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Friday, November 30, 2012 8:28 AM ET
Warren Buffett: A pyromaniac in a field of straw men
By Ada Lee
Ada Lee is a senior analyst for Indaba Global Research. The views and opinions expressed in this piece represent only those of the author and not
necessarily those of SNL.
William F. Buckley Jr. famously once described economist John Kenneth Galbraith as a pyromaniac in a field of straw men. Galbraith's torch has been
passed to a new generation of demagogue in the person of Warren Buffett.
Writing in The New York Times this week, Buffett advocates "a minimum tax on very high incomes." It's a reasonable idea with rational arguments to support
it, but Buffett eschews them in favor of tearing down straw man arguments that nobody is actually making.
Buffett begins by suggesting a thought experiment:
Suppose that an investor you admire and trust comes to you with an investment idea. "This is a good one," he says enthusiastically. "I'm in it, and I think
you should be, too."
Would your reply possibly be this? "Well, it all depends on what my tax rate will be on the gain you're saying we're going to make. If the taxes are too high,
I would rather leave the money in my savings account, earning a quarter of 1 percent." Only in Grover Norquist's imagination does such a response exist.
Leaving aside the reliance on hearsay in place of independent investment analysis, what Mr. Buffett is asking readers to believe is that investors don't care
about the effect of taxes on their investment returns. If you are managing the portfolio of a nonprofit endowment, then this is a reasonable assumption.
If you are an individual taxpayer, then outside of investments made within the context of tax-qualified plans — IRAs or 401(k)s, for example — then Buffett's
assumption is absurd on its face. If taxes would claim too high a chunk of any returns, then one may very well decide to seek alternatives, and there are
many alternatives beyond savings accounts. The public record is rife with evidence that Mr. Buffett is aware of the existence of municipal bonds, to name
just one potential alternative.
Buffett's example also assumes away risk. In real life, an investor would want to consider how much risk he is bearing in order to achieve a potential return
— after taxes. The tax liability has a direct impact on risk appetite.
He goes on to draw specious comparisons with the post-World War II economy. He points out that tax rates were much higher in the 1950s and 1960s, yet
"both employment and the gross domestic product … increased at a rapid clip. The middle class and the rich alike gained ground."
This ignores a few salient facts about the post-war economy.
One reason the economy did so well despite substantially higher marginal income tax rates is that it was far easier for high earners to avoid those rates. For
example, the alternative minimum tax did not take effect until 1970, and even then only for a tiny sliver of taxpayers. As Mickey Kaus pointed out in response
to an equally disingenuous argument recently put forth in The New York Times, even when the top marginal rate was 91%, it produced only a 45% effective
tax rate, not for the top 1% of earners, but for the top basis point of earners!
Another reason the economy did so well despite higher rates is that the U.S. was the only game in town. In 1945, the U.S. had the only industrial plants in
the world that hadn't been bombed to bits, and only slowly over the ensuing generation did the rest of the Western world (plus Japan) emerge as serious
competitors.
As to the egalitarian aspect of Buffett's claim, the period in question was characterized by, shall we say, uneven enforcement of civil rights, and only the
beginning of containerization, which drove down shipping costs by orders of magnitude. So the middle class gained ground as long as the household in
question included a white male, who didn't have to worry much about competition from blacks, or women, or foreigners. I submit that this is not an ideal to
which we should aspire.
A more reasonable argument for raising taxes on high earners is that, even though it brings in limited revenue relative to our structural deficit, our fiscal
situation necessarily means lifestyle-diminishing changes in taxes and benefits for much of the middle and working class, and so political reality dictates that
the better-off must be seen to take a hit as well, if only to help the real medicine go down.
Yet Mr. Buffett chooses instead to make specious claims about investor indifference to taxes and offer fairy tales about the post-war economy.
As Kaus said in the above-linked piece about similar claims made by Paul Krugman, Buffett knows all this — he just writes as if we don't.
Source: S&P Global Market Intelligence | Page 1 of 1