Monday, August 22, 2011

Why Warren Buffett is Wrong on Taxes

Former chairman and CEO of American Express, Harvey Golub, writes on why Warren Buffett and Obama are wrong when arguing for higher taxes on the rich.
What gets me most upset is two other things about this argument: the unfair way taxes are collected, and the violation of the implicit social contract between me and my government that my taxes will be spent—effectively and efficiently—on purposes that support the general needs of the country. Before you call me greedy, make sure you operate fairly on both fronts.
Golub highlights statistics that the top 3% of taxpayers pay nearly 50% of taxes.  He also cites the inefficient collection of taxes - namely due to tax breaks and loopholes given to all sorts of special interests - and inefficient expenditure of taxes - on wasteful and unnecessary programs - to drive his message home.  Golub concludes "Here's my message: Before you 'ask' for more tax money from me and others, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely. Then you'll need less of my money."

But while Golub's argument is fair, there is a more fundamental issue in his essay.  In refuting calls by some of America's wealthiest, including Buffett, for higher tax rates on the rich, he writes:
Others could pay higher taxes if they choose. They could voluntarily write a check or they could advocate that their gifts to foundations should be made with after-tax dollars and not be deductible. They could also pay higher taxes if they were not allowed to set up foundations to avoid capital gains and estate taxes.
The issue here is one of coercion and choice.  Buffett might be right when he calls for the closing of loopholes that give special treatment to certain forms of income or certain individuals, but that does not translate into justification for increased tax rates.  If Buffett feels he owes something to the community, he is more than free to write a check to any institution he feels deserving - including the US Treasury.  However, to argue that tax increases on certain individuals are necessary, because one feels like he is paying too little, distorts the relationship between government and the individual in a dangerous manner.

Income is naturally the property of the individual who earned it.  The government only has the right to take from an individual in order to provide the appropriate services of the state.  In other words, government should minimize its burdens on individuals and should tax only to meet its essential and proper functions (what these functions are is a separate discussion but would include many tasks that cannot be provided by the private market, for instance, defense, security, certain infrastructure, establishing rules and laws, and other pure social goods).  Taxes are thus a pooling of individual property to provide for certain aspects of the common good.  In this manner, taxes could be perceived as establishing or investing in an institution (the government) that provides needed services that would otherwise be unavailable.  Accordingly, all should benefit from this system.

Buffett's and Obama's argument turn this conceptualization on its head, arguing that the appropriate level of taxes is rooted not in the need to pay for essential functions but in an arbitrary determination of what an individual should possess.  Under this understanding, income (or wealth) is not the natural property of the individual, but is awarded to them based on their need.  Any amount that surpasses this arbitrary definition of need does not rightly belong to the individual and must, to be fair, taken away.  Taxes are thus used to 'level the playing field'.  The individual, whether rich or poor, now lives at the goodwill of the state, allowed to possess only due to the graces of leviathan.  In fact, taken to the extreme this argument does not even require the government to provide anything.  If taxes are justified by taking 'excess' from those who have it, the government has achieved its goal of taxation (this is not to say the government does not have other goals) simply by taking the money.

Taxation is a tool needed for the government to achieve its proper functions.  It is not a goal unto itself.  To assume otherwise is to break down the very fabric of a capitalist, free-market, liberal society and sets dangerous precedents.  It is certainly appropriate to debate how tax burdens should be carried by different segments of society, but it is far too dangerous to allow such discussions to distort the purpose of taxation.  Taxes are a government's paycheck or its alms - not a tool for social engineering.


  1. 1) The debate about taxation shouldn't be about "social engineering" but, as always, good policy. In the case of America, where 400 families have more wealth than the bottom half of society put together, I think it is fair that those who are living most luxuriously be expected to contribute far, far more than those living in constant economic insecurity.

    The relationship between relative income equality and a range of health and social outcomes is well documented.

    2) As Benjamin Franklin noted property is the "creature of society", not, in fact, the individual. Property that is not defined and guaranteed by society (other individuals) and the State is in effect not property but the commons. As a result, taxation - in a constitutional and representative State - is not theft but simply *legitimate*. Franklin went so far as to say that private property could be called upon to serve the public interest "even to the last farthing".

    Property is not a unproblematic "common sense" concept. This is particularly striking for intellectual property or ownership of land. No individual or corporation has a unilateral right to claim sovereign ownership - to the exclusion of the rest of humanity - of an idea or to a mountain or river.

    On the contrary, the modalities of such property must be defined by society and the State for whatever ends it has in mind (economic prosperity, individual autonomy, encouragement of research, remmuneration of artists..). None of these definitions could be derived at from the unilateral individual, but only from the society and State.

    I'll quote Franklin at length who expressed himself far better than I: "Suppose one of our Indian Nations should now agree to form a civil Society; each Individual would bring into the Stock of the Society little more Property than his Gun and his Blanket, for at present he has no other. We know, that, when one of them has attempted to keep a few Swine, he has not been able to maintain a Property in them, his neighbours thinking they have a Right to kill and eat them whenever they want Provision, it being one of their Maxims that hunting is free for all; the accumulation therefore of Property in such a Society, and its Security to Individuals in every Society, must be an Effect of the Protection afforded to it by the joint Strength of the Society, in the Execution of its Laws. Private Property therefore is a Creature of Society, and is subject to the Calls of that Society, whenever its Necessities shall require it, even to its last Farthing; its Contributions therefore to the public Exigencies are not to be considered as conferring a Benefit on the Publick, entitling the Contributors to the Distinctions of Honour and Power, but as the Return of an Obligation previously received, or the Payment of a just Debt."

  2. 1) Your statement here presupposes these individuals have some sort of moral obligation to others and makes a value judgement about what they possess and what they can or cannot do with it. This is precisely the mentality I challenge.

    2) Franklin says that private property is the subject to the calls of society "whenever its necessities shall require it". This does not mean the state can take in order to achieve some social or value goals but in order to meet the necessary functions of a state. This is precisely the argument I am making. (I don't know the broader context of this excerpt but I imagine it would apply to such things as war (eg to save the society from external destruction) when requiring the last farthing.

    As to property being defined by the state - I don't disagree. This is one of the essential functions of and needs for the state. But just because the state has to set common rules to define property-ownership doesn't mean the property is to be at the disposal of the state. Without the state property would still exist but individuals would have a greater level of insecurity. Property would thus be controlled by the strong. State definitions of property protect the weak, but do not give the state the right to distribute, claim, or manipulate property arbitrarily. You are wrong when claiming that undefined property is "commons". Undefined property may be disputed but this does not mean it is commonly held. If you and I disagree who owns something (IP or object) we use established rules, invent new ones, or fight to determine who owns it, but it is a leap of faith and logic to argue that if there is no established rule for ownership that everyone owns the item.

    I certainly agree there are many nuances to the rules and laws regarding property, but that doesn't negate the fact of the primacy of the individual. Government's role is to set rules and guidelines for people to interact together in as peaceful as a manner as possible. It has no independent purpose - an attempt to create one is wrong. Remember, people can exist without government, but government can never exist without people.

  3. 1) It isn't simply a question of "moral obligation" (although personally I find that compelling enough) but of national good. In an economic recession where jobs and sources of income are scarce, I think social peace and national cohesion is best served by giving the most economically insecure the most breathing space as possible. Otherwise those insecure, or simply *WITHOUT* livelihoods, will be prone to rioting, political radicalization, criminality and, etc, reducing everyone's well-being, including the wealthy's.

    (This problem is incidentally one version of the tragedy of the commons. We all have an interest in social peace but, as a shared public good, individual donors have little incentive to meet these problems individually.)

    More generally, I don't think the United States' exceptional level of inequality can be separated from the country's various equally exceptional pathologies (most per capita incarcerated in the world, infant mortality between Lithuania and Belarus..). Reducing these pathologies is a legitimate area for public policy.

    2) I don't think that people can exist without government except through the "nasty, brutish and short" lives of the State of Nature (e.g. Somalia). Probably a State is inevitable once there are more than even as little as 100 people together.

    However even in the case of small societies it is also true that an individual cannot exist without society as we are social animals (which is why you don't see a Libertarian exodus towards government-free desert islands).

    This is true on a very fundamental psycho-biological level: Even the very words we need to channel our thoughts *must* be given to us by society during childhood. Human beings raised outside of society, "feral children", lack this and are often incapable of even learning a language. Then, in a real sense, these humans who existed without society lack some of the fundamental characteristics that separate human beings from animals. The human individual, then, cannot exist without society.

    The trouble with America is that a significant part of the country simply rejects all human interdependence or importance of society or the need for public action in general (e.g. the very concepts of "the general welfare", public good or national good are rejected). To them, "every man is an island", which just ain't so on a fundamental biological level. Human existence is radically both social and individual and attempts to make either side wholly dominate the other will always end in failure.

  4. 1) I disagree with your remedy for the national good on both a practical and moral level. First, look at Europe, which presumably is much more in line with your vision of the welfare state and greater "equality". There is far more rioting and social upheaval there than in the US. Social upheaval is caused by a variety of factors and I'm far from convinced that wealth redistribution is the only or even best way to keep social peace (an unmet promise of socially provided goods seems to create not only a sense of entitlement but greater unrest than no promise of these goods, as we see in parts of Europe). Secondly, it is morally questionable in my mind to feel compelled to buy (or bribe) social peace through these means. To argue that to avoid unrest people must be prematurely bought off is an unsettling aim of public policy. It grants a horrible coercive power to those who want more - a mere threat to violence becomes rewarded with more goodies. To facilitate such blackmail (not saying all recipients or even most resort to this) is poor policy.

    2) What you are saying here is why a state is needed - what is better about it than w/o it. I certainly agree that the government can be good. I'm far from an anarchist and absolutely agree that individuals benefit from social institutions and government. (I certainly never jump on the bandwagon of "government is all bad" nor "every man is an island" but prefer to cast the role of government in its proper light.) The point is more to the effect of what direction the causal arrow flows. Government should be the product of man joining together to fill in the areas that are unsuccessfully accomplished as individuals and facilitate the interaction of individuals. Government fails this role when it no longer serves as an intermediary and attempts to apply its own (or a societal grouping's) beliefs and values on others. Such coercive power makes government tyrannical.

  5. 1) The current riots (which aren't universal) are occuring precisely in countries where the social compact is being radically changed (Greece, Britain). Incidentally however, the typical European riot is not comparable to those the United States is accustomed to (Watts, Rodney King.. both in terms of property damage and number of dead). The United States' exceptional "individualism" (e.g. absence of public spiritedness) I think can be linked very directly to to its other social pathologies: very unusually high levels of infant mortality, homicide, incarceration (only comparable in magnitude to Stalin's Soviet Union), social and economic insecurity (foreclosures), etc.

    In terms of social peace and health outcomes the issue I don't think is one of "bribing" but of public action compensating for where private/individual action contradicts the public good (as expressed by the people through constitutional and democratically-elected government). Why should private action be considered the only way of meeting human goals?

    2) That interpretation is only possible with a very expansive definition of "tyranny of the majority". Majorities in almost all developed countries support, and elect politicians who support, pensions for the elderly, relief for the unemployed, universal healthcare, etc. (Even the United States does not completely buck that trend.)

    Property is the creation of society. I cannot, individually, either legitimately or practically claim an idea, a river or a valley as forever mine and mine alone, even if I discovered that thing (which probably the strongest claim of original ownership). As such, property must be collectively defined for what is socially useful (Amerindians found the concept of owning land as incomprehensible as owning air). If, in fact, the society does not believe in the reductionist/inviolable Libertarian concept of property, why should it be forced (by Libertarians) to have laws and practices defending such a concept?

    3) More generally I would not say that all wealth held by every person in a given society is by definition his and only his in a sacred sense. Wealthy individuals and corporations employ armies of lawyers, accountants and lobbyists who make every effort to allow their clients to evade taxes, bend the law, and indeed write the law for their private interest. These private empires often learn to "game the system" in this way, in the end corrupting government and subjecting it to private interest. I think of much of the agricultural, energy, finance and defense industries, in particular, whose private profit is absolutely inseparable from their public influence. There is no reason to assume all wealth held by such entities is legitimately theirs by some divine right, or that this wealth could not be taxed for any number of public goods.


"Reading makes a full man, meditation a profound man, discourse a clear man." - Benjamin Franklin

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