Wednesday, August 17, 2011

Warren Buffettt on taxes

Warren Buffett made a big splash yesterday with his column urging higher taxes on the "super rich" in the NYT yesterday.

Like most pronouncements on policy by actors and others who are not trained in the relevant disciplines and who do not have the time to learn about them, Buffett partly, or perhaps wholly, undermines his case with relatively obvious errors.

First off, consider his empirical evidence for the claim that the elasticity of taxable income equals zero for high income individuals:
Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.
While there is much to complain about in regard to the literature on the elasticity of taxable income, I suspect that its consistent finding that this elasticity is not only not zero, but of a policy-relevant magnitude, would likely survive improvements in data and methods. This literature is not that hard to find; see e.g. Saez, Slemrod and Giertz (forthcoming in the Journal of Economic Literature) for a recent survey and in particular Section 5.1 for their summary of the evidence on the ETI. It is too bad that Buffett did not have one of his staff members go find it, and thereby avoid making a fool of himself in print.

As others have already pointed out, Buffett also gets his basic tax rate facts wrong. Again, where was the research assistant whose job it was to fact-check the article? Or, from a different angle, why does someone as smart as Buffett think it is a good idea to generalize from small non-random samples of his friends and co-workers?

Finally, like so many others, Buffett confuses income (a flow) and wealth (a stock), but at least he actually picks an income level for "rich" that does not include large numbers of middle class households with two working professionals who live in high wage labor markets like DC, NY or LA.

On the plus side, it is hard not to agree with Buffett's encouragement to his super-rich pals to devote themselves to philanthropy. Foundations can, at least in principal, use the money much more effectively than government as they should be better able to base their activities on evidence rather than interest groups. Also, Buffett is completely correct that the government needs to get its fiscal house in order. It is disappointing indeed that these salutary messages get lost among the errors.

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