Taxing the “Super-Rich”

Master investor Warren Buffett published an Op-Ed essay in the New York Times of August 15, 2011, entitled “Stop Coddling the Super-Rich.” Buffett said that his income tax rates are lower than tax rates on the other 20 people in his office. Buffett overlooked the fact that 99% of his wealth is invested in his company, Berkshire Hathaway, where corporate income is taxed at a rate about twice as high as Buffett’s personal tax rate and about as high as individual tax rates on Berkshire’s office staff. Buffett advocated significant tax rate increases on the “Super-Rich,” a group that he says includes 236,000 Americans generating $1 million or more of annual income.

Basing calculations solely on the figures in Buffett’s article plus data in the World Almanac, it appears that the additional tax revenues to be raised from his proposals would come to perhaps another $100 billion or so each year, an insignificant amount considering that in fiscal 2010 the federal deficit was 14 x that amount.

The federal government, as an institution, has proven incapable of using its tax revenues prudently, no matter which party has temporary control of the executive and legislative branches, witness the accumulated unfunded liabilities of $38 trillion for Medicare alone—an average of $330,000 per household.

The “super-rich” eventually pay out much of their accumulated wealth either in estate tax or by charitable contributions. John D. Rockefeller gave away most of his estate and Andrew Carnegie virtually all his estate, for socially beneficial endeavors. As Buffet observed, many of today’s super-rich have pledged publicly to do much the same.

Although a relatively small percentage of the super-rich generate large incomes in ways that are far from admirable, nevertheless overall the super-rich do a much better and wiser job of utilizing their after-tax income for the benefit of society than the federal government would do by increasing the tax from such people.

In 1967 the present author heard Andrew Galambos and Jay Snelson say that taxation is theft. After some initial shock at that idea this writer found himself in agreement. Over 40 years of reflection and pondering have not reversed this writer’s view that taxes are theft.

The website of which this blog is a part is intended to disseminate Galambos’ idea that everything that is socially desirable can be financed better by voluntary human interaction rather than by taxation. This is the subject of the first chapter of the book portion of this website, entitled “Replacements for the Political State.”

After nearly 100 years with our present system of taxation it is evident that the state takes a vast amount of the production of the country, that there are always more reasons advanced why more and more taxes are needed, yet the state does not live within its revenues, but spends money that will have to be paid by future generations in addition to the other living expenses of those future generations.

The total tax taken by federal, state and local government now approaches or exceeds 30% of GDP, yet at virtually every level, federal, state and local, there are mountainous state and federal debts growing at an accelerating rate via continuing and perennially rising deficits.

This appears to be the same road to ruin that caused the decline and fall of the Roman Empire.

In our political democracy taxes are determined by the voters’ choice of their representatives. Those seeking to get or retain political office have a personal economic incentive to offer tax-paid benefits, which appeal to a broad enough sector of the electorate to win elections. Those tax-paid benefits are determined politically, not in a way that is economically viable over the long term. So we end up where the U.S. now is: with debts that cannot be paid except via inflation which is a form of tax on everybody but that bears most heavily on two classes: low-income people and those who buy debt issued by the state.

In every country that went down this path, when expediency of paying state expenditures by inflation was not arrested or stopped, the outcome was hyper-inflation which destroys wealth stored in “investments” denominated in a fixed amount of currency and leads to catastrophic social upheaval—witness the role of hyper-inflation which in post-World War I Germany led directly to Hitler’s Nazi party gaining support and eventually seizing dictatorial power. In Argentina perennial high inflation after 1945 converted Argentina from a wealthy country to a poor one.

That is the path the U.S. is treading, with the current members of the Federal Reserve Board of Governors paving the road to high inflation. The escalating price of gold and commodities such as petroleum is evidence of the cheapening of the US dollar that has occurred recently and the fear that the cheapening will accelerate.

Three more ideas are relevant to consideration of Mr. Buffett’s income tax proposals.

1.    If the U.S. taxed 100% of the incomes of the ‘super-rich’ it would not be enough to cover the current federal deficit for one year, much less the additional amount that ought to be set aside to amortize future entitlement claims; and that 100% tax could be collected one time, and one time only, because those so heavily taxed would stop producing income as they would have no incentive to generate income that will be taxed away in its entirety. In the following year tax collections would fall to a level below the pre-100% tax on the super-rich.
2.    Because of the futility of trying to match state revenues and outlays by higher taxes on the super-rich, taxes would have to be raised a great deal on everybody to bridge just the gap between current revenues and current outlays. At present nearly half those who file individual returns pay either no tax or receive an earned income credit, a form of negative tax. The International Monetary Fund advised the U.S. at the end of 2004, when our fiscal outlook was better than now, that to cover all U.S. spending and commitments, taxes would have to be doubled or future entitlement benefits reduced by one half. The present writer is unaware of any dispute about this opinion.
3.    Higher and higher progressive income tax rates and inflation are the road to not just socialism, but to a despotic fascist or communist state. In the communist manifesto of 1848, Marx and Engels advocated steeply progressive income taxes and confiscatory inheritance taxes. Lenin, the first communist dictator of Russia, said a sure road to destruction of a bourgeois society (i.e., one like the U.S.) is to debauch its currency. In the cause of benefiting the majority of people both fascist and communist states take wealth from not only the wealthy, but from everybody in society. In the period 1933-1937 before the Nazis launched their aggressions against Austria, Czechoslovakia and the invasion of Poland in 1939, the German working man  was employed at very low wages and long hours to build up Hitler’s war making power. Hitler let the German industrialists keep nominal control of their factories, but only because that was the most efficient way to marshal all production for the war effort. This is documented in  The Rise and Fall of the Third Reich (1959) by William L. Shirer, chapter 8.

As a young man Warren Buffett was persuaded that the progressive income tax with high rates on the rich is a good thing. He was able to become super rich despite the high tax rates.

High income tax rates don’t affect much those who are already wealthy. They do have a negative impact on middle class people who through the dint of hard work and some effort to be thrifty manage to accumulate enough for a comfortable retirement. For much of the middle class, high income tax rates are an impediment to accumulating enough to secure their own retirement. This makes much of the middle class dependent on state entitlement programs to have a modicum of comfort and security in old age.

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