Warren Buffet, Mitt Romney, and their secretaries

Okay, so this place is obviously becoming a repository for missives I wind up writing elsewhere, but whatever; it's better than the nothing I've been posting here the last few years.

I've remarked in a couple of places in the last few days that arguments regarding the supposedly low tax burdens of the wealthy are intellectually dishonest and have gotten responses that led to longer, more detailed analyses.

Here's the first:
“That number doesn't take into account the corporate taxes that these people already paid before their capital gains ever made it into their hands.

Let's say someone makes $50,000 and pays $10,000 in taxes. His tax rate is 20%.

Let's say another guy makes $50,000 from his regular job, but also owns 10% of a business that makes a profit of $5M. That business then pays 30% of that in taxes and returns the rest to the investors; so the guy get's $350,000 (10% of 70% of $5M) in capital gains, on which he pays a 15% tax of $52,500.

These guys like Newt and Warren Buffett and Barack Obama and the people reporting on Mitt's taxes cry foul and say that the guy who made $50,000 paid 20% while the guy who made $400,000 only paid 15.5%, or $62,500 of his $400,000 income. This doesn't take into account the fact that he already paid 30% on his investment income through corporate taxes before he even got the capital gains which were then taxed another 15%. His real tax bill was $150,000 + $52,500 + $10,000 = $212,500 of the $550,000 that he really made, or 38.6 percent.

In using the term intellectually dishonest, I'm assuming that these people all get this and present it dishonestly for their own ends. I may be being a little harsh on the journalists who quite likely just don't get it and wouldn't understand if 100 people explained it to them, but Newt, Buffett and the president know exactly what they're doing; they are liars.

That said, as long as the tax system is set up the way it is, it will be impossible to keep liars from lying and misrepresenting what's going on. I would be happy either with eliminating the capital gains tax altogether or, better yet, eliminating the corporate income tax and taxing capital gains as regular income. Either one would eliminate the perceived problem, but then, I don't think that's the real goal of the people who insist on declaring that they pay lower taxes than their secretaries.”

On facebook, someone responded to my similar remarks with:
“Did Slick Willard pay those corporate income taxes or did Bain Capital pay them? Is the corporation a separate legal entity or not? Because if it is, then it SHOULD be taxed as a separate entity! If Slick Willard pays 15% on his capital gains and then uses the after-tax income to pay his housekeeper enough to put her in the 15% tax bracket, do you think she can honestly claim to be paying a 30% tax rate? If not, then why does Slick Willard get to play the martyr because he paid taxes for himself on the money Bain paid him out of its own after-tax proceeds? Other than, of course, the fact that he's a member of the aristocracy and all us dirty peasants need to shut up about the affairs of our betters.”

Here is my response. Jason is the guy on whose wall I was posting, Andy is an economist who regularly disagrees with me, and Alan is the guy to whom I was responding:
"Jason, I apologize for puking a 800 words of econ all over your wall, but it’s a rare slow day at work that didn’t require me to work while I ate my lunch; so I figured what the hell. It won’t hurt my feelings in the least if you want to delete. As a disclaimer, much of the more detailed analysis I’m about to post is simplistic, unresearched, barely thought out at all, and drawn from concepts learned long ago that I might be hazy on, in particular the part about income versus substitution effects. Someone better versed in the subject than I am - paging Andy Balthrop (Andy, feel free just to point out my most egregious errors or not to take the bait and get drawn into a facebook fight at all) – should feel free to correct me if I’m wrong, but I don’t think any of the places I might have been mistaken would be enough to substantially alter my argument. If they are, I reserve the right to backtrack, crawfish, or otherwise revise my statements in order to save face.

Alan, whether they are separate legal entities is irrelevant to the moral question of whether it's "fair" for someone to suffer a lower tax burden, as a percentage of what they've earned, and central to that moral outrage should be the question of whether that's even actually the case.

There is a depressingly large set of people who have decided to eschew any real economic theory and assume that any decrease in corporate taxation goes entirely into the pockets of the wealthy with zero benefit to anyone else, and I won’t assume you’re among them, but if they’re right, then of course there’s every reason to attribute Mitt’s corporate taxes to his having “paid his fair share” and no reason to consider these taxes when considering the burden that falls on his employees. That’s not, however, the case; so your argument bears consideration.

First, though, the housekeeper is probably not the best subject for making your case. She operates as a business herself and faces a demand curve that is determined by an income effect and a substitution effect. The substitution effect would be relevant if we were talking about adding taxes to Mitt’s salary, as it would lower the opportunity cost of his time, but the culprit here is the taxes on his company and capital gains, which doesn’t have the same impact; so the substitution effect is fairly trivial. The income effect is a bigger portion of the demand curve she faces (and thus the price she can charge), but her services would have to be among the lowest priority services millionaires were willing to pay for out of their budgets. Since most people are employing housekeepers well before they reach Mitt’s level of wealth, it’s safe to assume neither of these effects would be significantly impacted by higher tax rates on her clientele. Yacht builders, however, should probably account for corporate taxes and capital gains taxes of their customers as part of their tax burdens, though it’s mitigated by the fact that they also avoid the costs of building the yachts that aren’t purchased.

A better example for your argument would be one of Bain’s employees. Incidence of tax isn’t exactly a straightforward calculation and would require intense, industry- and firm- specific research to nail down, but employees of Bain should absolutely consider a portion of Bain’s corporate taxes in thinking about their own tax burdens, but it’s still a much smaller consideration than it is for the owners of the company. The increased cost of doing business that Bain faces as a result of its corporate taxes impacts the amount that they are able to pay their employees because it impacts the marginal value of each unit of effort that each employee puts forth. Still, this is a relatively small impact because the bulk of an employee’s pay is determined by the value he produces over that of the next best competitive alternative, which would be the next most talented employee they could hire. Because of this, the impact of the corporate taxes on the employees is much lower, as a percentage than it is on the company owners. For the record, anyone who uses Bain’s services or anyone who uses the services of those who use Bain’s services, and so on to lesser and lesser degrees, should consider Bain’s corporate taxes as part of their tax burden.

That said, Mitt is not an employee of Bain; he is an owner. If he owns 10% of Bain, he is entitled to 10% of disbursed profits in exactly the same way he would be entitled to 100% of disbursed profits of a lawn mowing company of which he owned 100%. As such, any tax that diminishes the profits of Bain diminishes his own well-being, and it’s dishonest to exclude that from a moral argument about whether he has paid his fair share. If Bain makes a $50M profit, and corporate taxes take that to $30M before Mitt gets his 10%, then that is $2M that should be included in any fair assessment of his tax burden. Without the tax, he’d have made $5M, and because of it, he only made $3M.

On a tangentially related note, it’s a bit of a leap even to consider a system where the wealthy pay a smaller share of their income in taxes unfair. To start, there are good cases to be made that the wealthy consume government services as a percentage of income at a much lower rate than others. There are also very strong cases made by philosophers and economists for centuries that a tax on consumption is both fairer and more economically sensible than a tax on income. Such a system would be undeniably regressive, since the wealthy dedicate significantly lower portions of their income to consumption than a very poor person, who spends nearly every penny he earns."

Krugman is wrong/dishonest again

I haven't posted in about 15 months, and I'm pretty sure no one will see this, but I thought I'd post this here for posterity's sake, since I've already written it anyway.

The other night, my boss sent me a recent blog post by Paul Krugman and this was my response. Enjoy:


It might be nice if he were right, but unfortunately, the column is just fundamentally dishonest. Even more unfortunate is that Krugman's columns can almost all be described that way, and the NYT continues to give him a paycheck.

To start with his assertions regarding the short-run, I don't think I've ever heard any serious thinker say anything like the strawman he constructs, claiming that deficits have to have the short-run effect of raising interest rates. The effect it has to have in the short-run is forcing a choice between high interest rates and inflation. We've chosen inflation. Krugman contributes to the "fact-free" environment by conveniently leaving out of his analysis the whole QE1, QE2, ...QEn/Twist thing. The Federal Reserve has spent the last few years throwing everything they can think of at the interest rate problem to stave it off, which has led to inflation that we haven't even fully realized yet, which I consider significantly worse than high interest rates, which I'd actually welcome. We saw 23 percent inflation in just 10 years between 2000 and 2010, most of which came in the last couple years of the decade. I'll be shocked if that number doesn't land above 50 percent for this decade.

For the long-run arguments, I'm honestly shocked that he made the claim that governments don't have to pay back their debts. That's just a lie. Short of just flipping all their bond-holders the bird (which I actually advocate), governments do have to pay back their debts. He says that on the basis of the fact that governments can always just borrow money to pay back their debts, though he ignores this in his earlier analysis regarding the impact of debt on interest rates, which I'm sure he excuses by saying that he's moved on to discussing the long-run by then. Government sells, for example, 30 year bonds. They then make interest payments on those bonds at regular intervals until 30 years have passed, when they pay off the principal, which they do by selling another bond of the same value, which they then make interest payments on for another 30 years. The problem is that they never actually pay down any of the debt this way, leading to snowballing debt levels, which we're seeing now. This is the long-run disaster that he's dismissing, but it's sadly becoming an ever shorter-run problem, as we've already reached the inflection point, which is why the total outstanding federal debt has more than doubled in the last 6 years, with the bulk of that coming in just the last three years since the current administration has taken office. He claims that debt growth will never matter as long as it doesn't expand faster than the tax base but then doesn't go on to say that it's expanding dramatically more quickly than the tax base. Debt as a percentage of GDP has gone from 57 percent in 2001 to 69 percent in 2008 to passing 100 percent a couple of months ago.

I can't decide whether his second point on the long-run is a lie or just the result of his being so engrossed in his collectivist philosophy that he's become unable to grasp the concept of individuals. He says we owe it to ourselves? I'd have to ask, who is "we" and who is "us"? The fact that the money is owed to U.S. citizens is totally irrelevant to any analysis that doesn't end with "we are Borg." It also indicates that Krugman hasn't looked at the breakdown of who holds our debt in a few years, which is somewhat excusable since it's been at least that long since he's taken part in any serious economic thinking. When I was in college, we learned that foreigners held about 18 percent of public debt, just over a trillion dollars. That wasn't exactly trivial, but since then, foreign holdings have ballooned to about $4.5 trillion. About a third of total debt. To dismiss this as trivial, as Krugman does, is ridiculous.

At the end, he finally gets around to what he's be dishonestly building toward for the entire column, which is what he dishonestly builds toward in nearly every column he writes, that "it's all the fault of these damn irresponsible right-wing lunatics who don't want to raise taxes." He says all we'd need is a "modest" tax increase. (I think Atticus Finch advised Scout to take out the adjectives and she'd have the truth - sound advice for anyone reading a Krugman column, it seems.) Of course, having dismissed all other concerns regarding the debt, all he has to do is assert that taxes aren't that big of a deal and suddenly he's justified historic debt-growth that goes beyond what any reasonable person can accept. Not even Keynes advocated the lunacy that has been practiced in the last few years, but for Krugman, as long as the guy in charge has a (D) by his name, nothing is unacceptable.

I should also say that, while I'm obviously not a fan of Krugman these days, he did some very good work before he was afflicted with Bush Derangement Syndrome in the early 2000s. He's the author of two of my favorite books, "Peddling Prosperity" and an international trade textbook, and my favorite professor was a devotee of his. He'd make an interesting psychological study - he was in his late 30s, just about the age when a rock star economist might start feeling entitled to have his ideas converted directly into policy, when Bill Clinton took office. He then enjoyed 8 years of exactly that at the apex of his career before George W. Bush took office, making Greg Mankiw, a rival of his whom many consider a better economist, his top economic advisor, and no one in power really cared much what Krugman had to say anymore. It really seems to have cracked him. He responded by becoming intensely political, which he never really was before, and totally abandoning academic economics. These days, he's really not taken seriously by anyone outside of the NYT readership, and so he plays to them in everything he writes.

Here's a recent Mankiw blog post responding to readers who'd asked for his thoughts on Krugman's view.

He links to a pdf of an article he wrote in the mid-90s. It's 26 pages, but well-worth the read. He takes a more neutral view than I do on the concept of ignoring the individual and looking only at total societal utility, but other than that, it's a much smarter, more complete and more measured version of what I just wrote. If nothing else, it's worth skipping to the end to read about the prospect of a "hard landing."

M3 and Taco Bell

Healthcare

As true today as it was then

Oh, the cognitive dissonance

Last week, John Mackey, founder and CEO of Whole Foods and hero to the left, wrote a well-considered and insightful column on health care reform for the Wall Street Journal. No doubt his loyal followers were pleased to learn that those capitalist pigs had finally allowed the light of liberal truth to grace their pages and picked up a copy to see what incontrovertible argument their hero had put forth in defense of nationalized health care.

A Margaret Thatcher quotation? But...but...but. This makes no sense. This guy runs an organic grocery store. He supports green energy. He requires humane treatment of animals by his suppliers. How could he stab us in the backs like this?

Turns out, many of Mr. Mackey's customers were none-to-pleased by his break from the party line, declaring their commitment to never shopping at his stores again and seemingly ignoring every point he made in the column, confused by the fact that someone could be an environmentalist who doesn't want socialized medicine.

What they don't get is that it's possible Mackey's beliefs and actions are determined not by a simplistic and all-encompassing philosophy of liberalism, but by a commitment to personal responsibility. Mackey runs his company in an environmentally friendly manner because he believes that's how it should be run and he takes personal responsibility for ensuring that's how it is run. He provides excellent medical benefits to his employees because he believes he should, and he takes personal responsibility for that, and it turns out, it works out pretty well for him and for his employees with no need to get the government involved whatsoever. Mackey rightly recognized that the reason so many companies offer such crappy healthcare benefits is that the government is too involved in the first place, making it far too difficult to run things the way they ought to be run (in both a moral and practical sense) for any company that isn't as focused on personal responsibility as his to come anywhere close to getting it right. The answer to our woes is not and never has been more coercion. It's allowing the markets the freedom to unlock the best and brightest ideas people like Mackey and countless others have to offer.

President promises candy rain, may be lying his ass off

So leftist Democrats finally figured out what it would take to bribe the Blue Dogs into betraying their constituencies and have gotten the health care bill out of committee in the House, setting up floor votes when Congress returns to session next month. In the mean time, the question of how the fuck we plan to pay for this counterproductive monstrosity remains largely unanswered, with President Obama still insisting that he will not do this in a way that will increase taxes on the middle class. This is, of course, ludicrous.

There are a few possibilities here. The first is that he's figured out how ridiculously bad this whole idea is and is open to a substantially scaled down version that will only waste a little bit of money and only make health care as a whole in this country a little bit worse than it is today. We can only hope...

The next possibility, and the most likely, is that Barry is just an outright liar with no intention whatsoever of leaving the middle class unscathed in the money grab required for this plan to destroy American health care. This plan is tremendously expensive, and someone has to pay for it. The political tactic here is likely to get people behind the plan under the false impression that they won't have to pay for it (a remarkably easy task if you can pull off the convincing them it's free part) and then change everything up at the last minute, raising taxes across the board to pay the bills and hope no one catches on to what has happened.

For the moment, however, let's take the president at his word. Let's assume that he really does intend to push through a bill that does all the things he says he wants the bill to do and that he really does intend to do it without increasing taxes on the poor and middle class. So how do we pay for it? Is the president's answer to everything really just going to be "Well, the rich can pay for it. They have the money."? Really? This is astonishingly short-sighted and simplistic for someone with such a reputation for brilliance and vision, and yet it really seems to be the only thing he can come up with to reconcile the insane statements he's made. Then again, he might just be lying.