Monday, June 11, 2012

The Buffett Rule

Judge William Whitbeck argues in his guest column (Grand Rapids Press, June 3, 2012, p. D4) that the "Buffet rule" should not be adopted because life is unfair. This is a poor excuse for an argument. While life is undoubtedly unfair (though it's not really clear that Whitbeck believes that the rich do not deserve their high incomes), we nevertheless expect that our laws and tax policies will be fair. That an appeals court judge would not understand this is appalling.
The basic principle of justice or fairness is that equals should be treated equally. Our current tax code does not do so. People who work for a living are taxed at a higher rate than people with the same incomes who do not earn their income from work, but receive it from investments. This is a failure to treat equals equally. It is fundamentally and transparently unjust and unfair.
There are additional reasons for the perception of unfairness. Traditional Judeo-Christian values privilege work as a source of income, and cast suspicion on "making money off of money." See for example the biblical prohibition of usury. Our tax code turns this on its head by privileging investment income over wages. The degree of inequality in our country has increased dramatically over the last thirty years. If our economy could grow and prosper in the fifties and sixties with much less inequality, why do we tolerate this greater inequality now?
Eliminating this rate differential would not make the tax code "even longer, more complicated, and more monstrous," as Whitbeck claims. Taxing all income at the same rates would make the code simpler and make compliance easier, as anyone who has filled out a Schedule D could testify. This move would return us to the principles of the 1986 Reagan tax reform.
The Buffet Rule would raise revenue in the long run, contra Whitbeck. Changing capital gains rates result in temporary shifting of capital gains realizations between years, but when rates are steady, higher rates yield higher revenues. This is a help in dealing with our federal deficit problem.
It is hard to feel sorry for the "rich people in their gated communities who already pay" a large proportion of our taxes. The taxes they pay are not that large compared to their share of national income, or the benefits they receive from our system of political economy. They have lately come under the illusion that they can buy their way out of society with their private security, private jets and helicopters, skyboxes, private schools, "concierge medicine", and the like. But they still need the rest of us, and if we're not treated fairly, it will become increasingly difficult to make our system work. That will hurt everybody, even the one percent.


Matt Huisman said...

Whitbeck’s argument is that the Buffet rule is a sham as a financial solution to our growing national debt, and that its principal value is political – namely to increase antagonism toward the rich. That an economics professor would not understand (misrepresent?) this is appalling.

Charles Krauthammer (per Whitbeck) says the Buffet rule (higher capital gains tax rates) may generate an additional $4-5 billion per year. The CBO says $3 billion. These are the optimistic estimates. But let’s say they’re accurate, we’re still borrowing $4 billion per day. Not exactly a comprehensive debt reduction plan.

As for privileging capital gains, I can’t help but wonder if there isn’t some fundamental difference between a paycheck and investment income. Do McDonald’s employees ever lie awake at night wondering how much they’ve lost this week? As for the capital gains “discount” rate (20%), less than 1% of the population pays an average ordinary tax rate more than that. These are the 1% that earn 19% of our national income, and pay 37% of the taxes. Calling any of this “fundamentally and transparently unjust and unfair” seems…well…fundamentally unjust and unfair.

But hey, these people need to understand just how much they need us, right?

Marty Wondaal said...

I am more and more disappointed with the quality of stuff that gets printed here. A few thoughts / questions for the Professor:

First, the concept of the Buffet Rule arose because Mr. Buffet objects to the fact that his secretary pays a higher tax rate than he does. For that to be true, Mr. Buffet's secretary must make in excess of $200,000 in income. That would allow him or her to live in a gated community and wall himself or herself off from society (to use the Professor's words). Do you favor legislation to curb excessive secretarial compensation?

Second, the rich people that you excoriate on this blog mostly are business owners and professionals. They became wealthy because they created products, services, or ideas that society rewarded through voluntary exchange in the free market. Relatively few wealthy people inherit their wealth. Sure, they may buy helicopters and jets with their money, but they do other things as well. Like give to Calvin College. We should do whatever we can to promote entrepreneurial behavior.

Finally, I agree with you that a large disparity in income (wealth) in society is not an optimum condition. I would submit that two major factors that caused this in the last 30 years are Federal Reserve actions (inflation) and the expansion of the Welfare State (creating dependancy). Thoughts?

Side note: As a person with many Calvin connections, I would very much like to hear from other Economics Department members on this blog. It would be interesting to see if there is a diversity of thought and opinion in the faculty.

John Tiemstra said...

Here's my rejoinder:

The Buffett Rule is not meant to be the sole solution to the long-run deficit problem, but it could be a piece of such a solution. Whitbeck repeated (as I remember) the claim that raising the cap. gains rate reduces revenue, which is not true in the long run.

Investors take risks, but employment is not without risks either. McDonalds employees, like most employees, are at the mercy of their employers when it comes to pay, benefits, and job security. They have plenty to worry about, and much less control over the risks they take than investors do. And why do the Bible and traditional theology privilege work?

The Buffett Rule is based on a comparison of marginal tax rates, not average tax rates. You don't have to make $200K to be in the 25% bracket, which is more than the top cap. gains rate, even without payroll taxes. Federal income taxes are less progressive since 2001 than any time since WWII, even after the 1986 reforms.

I admire people who create products, services, and ideas. But rewards in the market can be disproportionate, or even exploitative. "Capitalist acts between consenting adults in private" can be exploitative in the same way sexual acts can be when there are disparities in power between the parties. My problem with the one percent is that they don't think of themselves as part of the same society as the rest of us anymore. We have lost the sense that we are one nation, all in this together. The experience of WWII gave that to our country, but now we are losing it. Exploiting each other has become our national method of operation.

The increase in income inequality in the last 30 years is not due to inflation (which has declined steadily and dramatically over that period), or the growth of welfare (which has in fact contracted since the 1996 reforms). It is rather due to this sense that we are not one country, one economy, but that it's everybody for themselves. Companies that are profitable do not reward their workers with wage increases, as was the norm in the 1950s and 1960s, but sometimes even demand wage cuts (as Caterpillar has). This is the true class warfare, and it is killing our country.