THE BOOK--Playing The Percentages In Baseball

Misdirection.  The confusion of net profit for gross wages is decoration.

Bah - there are so very many errors in Phil’s article including only looking at federal income tax, ignoring payroll taxes, ignoring other tax burdens which disproportionately hit lower income folks (e.g., sales tax), using a company with a very high dividend-earning ratio etc etc

Don’t forget ignoring capital gains.  I don’t think most of the rich are deriving the majority of their income from dividends.

And, of course, if you perform the same treatment for a middle class person and their dividend income, they would have a tax burden well above the rich person for that income.  So, this proves pretty much nothing.  It is hardly a TKO.

Larry: Phil is making an apples to apples comparison, that the same amount of earnings would generate the same amount of taxes for the government, but the “credit” for it would look different.  He’s talking about direct credit and indirect credit.

Bringing in capital gains is a separate matter entirely.

buffett’s been making statements like this for a while. what i don’t understand is if he really believe he is not being taxed enough is why doesn’t he just take out his check book and make a donation to the IRS. they will accept his money i’m sure.

I understood the argument to be that overall, Buffet’s tax burden is 31.1%, which is probably not lower than his secretary.  This is because in addition to his 17%, another 14% has been taken in corporate taxes.  To get that, he applies Buffet’s 17.4% overall tax rate on the dividends.  That makes the implicit assumption that Buffet’s income is entirely in dividends.  Buffet surely earns capital gains, which are taxed at a rate lower than the 17%, and don’t have any corporate-side tax component.  So, I don’t think it is a separate matter at all.

Apparently kendynamo has never heard of the collective action problem.  I suspect Buffet thinks it is also a problem that Bill Gates’ effective tax rate is lower than the median earner.  And the Walton kids.  And Steve Forbes.  I don’t see what writing a check to the IRS would prove about that.

#7 - no i’ve heard of it. i think buffett writing a check would be a great example to his fellow multi billionaires if he thinks they too should all be paying more in taxes. surely the gates foundation could spare some billions too.

His point is not that it is some personal failing that his effective tax rate is too low, but that the rules that allow him to pay a lower tax rate are a poor set of rules and have perverse results.  So, he suggests that the rules should be altered.  Setting an example has nothing to do with it, as far as I can tell.

Phil in that article says that Buffett is inaccurate because of a specific example that depends on you to believe that most companies that Buffett receives dividend checks from actually end up paying a 30% corporate tax rate.

That article ignores that Buffett has a significant amount of capital gains income.

That article also ignores that companies pay taxes on behalf of their employees.

Finally, even if I were to grant every other incorrect argument that Birnbaum makes and use his figures, Buffett still pays a lower amount of tax on his discretionary income than anyone else who works at his company.

#9 - so as long as the rules says he can do it, buffett should continue doing something he believes is wrong (eg paying less in taxes than his secretary)?

i appreciate buffett calling to attention the US’ inefficient and perverse tax code but if he wants to make catchy sound bites that blatantly obfuscates the whole story he should expect to be called out on it.

If Buffett earned 0$ in capital gains (and paid 0$ in capital gains tax), Phil’s argument is that he STILL would CLAIM to have paid less taxes than everyone else in his company.

Apples to apples please.

@12:
Phil’s argument depends on a 30% corporate tax level.  The actual level that is paid is closer to 20%.  Using that average makes Buffett’s effective tax rate closer to 32% compared to the 41% in Phil’s example.  His example is garbage.

In addition, the actual argument is nonsense and nonresponsive to Buffett’s actual argument--that taxation policies that leave the wealthiest 1% of the population paying less of their own taxes than everyone else is ridiculous.  Birnbaum subtly shifts Buffett’s argument from what HE paid to what was paid in total.  Buffett’s argument is about what HE paid, not what was paid in taxes in total.

"… Buffett’s effective tax rate closer to 32% compared to the 41% in Phil’s example.  His example is garbage.”

Buffett says 17%.  I say 40.5%.  You say 32%.  If my example is “garbage” because I’m off by 9%, shouldn’t Buffett be double garbage because he’s off by 15%?

Sounds like you’re agreeing with me!

Some commenters bring up capital gains.  For instance,

>“That article ignores that Buffett has a significant amount of capital gains income.”

That’s a fair point, which I mentioned I’m ignoring for now ... and I’ll address capital gains in future.

But if you bring up capital gains, does that mean you’re agreeing with my current argument about dividends?

Payroll taxes are included in Buffett’s calculations, and therefore in my critique.  See the quote from his article (2nd paragraph of my blog post) for where he explicitly mentions them.

@14:
“Buffett says 17%.  I say 40.5%.  You say 32%.  If my example is “garbage” because I’m off by 9%, shouldn’t Buffett be double garbage because he’s off by 15%?”

No, my example is just an illustration.  Since I don’t know what percentage of Buffett’s income is capital gains, what percentage is non-taxable corporate dividends, and what percentage is anything else, I don’t know whether Buffett is right or not.  But I do know that your example is wrong because the average of Fortune 500 companies is 20%, not 30%.  Buffett’s claim was about the totality of his income (IOW, not ignoring capital gains as you do).

And to answer you here: “But if you bring up capital gains, does that mean you’re agreeing with my current argument about dividends?”

No, I do not.  Buffett’s argument is about the percentage of his income that HE pays in taxes.  Not what anyone else pays.

Tim/13:

>“The actual level [of corporate tax] that is paid is closer to 20%.”

I do not believe this. 

On my blog, I pointed to the Value Line reports that show Dow 30 companies pay around 30%.  Berkshire Hathaway, Buffett’s own company, has paid between 26% and 42% over the past 8 years, with an average of over 32%.

Now, your turn.  Find me a representative (as in, not cherry-picked) sampling of US companies who are paying an average 20% corporate tax rate. 

Evidence, please!

Tim/17: OK.  So, if Buffett’s income were all dividends from US corporations, and he was still paying 17%, and the corporations he owned shares in were taxed at 30% ... THEN you’d be agreeing with me?

Tim/17: OK.  So, if Buffett’s income were all dividends from US corporations, and he was still paying 17%, and the corporations he owned shares in were taxed at 30% ... THEN you’d be agreeing with me?

I feel a bit like a broken record.  Buffett’s argument is about the percentage of his income that HE pays in taxes.  Not what the company pays for him.  Not what is paid in total, but what he pays.  Your whole argument is a straw man.

“Find me a representative (as in, not cherry-picked) sampling of US companies who are paying an average 20% corporate tax rate.”
http://www.cbpp.org/cms/index.cfm?fa=view&id=3411

According to the US treasury in 2007, the average corporate tax rate from 2000 to 2005 was 13%.

Phil, I re-read your piece and realize that you are responding to Buffett’s statement about taxes he pays and those paid on his behalf.  Corporate tax still does not apply to that since those taxes are not paid on Buffett’s behalf the same way that payroll taxes are.

In short, your argument is about total taxation, and Buffett’s is about the level of taxation that he is personally responsible for.  These are different arguments.

Tim/20: you give results based on “corporate operating surplus”.  I don’t know for sure what it is, but I know it’s not income.  It’s like I asked you to find me a .300 hitter, and you find me a hitter with a .300 secondary average. 

Here, let me do this for you.  I just did a Google search and got:

“Two thousand U.S. companies paid a median effective cash rate of 28.3 percent in federal, state and foreign income taxes in a 2005 study by academics at the University of Michigan and the University of North Carolina.”

That’s here:

http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

Tim/21: Exactly!  My argument is that by concentrating only on taxes for which he is personally responsible for paying, Buffett understates the amount that he actually pays, because the corporate taxes come out of money that would otherwise be legally his, even though technically the corporation writes the cheque.

If you don’t think that’s a valid argument, then you should revisit my “proposal 1” on the grounds that it will reduce your tax rate to 15%, like Buffett’s.

"you give results based on “corporate operating surplus”.”

I did that because that’s what US Treasury does.  They have SME in this area, so I defer to them.  The reason why I defer to them is the corporate tax code is incredibly confusing. 

For instance, you would think that “median effective cash rate” in the article you cited was the amount they paid in corporate taxes.  But that isn’t correct either, since it includes local taxes paid, not strictly federal taxes.  For instance, Google under that system is at 22%, rather than the 2.4% in federal tax listed in the headline. 

So yeah, your examples are garbage.  But even setting aside the garbage, your argument is a non-sequitor, because it doesn’t address what Buffett was talking about. (I feel bad for using the word garbage, btw, but cannot think of a less offensive word to convey the way I think your examples are bad, so sort of a non apology apology there)

"If you don’t think that’s a valid argument, then you should revisit my “proposal 1” on the grounds that it will reduce your tax rate to 15%, like Buffett’s.”

It would, if I had the time/money to hire accountants to use the Double Irish.  Not sure what your point is here.

Count me among the folks who think Buffet’s point was about capital gains.

I also don’t understand what examples like this prove (beyond the case of Buffet himself).  If Buffett’s proposal would change nothing for himself… that doesn’t really mean anything to me.  If it would change nothing for 99% of people… that doesn’t really mean anything to me.  The very basis of the Buffett Rule is that applies to a very small number of people.  And his argument (as I see it) is that as long as this number of people is >=1, there is a problem that should be fixed.

Anyways, anxiously awaiting the capital gains followup.

"Not sure what your point is here.”

Right.  I think we’re failing to communicate.

Phil is 100% correct.  It is a rather simple concept - I don’t know why and how there is such disagreement.  Dividend taxes were lowered precisely for the reason Phil explains (or at least that is the explanation) - that the money has already been taxed at the corporate rate.  What that rate is for Buffet’s investments or any other corporation is irrelevant.  Phil uses 30% for his examples.  It could be 20% or 25% or 18%, depending on the corporation.  That doesn’t change his point, which is that Buffet is in essence paying far more than 15% or 17% on his “income.”

Now, all that being said, one could reasonably claim that if I own shares in a company like McDonald’s, I don’t really “own” the company such that the corporate taxes are coming out of my pocket (in profits that the company makes).  One could say that I am merely “investing” in McDonald’s when I buy shares in their company and that my return on my investment (my income) is their after tax profit, and thus I am paying 15% on my income.

I think that is a reasonable way of looking at Buffet’s argument.

In any case, I don’t know that you want to excoriate Buffet for his statement. I think he was using his income and that example as a metaphor.  I agree with him that people with large incomes should pay more taxes, whether that income is from dividends capital gains, or regular earned income.  But that is just my opinion.  I don’t think there are any factual arguments to be made one way or another.  Some people think that rich people should subsidize non-rich people (and the stuff that the government spends money on) to the tune of X and some people think it should be to the tune of Y and everything in between.

Buffet is spinning like everyone else in the world.  Why should we expect any less (or more) from him?

MGL /28

The reason we should be critical of Buffett’s assertion is because he isn’t merely stating some fact that he thinks is interesting, but he (and others, including the President) are arguing for a change in the tax code based on this rationale. Any time someone makes claims in order to justify changing public policy and it turns out that their claims are exaggerated or false, it is important to highlight it before anything is done.

#29, fair enough.

Doesn’t the law state that corporations are separate people? And aren’t they given rights that would be ludicrous if they weren’t legally separate people? (anybody who has watched the progress of Colbert Superpac 401(c) would understand)

So how is it that MY $30,000 gift (from already-taxed income) to Person A is further taxed on him, while a corporation’s $30,000 gift (from already-taxed income) is not further taxed?

It seems like corporations are “people” when it is convenient financially, but “not people” when the limitations come. And for the record, oligarchies are probably much more fun when you are in the “oli-”

I look forward to the day that two same-gender corporations have the right to marry and adopt children.

it is fairly simple. buffett’s conveniently ignoring the corporate double tax. this wsj op-ed explains most of it:

“What he doesn’t say is that much of his income was already taxed once as corporate income, which is assessed at a 35% rate (less deductions). The 15% levy on capital gains and dividends to individuals is thus a double tax that takes the overall tax rate on that corporate income closer to 45%.”

http://online.wsj.com/article/SB10001424053111903918104576504650932556900.html

a corporate tax rate of 35% is very high when compared to the rest of the OECD. raising it would probably lead to lower total tax receipts because of the laffer curve.

i appreciate buffett’s attempt to influence policy in a positive direction (simplifying an unwieldy tax code and creating a “more fair” system) but his example is still BS. 

#31 - the fact that corporations are “people” for legal purposes also makes them a lot easier to sue and asses penalties on when “they” do illegal things. the legal definition of corporations works both ways. its not perfect but it’s likely the best alternative. least i’ve not heard of a better one. its not like some other developed country uses a different system with any success.

it is fairly simple. buffett’s conveniently ignoring the corporate double tax. this wsj op-ed explains most of it:

“What he doesn’t say is that much of his income was already taxed once as corporate income, which is assessed at a 35% rate (less deductions). The 15% levy on capital gains and dividends to individuals is thus a double tax that takes the overall tax rate on that corporate income closer to 45%.”

Some of those who argue against a corporate income tax do not argue that corporations should not be taxed only because it causes double taxation of dividends; they also argue that the taxes are passed on to the consumer or passed on to employees (in the form of lower wages or fewer jobs).

Assuming that they are not simply obfuscating, that would mean that the corporate taxes are not being paid solely (indirectly) by Buffett, but also by the great masses, even further supporting Buffett’s argument.

Incidentallly, I read Buffett’s argument as being about the total tax burden, including payroll taxes, sales taxes, gasoline taxes, telephone taxes, etc. All of these in total are a substantial portion of the tax burden of the average wage earner, but are less than a rounding error to someone in Mr. Buffett’s position.

My argument is that by concentrating only on taxes for which he is personally responsible for paying, Buffett understates the amount that he actually pays, because the corporate taxes come out of money that would otherwise be legally his, even though technically the corporation writes the cheque.

Phil,

Do you believe that the rest of us are not also indirectly paying taxes? If you rent an apartment, part of the rent you pay goes to pay the owner’s property and income taxes. I don’t think you can assume that 100% of corporate income taxes are taken out of dividends; for one thing, many companies, such as Buffett’s Bershire Hathaway don’t pay dividends.

It is not fair to credit Buffett for the indirect taxes he is paying unless you also account for the indirect taxes that the average person pays.

Apropos of nothing in particular, I won’t accept a corporation as a person until they offer the president or CEO of the corporation to be executed should the corporation be found guilty of a capital crime.

#34 - i agree that both sales taxes and corporate taxes lead to higher priced goods and services. i’m unclear as to how that supports buffett’s argument. 

if the problem is that the taxes on businesses are passed on to the consumers, then should we eliminate the taxes to alleviate the burden on the consumer and the corporation’s employees?

Hank/34/35: Corporate tax on profits is not an indirect tax.  It’s as direct as income tax on an employee’s salary.  It’s exactly as direct as the tax withholding that your employer sends to the IRS.

Furthermore, if you want to argue that you have to include ALL the tax burden, then you should fault Buffett even more, for cherry-picking only one of the many taxes, perhaps the one that supports his argument the most.

In any case, my argument has nothing to do with how much tax Buffett should be paying.  My argument is that Buffett is ignoring a huge proportion of tax that he pays through the corporation, which is why just comparing the single rate, 17% to 36%, that he cites, is wrong and misleading.

You’re actually making a similar argument to mine!  I don’t see why you’re defending Buffett instead of criticizing him, except that you seem to agree with his conclusion that the rich aren’t paying enough.

As I said, I don’t know if Buffett is paying enough, or if he’s paying too much.  All I’m saying is that his particular single argument, comparing the tax rates, is wrong. 

And, according to your logic, so are you!

Phil,

I don’t see how my logic supports your argument, but perhaps I am missing something. The corporate income tax is indirect as far as Warren Buffett is concerned, since he doesn’t pay it directly.

My argument is that company dividends are not reduced by the exact amount of tax the corporations pay, so it is inaccurate to assign all of it to the stock owner, and that the rest of us also pay indirect taxes so it is also inaccurate to say that Buffett is paying a much higher percentage than he mentioned without also adjusting the percentage of whomever you are comparing to him.

Do you think that if the corporate income tax was repealed, that dividends would rise by the same amount of tax previously paid by the corporation? What about companies that don’t pay dividends?

Calculating how much anyone pays in indirect taxes would be extremely complicated and would vary for each individual person. I think that this is more likely to be the reason that Buffett only listed the taxes paid directly by himself and his secretary rather than that he was trying to pull the wool over everyone’s eyes.

>“My argument is that company dividends are not reduced by the exact amount of tax the corporations pay, so it is inaccurate to assign all of it to the stock owner, and that the rest of us also pay indirect taxes so it is also inaccurate to say that Buffett is paying a much higher percentage than he mentioned without also adjusting the percentage of whomever you are comparing to him.”

Perfect! 

What you’re saying is, it’s a complex issue.  And therefore, you say, you just can’t compare rates without taking indirect taxes into account. 

Therefore, just like I’m wrong when I compare the total tax bill on corporate earnings because of indirect taxes, you have to agree that Buffett is wrong when he just compares the earned income rate of 36% to the ostensible dividend rate of 15%.  Because, it’s much more complex than that!

So I guess we agree now that Buffett’s argument is wrong!

all the dividends and direct vs indirect taxes info seems beside the point to me. it changes the calculation slightly on the margins but any kind of tax on corporations will cause that corporation to lose value, no matter the tax mechanics or whether they pay dividends to stock holders or not (or whether they are publicly traded or not, etc). by exactly how much depends on countless factors, particularly the demand elasticity of the products being sold. every company is going to be affected differently, but every company is going to lose SOME value because of the tax and probably most lose most of the value. when a company loses value because of a tax, the stakeholders of that company lose wealth because of the tax. thats what buffet is willfully leaving out of the narrative he is selling. even if the gist of his opinion is righteous and true, he’s not explaining in honestly.

full disclosure: i am currently on the payroll of a berkshire-hathaway company tho uncle warren has yet to visit the offices during my tenure.

I have nothing to add to this conversation except to say thank you to those involved, especially Phil and Tim.

It’s been forever since I’ve read such a well-written disagreement, especially because this didn’t delve into partisan name-calling nonsense (in fact, the “issue” seems secondary to the math, which is probably how it should be).

I appreciate the discourse here.

While we could argue for years about the “right” way to account for every single tax, direct or indirect, that gets paid, Phil’s numbers are good enough to make the point he was trying to make: that it was silly for Buffett to frame the issue as being about the morality of having a 17 percent tax on dividends and a 30 percent tax on wages.

Although I’m inclined to agree with Buffett’s proposed POLICY of taxing the wealthy at a higher rate, the argument should be made on economic grounds. The marginal value of another dollar is far higher for poor people than it is for rich people, and the marginal value to the GDP of giving a poor person another dollar is much higher than the marginal value of giving a rich person another dollar. To the extent that we need to collect tax revenue, we should strive to do so in a way that hurts individuals and the economy as a whole as little as possible; therefore, we should tend to tax rich people more than poor people (though we should take care to avoid the kind of extreme overtaxation and overequalization that might take away the average person’s incentive to contribute to the economy).

Oh yeah, and there’s one significant point Buffett seems to be making (although he throws it out there in one sentence, almost as an afterthought) that is valid: IF rich people should pay a higher percentage of tax on wages than middle class people, then they should also pay a higher percentage on their capital gains and dividends than middle class people do.

Although I don’t know nearly as much about the tax law as Phil and his accountant seem to know, I get the impression that taxes on capital gains and dividends aren’t stratified in the same way that regular income taxes are.

Bill/43: In Canada, they’re stratified the same way.  Not sure about the US.

Sorry for being so late here, but…

Phil, they’re not stratified in the US, though the wretched alternative minimum tax may affect this somewhat.

Where I disagree with Phil is what MGL said:

Now, all that being said, one could reasonably claim that if I own shares in a company like McDonald’s, I don’t really “own” the company such that the corporate taxes are coming out of my pocket (in profits that the company makes).  One could say that I am merely “investing” in McDonald’s when I buy shares in their company and that my return on my investment (my income) is their after tax profit, and thus I am paying 15% on my income.

Ownership in publicly traded stock is not the same as ownership in, say, an LLC that has to distribute all its income to owners once a year.

In fact, you could argue that, since publicly traded stock is an important part of freely flowing capital in an economy, it *should* be taxed in order to distinguish it from tighter, more personal ownership situations.  It is more of an investment than an ownership vehicle, really no different from buying a corporate bond.

In the US, all dividends and long-term capital gains (holding period >= 1 year) are taxed at 15%. Short-term capital gains are taxed as ordinary income, so only these investment profits are stratified according to income levels.

One other important consideration, that Phil may not be aware of, is that many wealthy people never pay any capital gains taxes at all on most of their capital gains.  Capital gains are only realized if/when one sells an asset.  Wealthy people often hold stock shares until they die, at which point the cost basis becomes their value on the day of death (i.e. zero gain).

Of course, their heirs may pay estate taxes, depending on the size of the estate.....

Bill/43: The US has 6 brackets for ‘regular’ income tax, with the highest bracket taxing all income above $379,000 at 35% for single-filers. See here: http://www.moneychimp.com/features/tax_brackets.htm

However, for capital gains, there are only two brackets: 0% and 15%. Which bracket you fall into is determined by your regular income tax, with the cutoff for the 15% bracket at $34,500 (or $69,000 for married filing jointly).

So for a single person, someone who makes $1 million in regular income will be taxed much more than someone who makes $40,000 (their effective tax rates are 32% and 15% respectively). HOWEVER any capital gains income will be taxed at 15% for both, regardless of the amount because both have regular incomes over $34,500.

That was all fact - heresay begins here: Many people in finance and CEO-type people are paid mostly through capital gains means and therefore pay much lower tax than they would otherwise (see all of the CEOs who are paid $1 annually, but are given stock options bonuses instead).

James/#48,

I’m not completely up on the tax code, but I think executives that receive options or other forms of stock-based compensation have to pay taxes on the value of the options/stocks when they are granted.

So, if a CEO receives a minimal base salary but also receives stock options or stock grants that are worth $1MM, he has to pay taxes on $1MM in income (plus any capital gains when he/she sells).

I’m not 100% sure about that though. If I’m mistaken, please let me know.

I’m not completely up on the tax code, but I think executives that receive options or other forms of stock-based compensation have to pay taxes on the value of the options/stocks when they are granted.

Yeah, this is one of the really nasty things about the alternative minimum tax.  It catches these options and taxes you for them.

I worked for a company that granted every employee stock options, and we had to pay tax on them (if the AMT kicked in) even if we didn’t have the money to do it (stock options don’t result in cash until you sell them).

Not that I’m still angry about it.

"It is more of an investment than an ownership vehicle, really no different from buying a corporate bond.”

This is a really important point, and poses a real problem for Phil’s argument.  The fact is that the market price for shares of stock in a company already has the corporate taxes “baked in”.  When I buy a share of stock in McDonalds, I’m basically buying what I expect its future after-tax earnings to be.  Similarly, what I pay for a McDonalds bond is based on what it will pay out to me.  I pay a little bit less for the earnings (the “equity premium") because it has more risk, but the price isn’t radically different. 

But under Phil’s implied model, I am paying vastly less for each dollar of income from McDonald’s stock, because he’s counting the corporate taxes as “my” income.  You can look at it that way, but then you need to adjust for the fact that I was able to buy those earnings very cheaply.  Think of it this way:  if the corporate tax rate went to zero tomorrow, owners of McDonalds stock would not start seeing a 30% increase in returns, because the price of McDonalds stock would soar, greatly reducing the rate of return to investors.  Their Phil-calculated tax rate would fall, but their post-tax earnings would increase much less.  (Current owners of the stock would get a one-time windfall, of course—I’m talking about anyone buying stock after the end of corporate taxes.)

So I don’t think you can say Buffett is paying all those corporate taxes, unless you want to also count the enormous price discount he received in purchasing those shares. 

And conceptually, do we think a McDonalds shareholder is more like a McDonalds bond owner—someone who is purchasing a stream of income—or more like a business owner?  I think the question answers itself....

#51 - “ (Current owners of the stock would get a one-time windfall, of course—I’m talking about anyone buying stock after the end of corporate taxes.)”

isn’t that the point? doesn’t that demonstrate that the stock holders are “paying” the corporate tax? an elimination of a corporate tax would see the benefits accrue to the company’s owners. meanwhile the extant corporate bond yields stay the same. bonds and stocks both offer returns at varying risk levels and investors purchase them to acquire their attendant cash flows, but they are definitely not more or less the same thing.

and to me, whatever returns a company’s stocks or bonds are offering is still besides the point. corporate profits are where dividends and capital gains come from. they are already taxed. what is then realized by the individual is taxed again. buffett is only mentioning the second tax. buffett may be correct in that there is a better and more fair way to calculate that tax, but his example is flawed (in my opinion) for not pointing out the original corporate tax in his analysis.

doesn’t that demonstrate that the stock holders are “paying” the corporate tax?

No, because the initial price they paid for the stock already reflected the fact that the corporation would pay taxes. They’re legitimately “not” paying for that taxed amount. I don’t see how the “double taxation” idea flies when stocks are publicly traded.  It’s a great point by Guy.

corporate profits are where dividends and capital gains come from. they are already taxed.

Money changes hands all the time in our economy, The question is, at what point should that exchange be taxed?  Your wages are already taxed.  Why should McDonald’s have to pay tax on the profit they make when you buy a cheeseburger?

It seems clear to me that return on investments should be taxed.  Capital is just another economic input, like land and labor. People pay taxes on returns from those inputs, too.

We’re talking income for people who are essentially making money off their capital, the same way “laborers” make money off their hard work.  Just because the input is different doesn’t make it any less “income” from a tax perspective.

#53 - huh? i don’t see how you figure just because a stock is publicly traded that the equity holders don’t pay the tax on a company’s profits. the price of the stock reflects the taxes just as the valuation of any asset take into account the taxes environment in which it exists.

if i hold 30% of a publicly traded stock, im essentially holding a claim on 30% of their profits. if those profits change because of changes the corporate tax, that will be directly reflected in the value of my stocks. how does it follow that those taxes are not “paid” for by the stock holders?

as to whether or not people should or shouldn’t pay taxes on those returns from equity ownership and at what rate is completely beside the point. i’m not making any opnions on that issue. but the double tax on that equity still definitely takes place, publicly traded or otherwise.

Guy makes a very important point, which I wish I had thought of earlier.  And Kendynamo interprets it correctly.

Here’s what’s going on.  If Warren Buffett goes looking for a stock, he looks for a good after-tax return.  If the corporate tax is 99%, he doesn’t care.  He’s happy with the 1%, as long as he gets it cheap. 

Suppose the company makes $100 a share, and $99 is taxed.  That leaves $1.  Buffett might be willing to pay $20 for that $1 per year profit, giving him a return of 5%.  He pays 15% tax on that, giving him an after-tax return of 4.25%, which is competitive with bonds and other investments.

Now, my argument is that Buffett is actually paying a lot more than 15%.  The company made $100, and Buffett only keeps 85 cents.  He’s actually paying 99.15% tax!

Guy is saying, that doesn’t work, because Buffett got the stock so cheap, so the 99.15% rate is meaningless.  I agree partially.  I agree that the 99.15% rate is meaningless *for Buffett*.  But the government has still appropriated 99.15% of the profits, forever.  If Buffett isn’t paying all of that, who is?

It’s whoever owned the company when the tax rate went to 99.15% from, say, 40%.  At that time, the owner was entitled to $60 a year in after-tax profits, forever.  After the tax, the owner became entitled only to 65 cents a year, forever.  Effectively, the government taxed away almost all of the company!  And the owner then had to pay the present value of the tax increase in advance, to Buffett, by effectively selling him the stock at a huge discount to what it was worth before.

So, it’s not Buffett being taxed at 99.15%, but a combination of Buffett and the previous owner.

But, now, Kendynamo points out the logical implication of Guy’s argument.  If Buffett is making the same after-tax return as a bond, he must implicitly be paying the same tax as on a bond.  That would be at Buffett’s own rate, maybe 40% or whatever. 

In fact, the implication is that NO MATTER WHAT KIND OF INVESTMENT BUFFETT BUYS, he’s implicitly paying tax at the 40% rate.  The price of the investment moves up and down to reflect whatever tax regime is in place on that investment at the time it’s bought and sold.

What that means is: it is completely irrelevant, now and forever, to talk about the rate of tax Warren Buffett pays on an investment he purchased in the open market.  No matter what the tax looks like, it’s really 40%.  End of story.

Which means, again, that when Warren Buffett complains that he’s only paying 16%, that’s even MORE irrelevant than I said it was!  It wouldn’t matter whether his tax bill was 0%, or 40%, or 99%: the price of the investment would adjust so that he paid 40%.  If the effective tax is 16%, Buffett would have had to pay extra to the previous owner, as a premium for saving the 24%.  If the effective tax is 80%, the previous owner would have had to sell the investment at a discount, effectively paying the extra 40% in advance for Buffett.

Kendynamo is right: the number doesn’t matter AT ALL!  I was arguing that Buffett’s number is irrelevant because it’s measuring the wrong thing.  Kendynamo is much more elegant: he’s arguing that Buffett is paying 40% regardless!

Having said that, my argument still works.  Why?  Because the total tax bill on corporate profits is still about 40%, which is Buffett’s personal rate.  That suggests that stocks are valued at about the same multiple of earnings as bonds are, which means Buffett isn’t paying much of a premium, or getting much of a discount, when he buys.  That means that the previous owner is neither subsidizing Buffett’s future excessive taxes, nor is the previous owner charging Buffett for any tax savings. 

Therefore, the total government take is a reasonable estimate of what Buffett is actually paying: 30% in corporate tax, then 15% of the remaining 70%.

Well, we’re talking past each other here.  But let me try a different approach.

Stocks are an investment vehicle.  Publicly traded stocks are bought and sold on an open market.  People who buy and sell them do so on an expectation of future profit by the company. That expectation includes an expectation that profits will be taxed.

As a result, they get to pay less for that stock. Their original outlay factors in the fact that future returns will be taxed before being distributed to them. Therefore, when those returns are, in fact, taxed, they’re not really paying for those taxes.  That was the expectation, and it was reflected in their original investment.

That was really awesome from Guy and Ken.  A very, very elegant argument, an e=mc^2 moment.

To clarify, I’m referring to Guy/51 and Ken/52.

I need to think more about Phil/55, but I don’t think it’s right.  Why wouldn’t the effective tax rate settle at about the rate on bond earnings, i.e. around 20%?

Phil, you have to remember there’s a single price for all investments.  Tax-free bonds are worth more to high-income people, because they are in a higher tax bracket, but that doesn’t mean they have to pay more for those bonds.  Buffett pays the same price for a share of McDonalds as I do.  (He just buys a whole lot more of them!)

Guy/59: Isn’t bond interest taxed at the recipient’s marginal rate?  In Canada, the highest rate is about 45%, which kicks in at $100K or so.

Where do you get 20%?

Guy/60: I’m assuming that the equilibrium price is based on the highest tax rate, since the holders of investments are mostly at that rate. 

You can check.  Compare a taxable muni bond to a non-taxable one, same maturity and same lender.  At what tax rate are the after-tax returns equal?

I’m guessing it’s close to the highest rate, but I could be wrong.

Further to 62: it is unlikely that both low-tax-rate investors and high-tax-rate investors will buy munis.  Since the tax break is worth more to the high-rate investors, they will always outbid the low-rate investors, and so the low-rate investors won’t wind up with any.

Well, they might, once the high-rate investors have bought so much that they don’t want to buy any more because they need diversification.  I don’t know if that’s a factor in practice.

#56 - i’m with you all the way until your second to last sentence. investors do expect to pay taxes on their returns. and they do factor the corporate tax rate into the valuation of stock shares. i just don’t follow how that means that they aren’t the ones now paying the corporate tax. if not the equity holders then who? what does the expected return of stock investors have to do with the fact that there are two taxes on corporate income, once with revenue and once at personal income?

if someone sells me 49% of his neighborhood taco stand, i’m expected a return and factor that and the corporate tax into my price i pay my friend for the stake in his venture. i then pay tax on the capital gains from the proceeds of the taco stand, which are less than they would be if there was no corporate tax on the taco stand’s revenue. the double tax phenomenon is in effect here the same as it is if i were to go on etrade and buy a tiny percentage of stock in microsoft.

You’re right, my example doesn’t hold together.  Let me see if I can do better.  But not right now. 

Okay, I have a fundamental question.  When McDonald’s pays taxes on the profit they made from selling me a cheeseburger, why isn’t that considered “double taxation” of my wages?

I’m sure that’s a naive question, but what triggers a taxable stream of income and separates it from the previous stream so that there’s no double taxation?

66/Studes: Government is taxing the wealth that’s created.  You don’t want to tax the same wealth twice, but you can tax different wealth once each.

You work hard, earn $3.  You have created $3 in wealth, $3 worth of sabermetric research that didn’t exist before.  You pay tax on that $3, leaving $2.

McDonald’s takes 50 cents in capital depreciation, 80 cents in labor, and 60 cents in raw food.  They have taken $1.90 in raw ingredients, and turned it into $2 in hamburgers.  Effectively, they have added 10 cents worth of value.  The world is richer by 10 cents, which McDonald’s keeps as profit.

The total wealth you and McDonald’s created is thus $3.10, and that’s what gets taxed.

Guy/47: Right, very true.  With many capital gains, you can control the timing.  As you say, that means you can defer gains indefinitely, or save them until you have offsetting losses.

That goes the other way to offset some of the other, “negative”, aspects of capital gains taxation.  I’ll make sure I mention that in a future post.

Phil/61:  You are right, of course.  I was thinking that the tax rate on dividends had been dropped to c. 20%, and was conflating that with interest income.

It seems to me that the thing which should reach an equilibrium here—making a strong assumption of market effeciency—is not the effective tax rate on any given type of investment but rather the risk-adjusted return to the investor (after taxes).  That is, the risk-adjusted return for stocks, corporate bonds, and even tax-exempt government bonds should be the same.  But I don’t think it makes sense to say that Buffet’s tax rate on each of those investment is 40%.  On the bond income, yes.  But surely not on the tax-free bonds, right?

As for Studes’ issue, I don’t think Phil is right that taxes are tied to “wealth creation.” They are tied to money changing hands:  when money moves from one entity to another, taxes can—and often are—applied.  As Studes says, you could call many things “double taxation.” What about sales taxes I pay on the hamburger?  Those are after-tax dollars.  Those in the U.S. who object most strongly that taxes on investment income are “double taxation” also tend to be those who favor consumption taxes, and yet that “double taxation” doesn’t bother them. 

In the end I think this is a philosophical dispute, not a mathematical dispute.  The question is what counts as a different “person” or economic entity.  Are corporations in a meaningful sense independent actors in our economic system, or really just a collection of small investors who own them?  I’d say the former is a better description of reality, though the latter is legally true. 

And McDonalds can in fact be taxed, separate from its investors.  If you raise the tax on fast food, it will shrink the industry and reduce sales.  But the price of McDonalds stock will drop, and eventually investors will be able to get the same after-tax return as before.  (Closely held businesses and start-ups may be a different story.)

Similarly, the question of whether estate taxes are “double taxation” is a question of philosophy, not economic truth.  If you the think the proper “unit” of society is families, then when my grandfather leaves me $10M it’s just an intra-family transfer that is none of the government’s business.  But if I think individuals are the correct unit of analysis, it’s a taxable event.  (In the U.S., married couples get treated essentially as an individual, so it’s a hybrid.)

I certainly don’t think it’s wrong or dishonest for Buffett to ignore the corporate taxes paid by the companies he owns.  He bought the stock knowing he would never see any of that money, and it was irrelevant to setting the price he paid for that stock.  In terms of the income he actually gets, and paid to receive, his tax rate is just what he claims.

Guy/69: Right, there are different types of taxes that cause the same income to be taxed twice. 

But when I refer to “double taxation,” what is usually meant is the same *type* of tax, twice.  It’s a “horizontal equity” thing: some people pay more tax than others when they’re really in the same situation.

Sales taxes are a deliberate method of taxing the same income twice, but apply to everyone.  You’re taxed at (say) 40% of your income at the time you earn it, and then an extra (in Canada, say) 13% at the time you spend it.  That’s not what I’m objecting to.

What I’m objecting to is more fundamental.  Person A pays 35% of the wealth he creates because he’s an employee.  Person B pays 35% of the wealth he creates because he’s the owner of an unincorporated business.  But Person C has incorporated his business, and pays 40.5% of the wealth he creates.  That’s the bottom line. 

The fact that person C pays 30% inside the corporation and 10.5% outside is not that big a deal: the 40.5% is the number you need to consider.  Because, no matter how you slice it, the government takes 40.5% of profits.  There’s no way around that.  SOMEONE is paying 40.5%, and to concentrate on just part of that, the 17%, is to answer a different question.

But, just in case we’re talking about semantics, and we don’t realize we agree, let me ask this:

It is indisputable that the government takes 40.5% of McDonald’s profits, in the same way it takes 36% of an employee’s income.  Right?  The checks the government receives add up to 40.5%. 

And McDonald’s doesn’t really pay taxes; that’s just a convenient metaphor.  McDonald’s can’t pay taxes any more than your bank account can pay taxes, or your car can pay gasoline tax.  Only humans can pay taxes.  (I suspect you might disagree with this?)

So: If 40.5% tax is being paid, but Warren Buffett pays only 17%, who pays the rest?

I don’t know that McDonalds’ profits are taxed at 40%.  First, there is room for dispute about what it’s true profits are (the profits reported by corporations to the IRS is often less than what it reports to investors).  And effective tax rates vary a fair amount by industry and firm.  But if it’s a typical U.S. corporation, it pays about a 25% tax rate.  And yes, McDonalds pays that tax.

Buffett paid McDonalds in exchange for a portion of its future after-tax earnings.  It’s substantively not that different than if he had loaned them the money instead (bought a bond).  He probably pays something like 10% on those earnings, assuming he holds his stock until he dies.

#69 - taxes don’t just exist when money changes hands. in Virginia i get to pay taxes on my car every year. no money changes hands, just me forking over dough because the state says so.

which is fine, taxes have to be raised somehow. so philosophically i’m not saying the double tax is wrong or even making any kind of opinion whatsoever on tax policy. i’m just saying buffet is being disingenuous when he states that his tax rate is 17%.

the main point of yours that i disagree with (if i’m interpreting you correctly) is the idea that just because stocks in publicly traded companies are purchased as an investment vehicle somehow voids the double tax in corporate profits that takes place.

i don’t see how this is possible. the owners of a company are responsible for a tax on the company’s profits. whether it is publicly traded, privately held by one person or somewhere in between (and the vast majority off all companies in the world are somewhere in between) is irrelevant to the fact that the double tax still takes place. the state claims part of the equity that would otherwise go to the equity owners. it does that once on the EBIT before earnings are reported to the owners, and then again when the owners report their personal returns.

re: #71 - equity and debt are very different things for all sorts of reasons. i guess substantively it’s not different in that they are both investment vehicles with risks and returns, but how they differ from there is the very crux of the discussion. corporate debt is a pre tax operating expense, dividends are paid from the equity left over after taxes are paid. that’s exactly why a double tax takes place and it makes for a huge legal distinction.

before a company has an IPO, the equity holders are paying double taxes on the company’s profits. after the IPO, the equity holders, now including stock holders, STILL pay the double tax. there’s no way around it. the money does not get conjured out of thin air. it is the private property of someone before it goes to the IRS.

Guy, let me ask you this.  Suppose Warren Buffett buys a tax-free muni bond. 

1.  Is his tax rate zero? 
2.  Is the tax rate on the muni bond zero? 
3.  If someone said, “It’s not fair that Warren Buffett pays 0% tax on his bond, while his employee pays 36% on her income,” what would you say in response?

Phil:  The tax rate on the tax-free muni is an interesting question.  On the surface, the tax rate is zero.  I guess you could say that the city gets to borrow money from Buffett as an artificially low rate (ultimately reducing the taxes of city residents), and so he is really still indirectly paying a tax.  But I’d be inclined to say his tax rate is zero (and also anyone else who buys one).  Not sure why anyone would say #3.

Another way to think about corporate taxes is as a business expense.  It’s the price of doing business as a corporation in America.  Investors are interested in what they get after expenses, and that’s what they pay for.  Whether that expense is wages to employees, or a licensing fee, or utility bills, or a tax doesn’t matter to the investors.  So it’s in some ways a tax on economic activity, not unlike a consumption tax. 

Suppose the government stopped calling corporate taxes a “tax” and instead charged a corporate “fee” equal to 25% of net revenue for doing business as a corporation in the U.S.?  After all, the ability to incorporate is incredibly valuable, and corporations depend on many other public sector actions to do business (I can’t arrive at a McDonald’s drive up window w/o using public roads).  Then Buffet would not be taxed except on the dividends he receives—but the situation is fundamentally the same.

Now, it’s certainly true that if you eliminated corporate taxes, some actual human beings would then receive more money—which is your point.  But it might not only be investors.  If fast food corporations became tax exempt, fast food consumers would reap a lot of that benefit, not just investors.  I have no idea how to estimate the share each would get, but I feel confident consumers would take a sizable chunk.

Kenny/69:  yes, Virginia has a car tax. And many towns/counties have property taxes.  But wealth taxes generate a pretty small share of all tax revenue in this country—I’d be surprised if it’s more than 10%.  Taxes are mainly applied when money changes hands.

74/Guy: OK, so we agree that it’s not unfair that Warren Buffett pays 0% tax on his muni.  (That’s how I interpret “not sure why anyone would say #3.)

So I think you’re agreeing with me on the main point: that when Buffett says about how it’s unfair that he pays only 17% while his secretary pays 26%, that too is an invalid argument.

Where we disagree is with my explanation, where you don’t think my method of combining corporate and personal taxes on the same income is valid (even though you don’t agree with Buffett’s logic either).

Is that a fair restatement of where you’re coming from?  If it is, I’ll think about the best way to answer your other arguments.

"So I think you’re agreeing with me on the main point: that when Buffett says about how it’s unfair that he pays only 17% while his secretary pays 26%, that too is an invalid argument.”

I don’t see how the two claims have anything to do with one another.  His secretary also pays 0% if she buys a muni.

Buffett’s argument is that because he earns mostly dividends, he pays 17%.  Because his secretary earns mostly employment income, she pays 36%.  He says the difference is unfair, and therefore he (or any rich person like him) is not paying enough.

Replace “dividends” by “muni interest”, and “17%” with “0%”, and you have the argument that you don’t agree with.

I believe Buffett’s point is that it’s unfair that his effective tax rate (and that of many ultra-rich people) is less than that of his secretary.  I agree with that.  I don’t think his point is that there must be no investment vehicle of any kind that allows a lower tax rate on unearned income than earned income.  If America’s ultra rich were earning vast sums buying tax exempt munis, he (and I) might have a problem with that.  But that obviously isn’t the case today.

I suspect Buffett’s main concern is that the relative tax rate on the very rich in the U.S. is falling, while their share of national income and wealth is rising dramatically.  That remains true even if we use the Birnbaum Accounting Method and count corporate taxes as personal income—indeed, income disparities may well be growing even faster under your method.

Ah, OK, I see.  I worded it wrong.  Let me change the wording.

Suppose for a moment that Warren Buffett made all his money on munis.  If someone said, “It’s not fair that Warren Buffett pays 0% tax on his bond entire income, while his employee pays 36% on her income,” you would reply, “yes, you’re right, that’s not fair.”

So we’re back to where we started, where you believe the nominal tax rate *paid by Buffett* specifically is the one that’s important, and I believe the *portion of wealth that goes as tax that would otherwise go to Buffett* is the important thing.

No, I’ve taken no position on whether it’s good public policy to allow cities to issue tax exempt bonds.  That’s a complicated issue.  If Buffett is willing to accept a low rate of return on their wealth to avoid taxes, thus subsidizing the cost of municipal services, that might be a good thing (even for his secretary).  And if lots of rich people were doing this—enough to make this a serious fairness issue—the rate of return on these munis would be close to zero.  So we would still be effectively transfering a lot of money from rich people to the public sector, even if they appeared not to be taxes. 

The point is that it’s probably impossible to evaluate the fairness of any single tax in isolation.  The system is interconnected.  Buffett is saying that, overall, his tax bill is too small.  He’s right. 

*

“So we’re back to where we started, where you believe the nominal tax rate *paid by Buffett* specifically is the one that’s important, and I believe the *portion of wealth that goes as tax that would otherwise go to Buffett* is the important thing.”

It’s not that simple, because I don’t agree that corporate taxes would “otherwise go to Buffett.” And I’d be open to considering other metrics for comparing tax burdens, such as % of net worth paid in taxes.

One quick technical point: the rate on munis wouldn’t go to zero.  Suppose the rate on regular bonds is 4%, and there’s a 50% tax rate.  Then the after-tax return is 2%.

So, nobody would ever buy a muni that yielded less than 2%.  They would buy regular bonds instead.

In any case, I don’t see why you’d call this a fairness issue:

1.  The city issues regular bonds at 4%.  Buffett buys them and pays half the interest in tax.  The feds immediately give that tax money to the municipality, which means the city effectively pays only 2% on its bonds.

2.  The city issues tax-free munis at 2%, with the blessing of the Feds.  Buffett buys them and pays no tax.

The situation is EXACTLY the same both ways.  Buffett earns 2% after tax, and the city pays 2%.

I can’t see why one way is fairer than the other.

Anyway, I’ll save my main point for the next comment.

#74 - i guess income tax counts as ‘when money changes hands’ by your definition? i would consider it a tax on personal property, as i would corporate taxes. sales taxes and other transaction fees, on the other hand, make up a small portion of state and local taxes and zero federal tax revenue. strictly property taxes - the ad valorem taxes - are around half of state and local receipts.

i found this website helpful:

http://www.usgovernmentrevenue.com/statelocal_revenue_2011USbn

some of the bigger points you raise i mostly agree with more than i disagree, and then mostly just with details. but with regards to the original point of warren buffett’s taxes, i dont think you can have a meaningful conversation about it without including the share of the corporate taxes of the companies he owns. if you only consider corporate taxes on massive publicly traded companies who’s sole ‘owners’ are stock holders looking for a specific return, it gets trickier to see the forest through the trees. but most corporations are not publicly traded and either way, legally and realistically, all corporate profits are claimed by people, and those are the people that pay corporate taxes. that is a fact of life. the rest is just details.

">Buffett is saying that, overall, his tax bill is too small.”

I am not arguing about whether Buffett’s overall tax bill is too small, or too large.  I am deliberately trying to avoid that.

What I *am* trying to do is refute this particular argument of Buffett’s (paraphrased): 

“Because the rich pay only 17% while middle-class employees pay significantly more than that, it follows that rich people don’t pay enough.”

And some of your comments seem to agree with that!  You say,

“… it’s probably impossible to evaluate the fairness of any single tax in isolation.”

But that’s exactly what Buffett’s trying to do!  He’s saying that dividend tax 17% < employment tax 36%, QED!  Can’t get more isolated than that!

What I’m trying to do is remove the “in isolation” and add back in the corporate tax.  I know you disagree with that.  But if I’m wrong because I’m not considering all factors—like the actual incidence of the corporate tax and who pays it—don’t you have to agree that Buffett isn’t either?

(I’ll be back after work.)

Just to emphasize: my argument is intended to be entirely consistent with the claim that the rich don’t pay enough. 

There might be very good reasons to believe the rich don’t pay enough, and there may be very good reasons to raise taxes on the rich.  However, I argue, this particular line of reasoning from Buffett is simply BS.

I disagree that Buffett should be credited with all of the corporate tax for a different reason. I think the employees bear some of the weight of the corporate tax.

An owner is absolutely necessary to a company as they provide the capital necessary for the business to operate (be it through cash, obtaining loans, or buying stock), but they aren’t solely responsible for the profits. As a whole, the employees have to be producing at a level above their compensation, otherwise the company would go underwater because expenses would be higher than revenues.

If the corporate tax was eliminated, an owner would have a higher return on their investment (of capital), but the employees could also negotiate for a higher return on their investment (of labor) via salaries because they don’t need to provide as much surplus value to be profitable.

Therefore, is it really fair to say that only an owner pays corporate tax because otherwise their return would be higher, when an employee’s return would be higher as well?

#85 - i dont think having employees changes anything about the concept. employees MIGHT negotiate better salaries if a company found itself flush with extra cash but they also might not. the cost of labor is determined by the labor market. if your job is easily replacement or worth below minimal wage, you won’t see your salary increase just because profits increase. likewise, vendors and suppliers MIGHT negotiate better deals with a company when it is doing well but its not guaranteed. additionally, there are companies who have no salaried employees and consist solely of partners who provide all the labor.

for example, let’s you own company X. ‘you’ could be just yourself, or a consortium of partners, or 100,000,000 shares of NYSE traded stock. because ‘you’ are such good friends with important people in washington, legislation is passed that gives your company, and only your company, a one year reprieve from corporate income tax. all that money that once went to the IRS no goes to ‘you, and ‘you’ alone. you may spread it around to employees and vendors and the community at large, but you are under no obligation to. but in couple years, lets say a new election cycle takes place and new politicians come to power who are your sworn enemies, and they pass a law that claws back all the tax breaks you enjoyed earlier, plus they tack on a penalty. no one else but you are responsible to come up with the cash to pay that new tax bill. any employees, vendors, bond holders etc with contracts are also still guaranteed payment from you. you can’t force them to contribute to the payment because they may have enjoyed the spoils in the past.

Guy: it’s probably impossible to evaluate the fairness of any single tax in isolation.

Phil: But that’s exactly what Buffett’s trying to do!  He’s saying that dividend tax 17% < employment tax 36%, QED!  Can’t get more isolated than that!

I don’t see where you are getting this, Phil.  Buffett’s argument is about his total effective tax rate vs. his secretary’s.  Here is what he says, as quoted on your own blog:  “Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.”

Now, maybe Buffett has argued elsewhere that munis should not be tax exempt.  Or that every single form of income must be taxed progressively.  But that isn’t the argument he’s making in the op-ed you cite.

Question for Phil/Kenny:  if it is impossible to tax corporations—your position—why do you think it is that every country (AFAIK) tries to do this, and at relatively similar rates?  Why not eliminate corporate taxes and just tax investors? 

Non-rhetorical question—I don’t know the history of corporate taxation.

Right.  But the only way Buffett could have such a low “percent of [his] taxable income” is if most of it came from dividends and capital gains.

I keep talking about dividend and CG tax rates instead of Buffett’s personal tax rate, because I assume they’re roughly the same thing.  You’re the first commenter to think otherwise.

If Buffett’s paying 17.4 percent for other reasons, that’s different.  Is he?

[89 is a reply to Guy/87.]

Guy/88: I’m not an expert, so I stand to be corrected, but from what I’ve read I think there are at least a couple of reasons to tax corporations.

1.  If you don’t tax corporations, it’s harder to get tax from foreigners who own shares.  Actually, the US withholds tax on dividends to foreigners, but not tax on capital gains, so perhaps some of the undividended gains would result in Americans taxed more than foreigners, even on US corporations.

2.  Corporations don’t pay 100% of their earnings as dividends right away.  If you didn’t tax corporations, they’d be able to defer tax indefinitely by not paying dividends.  The corporate tax acts as an “installment” on eventual dividend tax.

3.  Corporations actually NEED to retain some of their earnings to grow.  The alternative would be to borrow more, or issue new shares regularly, both of which have drawbacks.  The corporate tax allows government to tweak the cost of capital.  In Canada, small businesses get a smaller corporate tax than big businesses.  The idea is to give entrepreneurs a bit of a temporary tax break so they can prosper faster.  (It’s temporary because when they pay dividends, the excess tax comes due, I think.)

----

I don’t really have any objection to the way corporations are double-taxed, so long as the sum of the double taxes are roughly the same as the tax on equivalent employment or interest income.  It actually seems reasonable to me.

Phil/89:  You asserted that Buffett was making a very narrow argument, and one that would logically mean he must believe tax exempt bonds are “unfair.” He did not make such an argument.  For example, if ultra-rich people only received 5% of their income from investments, I doubt Buffett would take to the pages of the NYT to object that he was paying “only 34%” rather than a 35% tax rate. 

You may think that Buffett’s position logically should require him also to take position X or Y, but recognize that this is only your hypothesis, and you may be failing to account for other beliefs or considerations that could logically and consistently lead him to other conclusions.

Guy/92: I understand what you’re saying.  I can revise my argument in light of your comments (which I largely agree with).

1.  Warren Buffett’s problem is that the tax system lets him pay 17% while his less-rich employees pay 36%.

2.  My assumption is that Buffett’s rate is so low because his income is mostly dividends [and capital gains, which never mind for now].

3.  You’re right that doesn’t mean Buffett is saying a 15% tax rate on dividends is too low.  He COULD be saying, instead, that the overall tax bill on someone earning a lot of money on dividends, is too low.  That is, he could be saying that if you or I pay 15% on dividends, that’s fine.  But when RICH people pay 15% on dividends, and there’s not enough other income to raise the rate, that’s a problem.

4.  In that case, my argument still holds.  I applied it to a single dividend, but I could apply it to millions of dollars in dividends, too!  Even under your interpretation of Buffett’s argument, I still assert that he’s not really paying just 17%.

Also, I would argue that the statement “The tax rate on dividends is 15% for rich people” has almost the same implications as “The tax rate on rich people who own only dividends is 15%.” It’s a distinction without much difference.  And it doesn’t make any difference to my argument.

But, as I said, if Buffett is paying only 17% for reasons other than dividends and capital gains, then my argument might be attacking a straw man.  However, most of the commentary I’ve seen on Buffett’s essay makes the same assumption.

#88 - i don’t think its impossible to tax corporations. i think they obviously are, pretty much everywhere that i know of (except, you know, places like north korea, failed states, etc). my bad if it seemed like that was the point i making because it was not what i intended.

what i meant (and is hopefully more clear now), is that corporations are just a nexus of contacts, and any profit they make is not controlled by somoe nebulous unperson. it is the property of the people who legally own that company. and if you tax the profits of that corporations, it is a de facto tax on the corporate owners’ property. hence, buffett ‘pays’ the taxes on berkshire hathway. just like mark zuckerberg pays the taxes on facebook’s profits or how Joe pays the taxes on Joe’s Taco Stand, of which is the sole proprietor.

and like phil i have no moral objection to this. you have to raise taxes somehow. and those reasons he stated for why a corporate tax sound good to me. i probably can’t add much more to the history of corporate taxes either. also pretty much ditto everything #93

kendynamo/86,

Am I to believe then that my company that is in debt as a result of owing back taxes, that I will not restrict budgets, lower salaries, and potentially even downsize to recoup the losses I’ve made before and instead pay back the taxes out of my own pocket?

So in other words, when I own a company I enjoy all of the spoils, but distribute all of the losses?

It may work that way (and indeed I think we’ve seen much of that over the past few years), but I think that by reducing costs as a result of increased taxes it shows that it’s not just the owners that pay tax.

#95 - again, they MIGHT do those things, but they dont HAVE to. and yes, you can change FUTURE budgets and agreements, but you can’t force employees and vendors to dig into their own pockets. its illegal to distribute the losses. some people will accept less money if it means not bankrupting your company, but thats their choice. you do keep all the spoils tho. thats the whole point of entrepreneurship. more risk but more reward.

so yes, the owners are still the only ones that pay that tax.

#95 - to follow up, i probably shouldnt have stated things as being so unequivocal. from a certain perspective, the stakeholders of the company can expand beyond strictly the legal owners of the company. everyone from employees to the vendors to the community in which the company has a physical presence.

however, those relationships all vary from case to case. the fundamental relationship between the corporate tax and the owners is the only thing that does not change. a company in a highly competitive industry should already be seeking to run as efficiently impossible. therefore, there should be no relation to changes in employee compensation and profit. profits will be maximized and costs minimized. it should not take an external shock to get them to reduce costs.

but yes, you can think up scenarios, often real, common and frequent, where increased taxes on a company’s profits negatively impact more than just the legal owners of that company. but ultimately it is still the owner’s sole responsibility.

I’m late here, but here goes:

even ignoring capital gains, Phil’s argument begs the question that Warren Buffett receives no benefits from incorporating.

Otherwise, either 1) Buffett receives all the benefits of incorporating (limited liability, issuing stock for investors vs. taking bank loans, etc.) for free; or 2) Buffett’s earnings are taxed at a lower rate.

As some other folks have implied here, looking at corporate taxes without looking at corporate benefits is just as insufficient as ignoring corporate taxes.

This also demonstrates why the “everyone should be incorporated” argument is rubbish: the wealthy derive much greater benefits from incorporation, relative to the working class.