no charity or government program that can possibly have that significant an effect.

        What is with the crazy libertarian rant ?
        Libertarian’s are as amorphous as Republicans or democrats. The most inclusive definition is socially liberal, fiscally conservative, covering the largest single block of voters. Every libertarian is not an anarcho-capitalist. And the intellectual support for republican economics (when they are not being as spendthrift as democrats) comes from libertarian-ism. Ronald Reagan said the soul of republicanism is libertarian.

        If you believe in government on the whole smaller than we have now, and you believe government should stay out of the private affairs of consenting individuals, then you are libertarian. Most libertarians would be in agreement with almost every formal position that the Tea Party has taken – most of us diverge on immigration

        Libertarianism is “the maximum of individual freedom consistent with order” – again Ronald Reagan.

        • Steven says:

          yeah – spending money on people in other countries to alleviate poverty – what a waste. What we need is investment in Glaxo so they can continue perfecting their boner medications. That’s what REALLY benefits society. That and iPhones and better video games. Curing disease- that’s just a waste of time and resources if the only people affected by those diseases are poor.

          This is where the crazy libertarian rant comes from. There seems to be a sort of religious blind-faith adoration of free markets that doesn’t match up with reality. Markets fail to be efficient in a lot of situations. Those failures can be pretty huge. Look at the state of the Mississippi before government regulation entered the picture. Look at the number of times the government has had to step in to break up monopolies and punish people for price fixing (GE was involved in one of the more famous of these, by the way). If you want to treat markets like they are the second coming of Christ, don’t get surprised when the word crazy gets thrown at you.

    • Johannes says:

      How often do I have to listen to that stupid argument that fans of higher taxation could just pay more taxes if they would want to.

      Whether I think higher taxes on capital income are better for the society or whether I think I alone should pay higher taxes is something fundamental different. Some of you might now that taxes are a coordination game. No person wants to pay taxes, but if everyone is doing it, the provision of public goods is possible which makes everyone better of. It is extremely seldom so, that people suggest higher taxes on their kind (e.g. capital owners), which I consider something positive.

      To your second point, it might be true that Warren thinks he knows better what to do with the money than the government. However, everyone thinks that and therefore it is still better if the governments spends its taxes (even knowing of its inefficiencies), as if everyone decides by himself. So again, if nobody can avoid taxation by founding a charity, he might be willing to give the required share to the government and than spend only the surplus on what he thinks is better.

  13. Sitting in his tenured glory in the comfort of Princeton University Paul Krugman weighed in on what he believes the rich should pay in taxes. (BTW – the answer is more). Numerous arguments can be made for and against this issue depending on ones political, emotional and economic persuasion. However what is beyond dispute, regardless of ones position on the subject of taxes, is that Krugman continues to cherry pick data to suit his personal agenda and as a result is well on his way to single-handedly completely destroying the value and prestige of a Nobel Prize. He argues:

    The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains — three-quarters of which go to the top 1 percent of the income distribution — warrant such special treatment.

    Defenders of low taxes on the rich mainly make two arguments: that low taxes on capital gains are a time-honored principle, and that they are needed to promote economic growth and job creation.

    To say that Krugman has the intellectual rigor of a first grader is actually demeaning to school children as Krugman knows better. He is correct that an argument can be made that low taxes do promote investment and growth, but lets assume for current purposes that this is not a valid one. What he neglects to mention, while rabidly trying to inflame the 99%, is that the logic behind taxing capital gains and dividends at 15% is because this income has already been taxed at the rate of 35% at the corporate level.

    By way of example if Joe the Plumber’s corporation makes $1M in pre tax profits he should have to pay $350k in corporate taxes. If he then paid a dividend to himself of the remaining $650k he would pay 15% taxes on that, or $98k, for a total tax bill of $448k or a tax rate of almost 50% before taking into account state and local taxes which would push his ultimate tax bill up further. If Joe chose not to dividend out his profits and sold his business instead he would have to pay capital gains taxes on any gains he made from the sale. (Conversely if his company subsequently went bankrupt he would not pay any taxes and lose whatever he invested in his business). Either way his business should have already paid taxes of 35% of any profits it made.

    To say Joe the Plumber only paid 15% taxes is just plain false and for Krugman to claim otherwise is quintessentially, well, Krugmanesque. If Krugman actually wanted to do something useful he should instead focus on eliminating ridiculous deductions and distortions that politicians from both sides of the aisle have introduced into the tax code, which would increase tax revenues significantly.

    http://bluecravat.blogspot.com/2012/01/champagne-socialist-just-cannot-help.html

    • Alex says:

      Krugman is intelligent enough to know what you are saying. That only makes things worse . He is deliberately confusing his public in order to push is political agenda. If he has to invent lies, then there must be something wrong with what he is advocating. He is no longer an economist, I would consider him a leftits agitator, the intellectual leader of those people who throw rocks at banks and things like that.

      • Viking Vista says:

        More the intellectual leader of those who use the government to legally rob and bully their opponents to the benefit if themselves and their mateeez.

  14. Daniel says:

    Equal is a synonym for fair (http://thesaurus.com/browse/fair). Therefore, this is simply a mathematical question of whether the wealthiest among us are paying a greater or lesser (unfair, if you will) or equal (fair, if you please) share (percentage) of their income as taxes (ewww).

    At no point do I see Mr. Mankiw attempt to truly compare the share of income Mr. Buffet’s secretary pays in taxes (corporate, federal, state, local, etc.) to those of Mr. Buffet. I only see him working to inflate Mr. Buffet’s federal tax burden.

    This feels like the standard media ploy to talk something to death without ever taking a definitive stand on an issue. Mr. Mankiw has only said he doesn’t agree with the numbers Warren is using, not actually taken a stance. Warren Buffet, Bill Gates, and now even George Soros have taken a stand on the issue. Which is why their opinions matter to the national dialogue, and at this juncture, Mr. Mankiw’s shouldn’t.

    He also needs to tread lightly when he refers to any government agency or employee as being “nonpartisan” and “some of the best in the business”. Them’s fightin’ words round these parts, sir.

    • Daniel,

      I think by “inflating” Mr Buffet’s taxes Mr Mankiw is trying to make an apple to apple comparison with his secretary. Whether Buffet should be paying more or less is open to debate; however; lets at least get the current numbers right and claims that he only pays 15% is just plain wrong.

      As for Mr Mankiw’s “stance” on taxes he is very widely quoted and his views are fairly clear.

      • Daniel says:

        I disagree. You can’t quite compare Warren Buffet’s secretary’s tax burden to her bosses without taking into account all taxes, state, local, etc., that are paid by BOTH as a percentage of their income. And Mr. Mankiw, as well as this blog, only look at one side.

        TL:DR:
        Okay, Warren didn’t take everything into proper consideration – BUT IS HE WRONG WHEN YOU (Mr. Mankiw) DO!?!?!? Inquiring minds wanna know… ya know? Because you can’t say taxes are passed on by Joe the plumber to the consumer by raising prices, then say Joe pays the full corporate tax rate.

        That means you have to take a stance on what percentage the secretary pays in corporate tax (through reduced salary and increased prices from every company she buys from) and add that to her tax burden, just as you would have to take a stance on what percentage Warren Buffet passes along to consumers to reduce his own portion (and what he pays through purchases to other companies). That isn’t as simple as dividing up the entire corporate tax rate by whatever percent Warren owns… it’s a very subjective number. Suddenly, you can spell IRS as WTF, am I right?

        It gets so tremendously complicated that I don’t think even the best of us could ever agree on just what an apple is! And that’s how we end up in circular conversations.

        And Mr. Mankiw never takes a stance on this issue in his article. He never agrees or disagrees with Warren Buffet on who pays more in taxes between Warren and his secretary. He just argues over which taxes should count ON Warren’s SIDE.

    • Tsk Tsk says:

      “This feels like the standard media ploy to talk something to death without ever taking a definitive stand on an issue. Mr. Mankiw has only said he doesn’t agree with the numbers Warren is using, not actually taken a stance. Warren Buffet, Bill Gates, and now even George Soros have taken a stand on the issue. Which is why their opinions matter to the national dialogue, and at this juncture, Mr. Mankiw’s shouldn’t.”

      Hardly. Mankiw has repeatedly expressed his opinions on marginal tax rates. Go to his blog. They’re not hard to find. Buffet’s opinion is completely irrelevant to the debate. Not only does Buffet make a bizarre comparison of his secretary’s marginal tax rate to his effective tax rate, but, certainly after all of the analysis after his first postings calling for what has become the “Buffet Rule,” he should know that his true rate must include a portion of the taxes paid for him by his holdings. Even more absurd is that Buffet calls for higher taxes and yet does everything he possibly can to minimize his tax burden today. If he truly believed that higher taxes on the rich was the proper course of action, then let me help him do his duty by sending a check to:

      Gifts to the United States
      U.S. Department of the Treasury
      Credit Accounting Branch
      3700 East-West Highway, Room 622D
      Hyattsville, MD 20782

      He obviously has no apprehension to donating large sums to charity so he is physically, mentally, and emotionally capable of donating money. The fact that he chooses not to donate to the federal government and instead donates money to other causes clearly indicates that he does not believe that the government can allocate resources more efficiently than he himself can. When Buffet practices what he preaches then his opinion matters. Until that time he is simply another misguided hypocrite at best or a misguiding opportunist at worst.

      As a complete aside I am tired of the perversions of behavior that an income tax produces. A consumption tax would be far harder for the “rich” to avoid and would actually reward production, investment, and saving –those things which actually create wealth– instead of the abomination of today which rewards consumption and debt and penalizes those things that truly generate more wealth for all of us.

    • Viking Vista says:

      Without knowing all the numbers from all the different taxes, you can confidently guess that Mr. Buffett pays more taxes in one year than his 1%er secretary will likely pay in her entire lifetime. If government is a service (rather than disservice), I don’t see how this can be construed as “fair”. Or perhaps you believe Mr. Buffett should pay multiple times more than his secretary for a quart of milk, a taxi ride to the airport, or to fix a leaky faucet. And at the other end, I suppose anyone without an income should be able to acquire whatever they want for free.

      “Fairness”, even for all its contradictory ambiguity, is something completely alien to any possible tax system. There is nothing fair about extortion. But what you can do, is evaluate the credibility of someone’s quantifying statements regarding taxes, and any associated economic theory they espouse.

  15. lithaca says:

    Incorrect, Professor Mankiw was not doing his job. He too misleads his readers.

    Capital gains tax on the sale of shares can occur–and very often does occur–before any corporate profit is earned or taxed. Consider just one such category of stock sales: technology companies are routinely bought out before they’ve earned substantial profits, if any.

    He might counter that the sale price is an indicator of future profits, which themselves will be taxed. But that would be a different argument than the one you quote him as having made, and also not a clear winner. To turn your phrase: this argument would be confusing tax projecting with tax collecting, the first a speculative undertaking that could go lots of ways depending on many factors, and the second one an indisputable, historical fact.

    • I would be interested in seeing the data that supports your claim that capital gains tax is paid “very often” on sales of shares in companies that do not generate any profits. In the scheme of things I would expect this number to be fairly small as compared to the totality of corporate tax collections. Either way this argument does not apply to Mr Buffet as he famously eschews investing in any company that is not profitable.

      Finally, while not impacting taxes directly, your argument cuts both ways in that capital losses are probably realized significantly more than capital gains in companies that have never been profitable.

    • Mario K. Maturo says:

      Absolutely correct. I do not know much about economics, but I just read through all of these posts because I immediatly recognized this same flaw in his argument and wanted to post the same thing. Its almost laughable that a Harvard economics professor puts forth such a flimsy premise.
      To William Occam who replied and was skepticle: Most of capital gains are derived not from dividends(which I would agree is “taxed twice”). Rather, capital gains come from the sale of stock, and has no direct relationship to earnings(well…). For exmple, I purchased Amazon stock in 1998, and sold it in december of 1999 and made a profit of 1 million dollars. That money did not come from Amazon, but from the buyer. Amazon did not pay taxes on this money, its not their earnings.
      Buffet’s gains have to be dissected and split into types. And when the bulk is seen as coming from stock sales, which again, have nothing to do with the company. Which means he wasn’t taxed twice.

      • Mario, Congratulations on your stock purchasing skills, which are far superior to your understanding of stock ownership!

        • Mario K. Maturo says:

          No, I don’t think you understand stock ownership. When you buy stock through one of the exchanges, NASDAQ/NYSE etc, you are not buying from the company. You are buying from another investor who is selling their shares. If investor A buys $1,000,000 in stock of company XYZ, how much does company XYZ get from the sale? Zero. When Investor A sells the stock, how much does the company get? Zero. In 1999 Amazon was worth something like a negative billion dollars. The book value was negative. It never made a penny of profit. Stocks go up and down from supply and demand, which is certainly influenced by expected earnings, but there is no money being transfered from the shareholder and the company unless dividends are issued. Many investors make a profit on companies with losses…ALL THE TIME.
          So, someone might have millions in capital gains, but it has absolutely nothing to do with the earnigs and thus the taxes of the company.
          Yes you can say that if the company paid less taxes then their profit would be higher and the stock SHOULD be higher, but what ultimately drives the price of the stock is supply and demand relating to various factors. The shares are not intrinsically worth more or less due to the company’s earnigs or cash, its the market that creates the price.

          • Alex says:

            Mario, with all respect, you are very confused. The thing goes like this: the price of a stock is the present value of the future dividend that you think it will give you. The future dividens are negatively correlated to the corporate income tax. I mean, the higher the income tax, the lower the dividend.

          • Tsk Tsk says:

            No, I don’t think you are understanding stock ownership. Are there examples of companies with no earnings with finite stock prices? Sure. Can stock prices be driven by emotion and irrational exuberance? Sure. Can day traders tap into these spurious swings. Sure. Can Goldman Sachs arbitrage the exchanges by putting massive compute clusters milliseconds upstream of retail accounts. Sure. But over the long haul and over the broader market what matters in the stock price are the earnings of the company and the dividends it returns to its shareholders:

            http://www.investorsfriend.com/Return%20versus%20growth.htm

            Do you believe that after a company IPO’s or issues new stock that any future sales of the stock have zero impact on the company? What do you believe that stock represents if not a stake in the company and a claim on its assets, liabilities and earnings? The fact that the stock changes hands many times after issuance doesn’t change that. You also forget that even though the company does not see any direct gain from future sales of issued stock those sales provide investment capital to those who did buy the original issues. That chain of transactions continues ad infinitum with each investor in turn participating in ownership of the company and benefiting or losing from the actions of that company.

          • Mario K. Maturo says:

            To Alex– I am not confused. Many stocks nowadays do not pay dividends. Investors invest in tech stocks not for dividends, but primarily for growth. There are many ways to compute stock value, including the one you pointed out, but that is only one of many models. It sounds like you have never invested in stocks…am I right? Not to harp on Amazon, but it is illustrating my point, how much is Amazon’s dividend? Zero. It has never paid a dividend. Obviously there is more to valuing a stock than your one method. Why do investors purchase tech stocks that do not pay divs? Growth. Why don’t they pay a div? Because they want to use the capital to reinvest in R&D. Case in point, cash rich Apple hasn’t paid a div since 1995. I will point out that there seems to be a return to divs. Back in the 90’s very few companys paid them out, and many that traditionally paid well slashed them to where the rates were inconsequential to the stock price. But there has been a return to payments the last several years.

          • mm says:

            ugh- you bought the stock from an OWNER- you don’t buy it from the “company”. The sale of the stock benefits the OWNER- and rightly so- the company does not own itself. All this talk of companies as if they were people has confused many. Furthermore, capital gains are taxed at a lower rate because they are accrued over more than one year- so often a significant amount of the “profit” is really just inflation- since we don’t index the “profits” (it would be very complicated) the lower tax rate helps to offset some of the inflationary effect.

          • Mario K. Maturo says:

            TskTsk: How does anything you say contradict the original post, or my supporting post, that a major portion of capital gains is not subject to double taxation, thus contradicting the argument put forth by Mankiw? I agree with many of your points. But, a share of a company is not a claim on its assets, liabilities and earnings.

          • Alex says:

            Mario, as for the dividends, true, some companies dont pay them but the only reason their stock has any value is because they have the potential to do so, and they actually do it if the stock goes deeply down. Microsoft payed its first dividend after the enron collapse, to assure its shareholders that the dividend estimations were correct. That is why dividens are more common today than in the 90s.
            If a company director declares: we are going to grow to the infinite but never ever pay any dividends, then the stock would be worthless. Maybe I am not being clear. Just try to answer this: why would you hold a stock that will NEVER EVER pay you any dividend?
            You may say to sell it, but why would anyone buy such thing?
            Maybe its clearer with a bond because bonds have an expiration date. Would you buy a bond that will never pay any interest or capital back? The principle for the stock is the same.

          • Mario K. Maturo says:

            To Alex says: Re: post at January 28, 2012 at 04:49
            There are many different investment strategies. Certainly, many investors seek dividends. But not all investors. I have invested in stocks and limited partnerships for their returns via dividends.
            Other times I have invested in stocks because I anticipated growth (in sale/earnings/market share/whatever) that would propel the shares to rise. That is to say that some strategies do not take dividends into consideration at all.
            An investor will invest in stocks that pay divs when they seek income as part of their investment strategy. Retirees usually will want income from their investments. The company is earning money, and paying it out to shareholders. Other investment strategies do not seek income. Why take income when company can re-invest and make more, my stocks rise in price and I defer taxes until I sell, avoiding paying taxes on income I do not currently need. For such an investor, Newt would certainly be a boon becasue they could cash out without cap gains tax. You asked the question of why invest in a company if it will never pay you a dividend? For price increase. 10 years ago you could have purchased Amazon at $12. Now its $197. It didn’t pay a div, thats a “worthless” stock in your eyes???
            As you know, there are many other models of investing, everything from day trading to options and commodities. Divs may be central to your plans, but insignificant to others. I disagree with you that divs(or anticipated divs) are the absolute measure of a stock’s value.
            But, as I said said in a prior post, the point of the original poster, the point I agreed with and still stand by is that not all capital gains are taxed at the corporate level. Which then counters the support of mankiws stance. The desriptions of a person opening a corp and being taxed twice is different then the reality of many investment scenarios, and Buffet probably falls into both categories.

          • Mario K. Maturo says:

            Alex asked:” Maybe its clearer with a bond because bonds have an expiration date. Would you buy a bond that will never pay any interest or capital back? The principle for the stock is the same”
            Okay. You muddled the question by inserting the part about the capital back, but lets stick to your income is necessary stance for investments.
            Some bonds pay interest. Some don’t–zero coupon bonds like savings bonds pay nothing until they are redeemed. You buy them and then they increase in value. During the time that you are holding a zero coupon bond, lets say 20 – 30 years, there are no payments of interest. You buy them at a discount, then cash in for a higher price.
            Are you catching on?

          • lithaca says:

            Alex wrote: “The price of a stock is the present value of the future dividend that you think it will give you. “. That is too narrow. For example, the price may reflect the value of future dividends to a differently taxed entity, say, an untaxed pension fund, since I can sell it to that fund.

            Also, the stock price may reflect the value of the business to an aquiring entity, independent of the value of futre dividends. Consider the recent sale of Skype to Microsoft: on its own, Skype was a barely profitable entity with no prospect of monetizing its massive user base; but in the hands of Microsoft, that user base could plausibly be worth billions of dollars, if only as a means of defending the Outlook franchise.

            The main point though is that capital gain tax has nothing to do with the corporate income tax that has already been paid, and Professor Mankiw shouldn’t have suggested it does.

  16. mccloud says:

    I do have a couple of issues with your argument. First though, if someone makes $100,000 in salary/income he/she will only be paying about $21,610 at max. That is to say that he/she does not have any tax credits, children, or whatever to get him/her less of a tax burden. Either way, we are looking at having about $78,000 or more left over after taxes (thats by using 2011 tax brackets of 10%, 15%, 25%)

    Now to get to your point. Lets assume that Buffet, or Buffet’s accountant(s), know where his money is going. I think you, and others who have left comments here, are missing the main argument. The issue is not with those making $100,000….or even $500,000 in salary. The issue is with those who make millions in interest and dividends. Lets suppose that corporations who may be paying taxes on profits then give out dividends to its shareholders. Many of those shareholders are not making millions so they should be left out of the equation here. What Buffet and Obama are trying to get at is that those who are making millions in dividends (which is a popular way of making money for the rich) should be paying more in taxes. And thats it. If multiple entities are being taxed then so be it. Thats not the issue. The issue is we need more revenue. If that means continuing to tax corporations (which isn’t that much ost of the time) and then tax those making more than 1-million in interest and/or dividends above the 15% mark, then so be it.

    • “The issue is we need more revenue”

      Whatever ones views on taxing the “rich” understand one thing: Higher taxes do not begin to solve America’s financial problem. The US has a spending problem at every level of government that it cannot tax its way out of. While it is effective election rhetoric to make believe that a small minority can solve the problems of the 99% that is purely wishful thinking….

      http://bluecravat.blogspot.com/2012/01/sorry-there-is-no-fairy-godmother.html

      • Daniel says:

        Bill Gates touched upon that point when he endorsed Warren’s idea, though.
        Warren has never painted an increase in taxes on the rich as a one step solution.
        It’s just the only part that has gotten press.

        This is a near term fix to address budgetary shortfalls while you make necessary changes towards long term sustainability that some very successful household name people believe is fair. And I see no concrete evidence to the contrary, only jabs at the data used for comparison. But I am (still) looking.

      • mccloud says:

        I understand that more tax revenue is only one part of the problem; however, we need only to slow the increase in government spending paired with increases in tax revenue to make a difference in our debt. Moreover, this decrease in the change in government spending shouldn’t occur until after the economy is on a better and relatively “safer” track of growth. But the increase in the taxes can occur since those making, for instance, $1-million in capital gains and more will probably not be affected to a point that will change their daily lives. Also, if a person makes that much in capital gains it is highly likely that they will continue to make large amount in the future.

        That 1% minority you speak of actually controls quite a large portion of the wealth in the U.S.. Enough so that it can definitely make a difference. Moreover, lower increases in spending year-over-year, along with increased taxes on those making a certain level of capital gains, and just an improvement of the economy (leading to more personal income and therefore more tax revenue) will lead us closer to a solution.

        But the real answer will come from a combination of changes to the tax-code and social security, and of course a congress who can play together and unafraid to act in such a way that will get them fired by voters.

        The question here though was the idea of taxing the rich and this question of tax incidence. I am saying that the question isn’t how much has been paid and by who, but that we simply need more and those who make millions in capital gains can definitely afford to pay extra. It will not solve the problem but will put us in the right direction. Intermediate targets do help get to that final goal.

  17. Bilbo says:

    Just curious, though, how this would apply to income derived entirely from interest payments.
    For someone deriving an income solely from interest, say a trust fund holder, they would be paying just the capital gains rate on their income, correct?
    Would your response be that the bank is already being taxed at the corporate income tax rate and then passing along those costs in the interest it pays out?

    • Bilbo says:

      Oh nevermind, I guess interest income contributes to one’s personal income and thus the typical personal income marginal tax rate applies.

  18. Gary Cornell says:

    Mankiw is also telling only part of the story.

    The trouble with this analysis is that if you wish to count the tax rate that Buffet pays by attributing BH taxes to him, you should also attribute BH income to him as well. If Buffet owns 25% of BH approx as he does, then it is certainly fair to say he paid 25% of it’s tax bill. BH paid around 5.6 billion in taxes last year on profits of 19 billion or so. Then one way to reason is that Bufffet made about 4.75 billion and he paid about 1.62billion i.e 29% since doing it this way what he actually filed as a tax return is roundoff error! But i suspect that 29% is probably about what his secretary paid in total taxes when you combine FICA and income taxes…

  19. louis says:

    “When you pay your property tax, you pay the tax. Not your house. So you have to attribute the corporate tax collection to somebody. That person should be the shareholders.”

    Actually, if you knew about the property tax before you bought the home, the guy who sold it to you paid the tax, because future taxes would be capitalized into the purchase price.
    Similarly, in a perfect market, lower profit taxes (which is what corp income taxes are) will attract more entrants, bidding down prices and bidding up costs, and resulting in basically the same after-tax profits.

    Buffet is saying he only pays 15% tax on his income. And he’s right. The system taxes money as it flows into individuals’ pockets (unless those people use passthrough entities…). And the idea is this: take 2 companies, IBM and GE. IBM pays 35% tax. GE pays 0%. IBM pays a dividend of $1 from their after tax cash flow, GE also pays $1. Buffet is willing to pay $20 for each, because he gets a 5% dividend from each at that price. Sure, if you cut the corp tax IBM will become more valuable vs. GE. But the 5% is the market return that Buffet expects to get from investing his capital in the stock. We tax interest income at personal income tax rates, there’s no objective reason we shouldn’t do same for div income or cap gains.

    • Viking Vista says:

      No. This misses the point of tax incidence. Both parties pay part of the tax. As property taxes increase, the number of home sales will, c.p., decrease.

  20. joe says:

    Lets make the case this way.. I am the sole share holder in a c corporation that makes 1 million a year on 10 million in revenues. The corporation pays tax at the corporate level at approx 35% ($350,000) and consequently $650,000 is left over as retained earnings. This corporation is my sole form of income but I decide to not pay myself from it, nor to distribute any dividends. Instead I authorize the corporation to loan me 500,000 to live on. Voila, I have 0 “income tax” for this year if we are calculating income tax as only what the individual pays. I continue this on for several years and can demonstrate 0 income tax liability for a period of years. Not arguing that this is a smart way to manage or that it ultimately minimizes tax liability, but am showing that unless you impute corporate income (and income tax) to the shareholder that you aren’t getting a true picture of income taxes nor tax rates.

  21. Yeon says:

    I think most people who understand the issue would agree with you but you don’t seem to address the capital gains treatment of carried interest at all. I’m not sure what the percentage of capital gains is carried interest, but I suspect that most people who have carried interest income are quite wealthy. I have yet to hear anything persuasive as to why carried interest should be treated as capital gains when it looks like ordinary income.

    • PrometheeFeu says:

      That depends a lot upon your reason for treating capital gains differently. I just posted one reason which would point towards treating carried interest as capital gains: it encourages investment relative to consumption by lowering the price of investment managers. But one could also consider that your utility is better measured by your consumption than your income which means that savings should not be taxed, then carried interest is just normal income and should be treated as such.

      • Johannes says:

        Saving is good and spending is bad. I get it. So everything which encourages saving is good.

        However, we live in a world were probably every country could easily increase its production. There are so many idle resources from human capital to money capital, but things which I would call investments are not happening enough. Why? Maybe it is not the inability of capitalists to produce value added products or services, but the ability to pay for these services?

        How can this be a problem in economic models in which one household sector exists which is investor and consumer at the same time? It cannot, but in reality this is not the case. There are mainly investors in the top 1% and mainly consumers in the lower 50%. THE PEOPLE IN THE TOP 1% DO NOT EARN MONEY SO THAT THEY CAN SPEND MORE IN THE FUTURE!!!!! Money is a status symbol which shows power and wealth in the top 1%.
        Basically there are people with desires and without money, and people with money but without desires.
        Now if the rich don’t consume their money, it is missing in the rest of the economy. Of course they invest it. Which within the USA basically means lend it to the poor, so that they can buy a house. This is a nice thing, don’t get me wrong, but problems arise if the rich actually want their money back.
        At the end of the day investors can only get the money of the lower 99%. Which would not be a problem if the missing 1% would not command such a large share of wealth.

        If something would make sense, than to encourage the rich to actually consume more of their wealth. This would also make it easier for new entrepreneurs to make money with innovations or services they can sell to them, and we would not discuss to reduce taxes on investors again. Have they ever been so low in modern history?

        Besides it would be more sustainable if people with actual money would consume it, instead of poor people who lend it from someone else. And the poor will also have a chance to earn some of the money the rich spend.

        P.S. I am aware that the world is not divided in rich and poor, but it is easier to make a point like this.

        • Brian T says:

          Don’t some economists believe that we’d see more investment if the wealthy were taxed more? I believe their contention is that they would speculate more to increase their after tax incomes. They’d be more entrepreneurial not less. They’d realize they should take a chance considering they can write any losses off their gains. An added benefit would be more jobs and distribution of income. There would be more money for people to consume. Consumption is a major part of GNP. The wealthy and others would benefit. It’s a win win.

          • Johannes says:

            I agree, that real investments would go up, not for the reasons you stated so. Rich people are largely risk adverse and they have a lot to loose, but only little to win. However, I would make the case, that the rich would not invest much less if they would have to pay higher taxes (what are they supposed to do with their money?). And if the government either redistributes the money or spend it, more investment opportunities will emerge. And if the rich are good business men, they have a chance to get their money back.

            Alternatively, if the rich do spend more of their money to avoid taxation, there are also opportunities coming up for other people to make money. This would also increase upwards and downwards mobility.

            So either way it is good in most modern economies to tax capital incomes high, or to have high wealth taxes.

            That is different of course from the argument whether to have high corporate tax, because this can lead to problems in the international context

        • Viking Vista says:

          “THE PEOPLE IN THE TOP 1% DO NOT EARN MONEY SO THAT THEY CAN SPEND MORE IN THE FUTURE!!!!! Money is a status symbol which shows power and wealth in the top 1%. ”

          Being personally familiar with many people in the top 1%, many of whom came from lower middle class or poorer families, and all of whom worked their asses off to obtain advanced degrees that afford them the 80+ hour per week jobs that put them in the top 1%, I can assure you that you are wrong.

          They work because they have to work just like most people. They spend their hard-earned money to reward themselves for their work, pay their bills, and secure a future retirement, just like most Americans. And most couldn’t give two hoots about money as status, realizing that life is too short for such nonsense (though all rightfully like to see their achievements appreciated, and enjoy nice things). Some already have children old enough to realize that they likely will never attain the temporary 1% status that their parents for a time achieved.

          Are there such people as you describe? Probably, but probably not even 1% of the top 1%.

          Your sociology is as erroneous as your economics.

    • Brian T says:

      Further, in the case of Bain and other venture capital institutions they do do work. They acquire, they manage and sometimes they liquidate. Their employees or partners who do this work such as Romney should have earned income somewhere in their tax history. Investors take the risk investing in Bain. I don’t see why all the income is treated as capital gains income.

  22. Frank Restly says:

    To say that Greg Mankiw is right and Warren Buffet is wrong belies the truth.

    From Greg’s article:

    “None of these calculations, however, say whether the rich are paying their fair share. Fairness is not an economic concept. If you want to talk fairness, you have to leave the department of economics and head over to philosophy.”

    From Warren Buffet:

    http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/

    “The question is what is fair when you have to raise multi-trillions to fund the United States of America,” said Buffett. ”[Raising taxes] will not change my behavior. I have paid all different kinds of rates and I’ve always been interested in making money. I believe this should be a defining issue. Debbie works just as hard as I do and she pays twice the rate I do.”

    Notice that Buffet says that he should pay more taxes in the spirit of fairness while Mankiw says fairness is not a concern of his.

    • Viking Vista says:

      A man is judged by his actions. Many people over the years have given Mr. Buffett specific instructions on how to send more of his money, to whatever extent he deems as fair, to the US Treasury. That he doesn’t avail himself of this opportunity, but rather strives instead to minimize his tax burden, shows that he does not mean what he says.

  23. Amy says:

    Fabulous post! Thank you for taking the time to look at the ENTIRE picture!

  24. Steven says:

    Adding your blog to my list of things to read – maybe send a thank-you note to Dr. Mankiw for sending readers your way :)

    FYI, the idiom is “living UNDER a rock.”

  25. Steven says:

    You say: “the income tax paid by Buffet’s secretary creates a burden for both her and her employer.” Can you explain your reasoning there? If labor earns its marginal product, the tax rate on wages doesn’t alter wages, it alters people’s decisions about how much to work.

    If you account for the fact that the corporate tax rate reduces the profits being paid out, then shouldn’t you also have to acknowledge that they likely lower wages, since they reduce the marginal product of labor? If I’m not mistaken, the tax is on corporate income, not corporate profits. This means that the pool of money out of which labor gets paid is also being affected by the tax.

    • PrometheeFeu says:

      Labor doesn’t really earn its marginal product anymore when there are taxes to be paid. Imagine the marginal product is $1. If there is a 50% tax, labor only gets paid 50 cents at which point you will lower the amount of work you are willing to do. Or, your boss could pay $2 and you would get $1 and be willing to do the same amount of work. But he would only get $1 out of your work, so that won’t work for him. So the answer is somewhere in between.

      I will do a post tonight or tomorrow with an explanation of tax incidence in standard partial equilibria micro models.

      • Steven says:

        But that’s my point. To be clear, by wage I mean what gets paid by employers (if you ask someone their wage, they give you the pre-tax amount). If you assume employers pay labor its marginal product, then the level of tax will not alter the wage at all. I tend to think of labor supply as pretty inelastic, mostly from personal experience working blue-collar jobs. I’m not actually sure how that holds up to actual evidence and would be interested to see some. From that assumption though, it follows that corporate income tax reduces returns to shareholders and labor in the same way.

        Unless… here is where I am (extra) ignorant … taxes are on income after wage payments have been deducted. If this is the case, then the wage / labor supply that maximizes P will also maximize (1-t)*P and so my point is null and void. If this is the case, then I completely agree that Mr. Buffett is dead wrong and also, (on a tangent now), I would think this would put an end to the “taxes on the wealthy slow job growth” talk.

        Thanks for a place where civil economic discourse is possible. PLEASE don’t get involved in the Krugman et al / Lucas et al cat fight :)

        • PrometheeFeu says:

          You’re right that it’s all about elasticities. But it’s about the relative elasticities of supply and demand. I think you’re probably right that labor supply is relatively inelastic while labor demand might be more elastic which would mean that employers shift more of the burden of taxes on employees. That said, there are many different labor markets (different places but also different professions) and so it would be difficult to get a good estimate of labor market elasticities. And then there is the famous theory that the supply curve actually bend backwards at higher incomes as wealth effects kick in, but I’m not completely convinced by that theory.

          As for the stimulus cat-fight, I plan on showing that one can talk about fiscal stimulus without yelling or insulting anybody. But probably not for a little bit. All the comments have incited me to post more about taxes for the near future both on more complex policy issues and some basic micro analysis. I’m sure most people have already seen all the micro I’m going to throw out there, but maybe some have not, so it might help to build the basic framework.

      • Steven says:

        HUGE typo in that response. When I said “then the level of tax will not alter the wage at all” I meant the exact opposite. The demand for labor will decrease. Workers will work the same hours but earn less. If you relax the inelastic supply assumption, then the effect is offset by a decrease in labor supplied, making the wage decrease less (assuming diminishing returns to labor).

  26. Cynic says:

    Corporations are treated as people, certainly in matters of legal liability.

    What forming or investing in a company does for you, is add another fake person to take responsibility for you. The corporation is responsible for its behavior, responsible for its own debts, the trade-off is that it is also responsible to pay its share of taxes.

    I can invest in 100 companies without any legal responsibility for any of their actions or debt, while the average individual has no such indemnity. You could theoretically just as easily invest personally in 100 ventures all owned by yourself rather than any corporation. However, if any of them tanked or acted illegally, you’d personally be on the hook for it.

    You can’t have your cake and eat it too. The price for the government agreeing to assign responsibility to a corporation rather than its owners, is that the corporation is responsible to pay taxes to the government.

    • Viking Vista says:

      Nope. Only human beings are held liable. Obviously, if an employee or officer or shareholder commits a criminal offense, that person is held criminally liable. When the law imposes a financial liability upon a corporation, the lost value of the corporation is the lost value to the shareholders. I. e., the shareholders are being held liable. The law, for good or ill, merely limits the shareholders’ liability to the value of that corporation (including whatever insurance it may have).

  27. TH says:

    The tax is factored into the price paid for the investment. Claiming Buffet paid the corp tax is like claiming Buffet paid for the salaries of the people working at the companies he invests in. By that logic, he also paid for their taxes and so on. Soon we’ll find Buffet paid all taxes collected. It’s non-sense. The only way to claim Buffet paid for corp taxes is if there had been an unexpected increase in the corp tax rate. Then the marginal cost of that increase could be assigned to Buffet. But that’s not the case.

  28. bodams84 says:

    Reblogged this on ZLB, Neg IR and just about everything else and commented:
    I saw this an thought of all the various arguments i have had on this subject in the last week. And frankly the arguments are better than i could put together.

  29. zmil says:

    I really like your analysis, as far as it goes. I’ve tried to make a similar argument many times, but much less clearly. However, I have seen many arguments (including further up in this comment chain) making a distinction between income coming directly from corporate profits, and income coming from sale of shares. I’m beginning to think point this has some merit, but I feel like it hasn’t been stated as clearly as your thought experiment.

    So let’s extend your thought experiment: I have formed a corporation, and it’s paying taxes on profits, and I’m paying taxes on the dividends, as before. Now, let’s say I make a brilliant invention, and suddenly my corporation is a lot more valuable. I can’t really expand on my own enough to really bring the idea to its full potential, I haven’t actually made any extra money on it yet, but a corporation sees the potential, and buys my company outright, for say, 10 million dollars. If I understand correctly, I would pay 15% tax on that sale. I have trouble seeing how that money was doubly taxed. I am willing to be enlightened, however.

    What I take from that is not that a low capital gains tax is good, or that a corporate income tax is good, but that neither really makes much sense. Much simpler to tax all individual income equally, and not try to tax corporations at all.

  30. steve2 says:

    So all these years when economists claimed that corporate taxes were passed on to consumers in the form of higher prices was wrong? It is really just income tax for shareholders? Then cutting corporate taxes will not make our corporations more competitive.

    Steve

  31. Heathcliff says:

    I guess the secretary’s pay doesn’t come out of money the corporation makes.

  32. Woodbutcher says:

    The thing I get out of all of this is that the we need a simpler tax code that eliminates the many incentives and social engineering that have been incorporated into the tax system.

  33. Steven says:

    High frequency traders pay the capital gains rate. It’s hard to imagine an argument that says that in the 3 seconds between trades the tax on the corporation’s profits mattered. In fact, if a stock is priced at the net present value of some share of profits and everyone knows profits are taxed, then the price of the share already reflects the tax. It would seem then that only the initial sale of stock is taxed twice- the value is lower to begin with because the stream of profits attached to it will be taxed and then the money from the sale gets taxed again. Afterwards, only unexpected changes to the tax code would matter.

  34. Mama na teta says:

    clap clap clap…. I just love to see two different arguments together.

    When it has to do with paying taxes the final payer is the shareholder so he/she has to be given a tax break to account for that hidden tax (the one levied on the firm). Ok.

    But if the company goes bankrupt (and with it debt and other losses, perhaps on employees wages) then it is limited liability… I do not see the shareholders stepping up and covering the losses with their own ‘private’ money. In such case, a corporation is a completely different entity. Like some say, corporations are like people.

    You guys make me laugh so hard…

  35. Trevor says:

    Thanks for this post! It improved how I understand taxation. Some things that came to mind while reading comments were:

    Corporations are “Pass Through” entities. Meaning, all profits, risk, taxes… are passed on to the owners (shareholders). It is as simple as that.

    As said before, the value of a company is equal to the present value of future profits (dividends). For example, if Apple would pay its $97 Billion dollars in cash to its shareholders as a Dividend, the value of the company (market cap) would drop by $97 billion since apple no longer holds that cash. In other words the value of the company and the value of future dividends are equal.

    Lastly, I agree with some other posters that a consumption based tax would be more efficient and fair. See fairtax.org for more info.

  36. auls_ says:

    Reblogged this on sour cupcakes and beers and commented:
    read this!

  37. Pingback: From Mankiw’s Blog 2012/01/30 : Y-Nung Yang's WP Site

  38. Johannes says:

    Isn’t the main argument for corporate taxes that they largely use our infrastructure and other public goods and institutions?

  39. Inequality’s pair most iconic,
    Mr. Buffett and Mrs. Bosanek,
    Have talked up the facts
    Of the rates of his tax,
    Which are lower than hers – most ironic.

    “An investor like Buffett,” says Mankiw,
    “Has firms that pay tax as well, thank you;
    We must add the taxation
    Of each corporation
    To see in which bracket we rank you.”

    So taxation’s not simple as “one-two”,
    You can argue the point if you want to,
    But unequal or not,
    Ms. Bosanek ain’t got
    Someone else she can pass the tax onto.

  40. Brian T says:

    Seems to me there is a problem over analyzing the comparison of Buffet and his secretary. She is paid with profits from the company therefore her income has also been taxed when the corporation was taxed. The same it true of Buffet. End of comparison. To go on and complicate the issue with tax incidence or legal questions seems only to confuse.

    • Steven says:

      Wages are paid from income, not profit. Taxes are generally on profits: income minus labor costs, capital costs, etc. Taxes do not generally affect the pool of money that can be paid out in wages.

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  42. Ken says:

    Steve Landsburg has a good post similar to your discussion above, although, he talks about Romney, instead of Buffet.

    • PrometheeFeu says:

      Thanks for bringing up Steve’s post. I had read it and found it very interesting. He is talking about the fact that the money you invest was at one point in time or another taxed as normal income. I am focusing on the fact that your dividends were already taxed as corporate income.

  43. Dino says:

    Some corporations pay very little in taxes like GE. It would be far more efficient to drastically reduce taxes on corporations and close the loopholes on the wealthy elite by imposing a minimum rate of 25-30% regardless of where income is derived. Better yet, tax consumption rather than income. The US tax code is a favorite place for rent-seekers.

  44. Pablo says:

    If someone is being taxed, it doesn’t go back to Buffet, and corporations aren’t people. The tax is ultimately on the worker who actually produces something of value. In all equations and at all times tax is imposed on labor, no matter how many times the tax is sloughed off. The tax is imposed on labor because it is only labor that creates something of value.

    • Viking Vista says:

      In spite of the malicious villain he became in later years, it is almost certainly true that Mr. Buffett’s labor created more value than you, me, and entire factories of workers combined. And like you say, the value WB created was taxed heavily.

  45. che says:

    Y’all are angels dancing on the head of a pin. Supersmart, but none of it matters. If income inequality reaches a certain point and real privation occurs amongst the peasantry, they’re going to come and hang us all from the lamp-posts. At which point I’m sure you’ll all go into orgies of exquisite justification for prison camps & extermination campaigns.

    • Viking Vista says:

      What if income inequality grows, while privations continue to diminish? Remember, intraindividual income variations are conflated with interindividual variations. That means that a wealthier more educated population–where people spend less time working but for larger working incomes due to long periods of education and long retirements–would result in greater income inequality, even if every single age-matched person was completely identical.

      It is easy to understand why socialists like your namesake despise the individual independence and self-directed prosperity that such income inequality characterizes. To keep income inequality low, it must be the case that individuals spend almost their entire lives working, and that their incomes hardly change and are too low for any savings (otherwise people would have the opportunity to stop working and live off savings, thereby spoiling the desired income equality). A population so living hand to mouth would be much easier for the state to control. And of course, an easily controlled population is what the socialist needs and yearns for, so that he can engineer society in the shape of his utopian fantasies–fantasies which are thoroughly repulsive to the kind of independent and accomplished people blessed with income inequality.

      • Steven says:

        Controlling for age when looking at income variation doesn’t change the story much. Income inequality in the US is still growing. Most of the recent literature actually points to variations in education as the main driver. Another big one is the income of your parents. No serious person who talks about income inequality is comparing the income of a 95 year old to the income of a 40 year old. Reducing income inequality to simple differences in individual effort ignores a gigantic body of literature that points to a variety of forces at play. For example (there are hundreds):

        “The distribution of income by factor components”, Graham Pyatt, Chau-nan Chen and John Fei, QJE, 1999

        “Intergenerational Income Mobility in the United States”, Gary Solon, AER 1992

        “Poverty trap and growth with public goods “, Naohito Abe, Economics Letters, 1995
        (more about the role of public investment in economic growth than about income inequality. However, since studies suggest that lower income families have less access to many of these public goods, I think this one is still relevant.)

        “Changes in the Wage Structure and Earnigns Inequality”, Lawrence F. Katz and David H. Autor, Handbook of Labor Economics, 1999

        “A Theory of Persistent Income Inequality”, Steven N. Durlauf, NBER working paper, 1992

        • Viking Vista says:

          “Controlling for age when looking at income variation doesn’t change the story much. Income inequality in the US is still growing. Most of the recent literature actually points to variations in education as the main driver.”

          Your first sentence is incorrect. *Simply* controlling for age has effects significant enough to actually reverse conclusions from increasing to decreasing inequality when looking at certain historical periods. Education being correllated with age results in age showing a smaller effect in multiple regressions including both. But the point of people doing age adjustments is not to test the hypothesis that there are important biological senescent causal factors at play. The point is that age correlates with many unavoidable and even desirable life cycle factors, like education, which strongly affect the interpretation.

          Income inequality statistics are a dubious cause of normative conclusions in any case, but such statistics without lifecycle adjustments are misleading, and given the decades-long recognition of this problem, deliberately so. If there is a factor hidden within icome inequality measurements that is believed to be a cause of social unrest or other problem, then that is what needs to be studied directly, because clearly there are good and desireable factors lumped in there as well. The widely held belief that income inequality per se is a problem is as poorly defended an assumption as “income inequality” is a coherent concept. My reply to che was to give a simple and clear example for why his use of “income inequality” was poorly considered and poorly defensible. People tend to parrot the nonsense they like to hear.

          “For example (there are hundreds):”

          I wish that were the case. Sadly, you undercount this misguided field of research by at least an order of magnitude.

  46. Naveen says:

    Well, basically the argument is that the rich own the corporations and so corporate taxes should be viewed as being levied on them. There are at least two big problems I see with this argument.
    1) First, in fact, corporations pay very little taxes in dollars.
    2) Second, the rich can also deduct lot of expenses through corporations. If I were a corporation, I would get deduction for all of my rent, education, all of my utility and phone bills, all my commute to office, and a lot of what I spend on food, clothing, and entertainment. Bottom line – if you were to merge owners with corporations, you would find that their total tax bill is higher, but so would be their total tax income.

  47. Naveen says:

    Continuing from the previous post…

    Let us do the thought experiment of treating Berkshire Hathway and its shareholders as a single entity. The effective tax rate on this entity is may be 30% to 40% but at the same time this entity enjoys all the privileges of being a corporation.

    What would happen if were to provide Buffet’s secretary tax parity with corporations. She would be able to deduct may be 50% of her income by way of rent, utilities, and other expenses which are a write-off for corporations but not for people. With 33% of her remaining salary being paid as tax, her effective tax rate is almost 66%.

    Buffet’s point about fairness of tax system is still valid, though what I am highlighting here is not the rate itself but an unimaginable gap between the deductions that the rich can take and what ordinary people can take. The former almost define what is income, the latter have it defined for them by the IRS.

    • Viking Vista says:

      Federal receipts from corporate income taxes are typically about half as much as receipts from personal income taxes. This cannot correctly be called “very little” unless you are indifferent to the idea of abolishing the corporate income tax altogether. This accounts for the peculiar behavior of individuals who falsely claim “corporations don’t pay taxes” also being adamantly opposed to decreasing them.

      Although you are correct that the owners (shareholders) of a corporation, e.g. Verizon, do not usually pay taxes specifically on rent paid for the corporation’s facilities, the owners do not get to deduct the rent they pay for personal use. And since all of the income that the shareholders derive from their corporation is captured and taxed as capital gains and dividends, one must wonder why there should be any corporate income tax at all.

      It simply isn’t true, outside of tax fraud, that owners of corporations deduct all of their personal expenses. Small businesses, mostly self-employed individuals, may because of their shear numbers get away with some degree of such fraud, or legally have some overlap between personal and business expenses. But then it wouldn’t be corporations per se that you want to clamp down on, but rather small businesses (whose owners commonly are not rich), since shareholders of large corporations don’t typically have the opportunity for such fraud or overlap. I own some shares of Verizon, but my accountant tells me that doesn’t permit me to deduct any of my apartment rent.

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