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.

Taxes, taxes, taxes

MSNBC on the joyous tax regime in Denmark.

Hat tip: Lars Skipper

Explaining the variance in tax compliance

Casey Mulligan reports on a Chicago dissertation that examined how "tax compliance" - the formal term for whether or not you pay all the taxes you owe - varies with the amount of integrity required in different occupations, as rated by an external source.

My quick internet investigation suggests that Oscar now works at the Ministry of Finance in Mexico.

More on Madison

A nice piece from the Economist on the battle between Governor Walker and (some of the) public employee unions.

In addition to the thoughtful arguments it makes, the Economist piece illustrates a clever and largely untried approach to the dispute. I call it analytical thinking.

Most of the takes one reads around the internet are, instead, based on moral reasoning, or perhaps just moral ranting, sometimes supplemented with dodgy evidence from interested sources. I don't think there is really any moral content here at all, just a principal agent problem between the taxpayers and voters and their state and local governments that needs to be fixed with better institutional design.

Thanks for nothing

Should the tea party, or the dems, or anyone else, be thanked for lower taxes due to the extension of the Bush-era tax rate cuts?

Well, no, because while rates were kept at current levels for now, spending was increased, which means that either future income taxes will be higher, or other taxes (e.g. inflation) will be higher or both. Cutting taxes in a meaningful sense, rather than just moving them around in time or in form, requires actually cutting spending. Let's get to it. Doing it sooner makes it easier to do it in thoughtful ways.

A public finance Top 5 list

An excellent TOP 5 list yesterday:

NOTE FROM CHRIS:

The United States Congress has just passed President Obama's "compromise" version of a bill that would extend the Bush tax cuts implemented in the early '00s. This version is said to have provisions that appeal to both the left and the right.

Let's take a closer look at the bill, shall we?

The Top 5 Hidden Provisions of the Obama Tax Bill

5> Tax payers may choose to donate $1 to help the president get an American birth certificate.

4> The Romney Loophole: The cost of hair care products may be deducted from your personal taxes if the resulting hairdo can withstand gusts of up to 40 mph.

3> Democrats claiming to favor the Bush tax cuts inserted language allowing strippers to deduct 100% of Brazilian wax expenses.

2> New alternative-energy windbag subsidies for Limbaugh, Olbermann, O'Reilly and Beck.

and Topfive.com's Number 1 Hidden Provision of the Obama Tax Bill...

1> One-time airport restroom sex partners can now be counted as dependents.

As an aside, I am pretty sure that Brazilian waxes are already deductible as a work expense for strippers under current tax law.

Oh, and I laughed the hardest at #5.

Be sure to patronize the funny folks at www.top5.com.

Views of the tax cut compromise

Two very different views from Robert Reich and Charles Krauthammer.

I am more inclined to side with the Krauthammer view.

Regardless of which view one agrees with I do not recall a policy discussion where the within-group variation in views was so large for both the Rs and the Ds. I think fiscal responsibility is, like civil liberties, a cross-cutting issue on which the parties are not very strongly sorted.

Hat tip to Nat Wilcox on the Krauthammer piece; the Reich piece is via those portside.org emails that I am still getting despite not having signed up for them.

Taxing the rich

One problem with taxing the rich is that both they, and their income and assets, can often move around. They also have the incentive, and the resources, to keep up with the tax laws and exploit every mistake that gets made when they are composed by some sleep-deprived Yale political science major policy wonk at 2 AM, just short minutes before they get voted into law.

Example 1: Rolling Stones

Example 2: Famous athletes

The second example is doubly troubling as apparently the UK government has given up on the rule of law in this policy area, setting tax rates for events based on the whim of some bureaucrat at HM Treasury (or, more likely, based on the gifts received by some politician).

Dammit! Why won't people just lay there and take it like they are supposed to?

Via: Mankiw and Marginal Revolution

Mankiw's students fight back

There is an ongoing discussion in the blogosphere about Mankiw's NYT column on the effect of increased taxes on his work effort. I've been meaning to say something substantive about it, but for the moment this video by some of his Harvard undergrads must suffice.

Colbert on tax cuts and Mankiw

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Tax Shelter Skelter
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

This is funny and also illustrates some points. First, again note the use of "rich" along with images relevant to idle people - Kennedy grandchildren say, or Paris Hilton - to mislead the audience away from thinking about the tax cuts as applying to doctors, lawyers and economists and a large fraction of all two-professional couples in high income cities such as NYC or DC. Taking all of the money from all of the actual rich people, idle or not, just does not yield all that much in the way of funds, because there just are not that many of them. Also, in the Goolsbee segment, note the wording that suggests that the government would be borrowing to cover the tax cuts, rather than the spending. This is again rhetorical play designed to distract the listener away from thinking about what the government is actually spending money on and towards class conflict.

Via Greg Mankiw

Mankiw on taxes

A fine NYT column on taxes from Greg Mankiw.

The literature on optimal income taxation suggests higher rates on those who supply their labor inelastically so as to minimize the behavioral response to the taxation. This is, of course, just a special case of the general point that you want to tax things that will not change in response to the taxes. Rather obviously, this conflicts with distributional concerns, but it is worth keeping in mind nonetheless.

Greg's piece also implicitly points out that estate taxes are a boon for the higher education sector, as it allows wealth, or at least the capacity to create wealth, to be passed on without paying the inheritance tax.

Addendum: responses from Tyler Cowen and from Greg Mankiw.

I think Tyler is correct to raise the moral dimension. As marginal tax rates as high as 90 percent can have little justification other than incompetence or envy, it is hard not to see them as immoral as well as inefficient.

Wesley Snipes, tax resistor

Read all about it here. An extra good bit:

Snipes also claimed that as a “fiduciary of God, who is a ‘nontaxpayer,’” he was a “‘foreign diplomat’” who was not obliged to pay taxes.

All those action movies and poor Wesley does not realize he is outgunned?

Hat tip: Adam Cole

Seminal issues in public finance

It turns out that if you set up a foundation whose mission is to distribute your own sperm to eager female recipients, the IRS will not grant your foundation tax exempt status.

A colleague adds that "the courts have ruled that one has no basis in one's, um, bodily fluids (comes up mostly in blood donor cases), so THAT component of any donation to a nonprofit sperm bank is extremely unlikely to qualify for a deduction under any circumstances."

Good to know.

Hat tip: Adam Cole

Cough, cough, eh.

For Adam Cole: the current state of play on evasion of cigarette taxes in Canada.

Taxing tobacco

Recent UM Ph.D. Adam Cole points me to this interesting study on tobacco taxes produced by the US Treasury Department.

For me, the most interesting bit is in the appendix. The study authors would like to estimate the volume of cigarettes consumed in the US on which tax has not been paid. One reasonable way to do this starts with using administrative data to determine the number of cigarettes on which federal taxes are paid. Administrative data works well here because federal taxes are paid at the production site and careful records are kept. The number of cigarettes consumed, in contrast, can be estimated using data from a nationally representative survey, in this case the National Health Interview Survey (NHIS), a data set widely used in research in health economics.

The problem is that when you do this, you discover that the number of cigarettes consumed lies well below the number on which taxes are paid - see Table 4. Given that cigarettes degrade in quality when stored reasonably rapidly, which indicates that the excess cigarettes are not being stored by consumers, this finding suggests that the NHIS measure of cigarette consumption has a downward bias, presumably due to "non-classical" measurement error in smoking incidence and/or (probably and) in number of cigarettes smoked conditional on reported incidence. The study does about the only thing one can do in this situation, which is to present estimates - see Table 5 - of the lost tax revenue as a function of assumptions about the downward bias in the NHIS consumption measure. One obvious recommendation here is to improve our knowledge of the degree of downward bias in smoking consumption measures by doing some sort of validation study. More generally, this study provides a nice example of how research on measurement, which might seem rather arcane, actually has a real world payoff.

The other bit of the study that stands out to me is this:

Recommendation 3: Allow enforcement officials to pay investigative expenses with proceeds gained through undercover operations.

Problem: Currently, tobacco tax enforcement programs are funded principally through agency appropriations or from forfeiture proceeds arising from asset forfeitures in concluded criminal cases. Additional funding through the use of proceeds gained through undercover investigations would expand investigative resources without the use of additional appropriated funds.

Recommendation: Existing law should be amended to authorize TTB to use proceeds gained from undercover tobacco tax enforcement operations to fund its investigations.

I disagree with this bit for the same reason I dislike asset forfeiture laws. I do not think that law enforcement should be a profit center for the government. Making it such strongly enhances the incentives for misbehavior by law enforcement officials.

No new taxes

You know, I seem to recall that there was another president who made bold claims about "no new taxes" and came to regret it.

It seems doubly crazy in this case for two reasons. First, by any reasonable accounting, the pledge is already broken via the stimulus package, which represents a huge increase in future taxes. Second, unless Obama is planning to take over the Fed and start printing money (which is, of course, just a different way of raising taxes, in that case on cash balances), or to make huge cuts elsewhere in the federal budget, neither of which seems likely, there is simply no way to pay for the current health care policy changes on the table solely with taxes on those making more than $250,000 per year. There are not that many such people and they tend to have the most opportunities to avoid income taxation, either via legal loopholes or simply by not reporting parts of their income, or even by moving elsewhere.

I think Obama will regret this move, just as Bush I did. Why not be honest instead? It really is kind of amazing that this administration, after all the hoopla, hasnt' even really tried to be different. From day one it has been business as usual with spin, spin, spin.

Legislative incompetence

The Nation (!) reports on truly astounding incompetence on the part of Congress in the writing of the tax provisions for alternative fuel use in the 2005 transportation bill. The result is distortions in the paper market and pointless, non-trivial transfers to some large paper companies.

The Nation, of course, blames not the legislature, but rather the companies:

Whether or not Congress gets around to turning off the spigot, the episode is a useful reminder of the persistently ingenious ways the private sector can exploit even well-intentioned legislation.

It is also a reminder that it is useful to think hard about legislation before passing it. The companies job is to maximize profits within the law, not to cut the legislature a break when it does something stupid.

And how come it has taken this long to fix? Yikes.

Hat tip: marginal revolution

Another new frontier in public finance

An intrepid Seattle Times reporter investigates the price effects of a proposed (by a democrat!) porn tax in Washington State by going to the Deja Vu store at 9 AM.

Too bad Nicole did not call one of my public finance colleagues, who could have explained to her that optimal taxation is all about elasticities of demand. Putting aside taxes whose point is to change behavior rather than raise revenue, such as cigarette taxes, you want to tax things with inelastic (not responsive to price) demand so that you do not change behavior. This minimizes the tax-induced distortions to individual choice.

I have no idea what the elasticity of demand might be for the products sold at the Deja Vu store (or the neighboring Deja Vu "club").

Car tax in Denmark

This picture is of the informational sign that stood beside the new Volkswagen Passat in the lobby of the Radisson SAS Hotel in Aarhus.

At the bottom of the picture is the tax inclusive price of the Passat, which equals 579, 989 Danish Kroner. At the current exchange rate, this equals US$111,772 according to x-rate.com.

This is why you travel to foreign countries, to see things like excise taxes over 200 percent.

Oh, and this is a great hotel if you ever get to Aarhus. One of only a few that I really look forward to.

American exceptionalism

As best I can tell, there are exactly zero people like this in continental Europe:

http://rachellucas.com/index.php/2008/04/12/today-i-know-the-meaning-of-butthurt/

I think Rachel substantially overestimates the fraction of the budget that actually goes to poor people in the US (as opposed to old people or favored businesses / farms or foreign military adventures or people and firms in the poverty industry). And, of course, some parts of government can be viewed in multiple ways with differing normative spins: for example, is social security a vote-buying handout scheme, a realistic approximation to some optimal inter-generational transfer or a way to deal with human limitations in regard to discount rates? It is all of these at some level and probably some other things as well.

I think the relatively large number of people like Rachel in the US puts a real break on the size of government, which is a good thing in my view (even if there are a few bits I would make larger, most bits I would make much smaller).

Hat tip: instapundit.com