Warren Buffett has me Confused

http://www.whattofix.com/blog/archives/2011/08/warren-buffett.php

by DanielBMarkham • 15 years ago

26 66 15 years ago

drags• 15 years ago

If there is more demand for government bonds (due to higher capital gains taxes, for example), I imagine the yields on government bonds will decrease. That would probably help the economy more than hurt it.

Taxes (in general) apply to _gains_, inflation applies to _principal_. If 30-year Treasuries start paying 2%, capital gains could be taxed at 50% and people would still invest in equities just to have a shot of not having the real value of their wealth cut in half over the next 20 years.

The apocalyptic vision expressed in the article (nobody will invest in bonds! and nobody will invest in stocks!) is overblown. The market will adjust to demand, and the fear of inflation will grow as bond interest rates decrease.

joe_the_user2• 15 years ago

Wow,

I think my group should pay its fair share (paraphrasing)

OK, lets do little example.

Suppose a large group of your friends a pizza and half the people just hadn't paid. Would you say "hey, I'll pay for all these people" or "hey, we all need to pay our fair share".

How hard is that to understand?

mikeash4• 15 years ago

If I'm out with my friends, you're damn right I'd want to pay for the ones struggling with a minimum-wage job and consider that to be my fair share.

jackpirate5• 15 years ago

You missed the point. That's exactly what Buffet wants. In the pizza example, the people who are not paying their fair share are not the minimum-wagers, but rather the mega-rich who pay only 15% capital gains.

voxmatt• 15 years ago

The primary point of Buffett's article isn't even addressed here: most people pay a much higher percent of their income to the federal government than do the "mega-rich" (I do have to say that don't really like Buffett's term there) and, furthermore, that the economy didn't suffer one drop when the rates were more reasonable (and in fact, did much better than under the historically low capital gains rates of the last decade).

In fact, if you read this article closely, it really doesn't present an argument, it just says "I don't wanna."

thematt• 15 years ago

Buffett pays a lower percentage of income by choice. Meaning, he derives his income from investments that get taxed at the capital gains rate. Everyone else is free to make the same decision, but they don't. They "invest" in houses, cars and other lifestyle purchases and then rely on their daily job to provide their income...hence their tax rate being so high.

Rather than punishing the rich for making smart decisions, let's instead educate the other people so they can make the same good decisions.

justinph• 15 years ago

What?

Tell me how people should choose to not to get born into poverty or a family that can't afford college.

You seem to think people should make their money from investment rather than production, which has little value for a society. We should encourage people to make money from actual productive work, rather than shuffling paper around. Having higher taxes on wages (actual work) rather than capital (shuffling paper) doesn't do it.

tghw• 15 years ago

I think you're missing the point of Buffett's argument. He's not paid a huge salary, he's making the vast majority of his money off of investments, and because he invests for the long-term, it means that when he does take profits, they'll be taxed at the long term capital gains rate, which is 15%, instead of the income rate of >35%. To "choose" otherwise, he would have to go out of his way to create short-term capital gains while maintaining a long view, which doesn't make any sense.

byoung2• 15 years ago

he derives his income from investments that get taxed at the capital gains rate. Everyone else is free to make the same decision, but they don't. They "invest" in houses, cars and other lifestyle purchases and then rely on their daily job to provide their income...hence their tax rate being so high

The average citizen making $50k a year doesn't have the cash to buy that house and car (or even the other lifestyle purchases). They have a mortgage, a car payment, and a few thousand dollars in credit card debt. You couldn't use the money used to fund those purchases to invest in something that would allow you to draw income taxed at the capital gains rate. You'd need a lot more cash for the amount of investment that would net you enough to replace a salary.

pyoung3• 15 years ago

You conveniently ignore the huge wealth discrepancies that allow the mega-rich the ability to derive the majority of their income from investments, rather than payroll. If you read Buffett's op-ed, his co-workers, who presumably make a good salary and are probably very savvy investors, pay effective tax rates nearly twice as high as Buffet. The only reason that Buffet and the mega-rich have a "choice" to pay lower effective tax rates is because they are mega-rich to begin with.

No one is 'punishing' the mega-rich. We are asking them to pay their fair share. They derive much greater benefit from the social stability provided by a strong government than does the average person. As such, they should be required to contribute accordingly.

mikeash4• 15 years ago

By that argument, you might as well push for a 99% capital gains tax. After all, people invest by choice. They're free to make money by other means, or not to make money at all.

jackpirate5• 15 years ago

I think the author is making a small fallacy regarding investments. He assumes that as the capital gains tax rises, investment will fall because the investor will make less money. This seems true for small investors, who might decide to "not invest" their money, and instead find starting their own business will have a higher return than buying GOOG stock.

But if I have $1 billion to invest, then I don't have the option of "not investing" that money. It has to sit in stocks, bonds, or some other financial instrument. A higher capital gains tax may change which instruments I choose to invest in, but that money will all still be invested.

A legitimate argument against higher capital gains taxes is that really great investors (i.e. the kind you want selecting investments, such as Buffet) will have less money to invest. This would hurt the economy, unless the corresponding good caused by government spending is greater.

I think everyone would agree there is a happy equilibrium somewhere. Most rich people think it lies on the side of less taxation. Buffet, in contrast, seems to think that quality investors don't add as much value as they want to believe.

glenra8• 15 years ago

> If I have $1 billion to invest, then I don't have the option of "not investing" that money. It has to sit in stocks, bonds, or some other financial instrument.

No it doesn't. I could buy an extensive auto collection. Or a yacht or some paintings. Something that is pretty much guaranteed to depreciate, but at least I'll get some use value out of it in the meantime. (This is why when Britain had top tax rates close to 100%, people bought Bentleys and Rolls-Royces.) When investment is taxed at punitive rates, consumption becomes more attractive.

festivusr6• 15 years ago

Buffett isn't suggesting punitive rates, just rates in line with the income taxes that an average working person pays.

jackpirate5• 15 years ago

I've three gripes:

First, I suspect most mega-rich find investing in all conditions far more enjoyable than anything that money might be able to buy.

Second, even if they wanted to buy, it takes time to spend billions of dollars. In the mean time, that money will be put to work in some form of financial instrument. Even if it's only sitting in a bank, the bank will make a more lucrative investment with it.

Third, it's not like buying an expensive auto collection is wasted money. That money will be used to build the infrastructure of those companies. This has the same shocking benefits of "pure" investment, although it is probably mildly less efficient.

tzs4• 15 years ago

If you are interested in an auto collection or yachts or paintings, you'd already be buying those. You aren't going to say "Dang...I was going to invest my $1 billion and earn $200 million/year, but these new taxes mean I'll only earn $180 million so screw that--I'm going to quit investing and become a car collector".

earl• 15 years ago

Let's start with the first argument: "His message seems to be 'I'm rich, and I want the super-rich like me to pay more in taxes.'

That's great. Write a check."

But him writing a check isn't the point. If Warren writes a check, we get that check's worth of new government income. If taxes are raised, for Warren's contribution of the same check, we get much larger pool of spending. Put more simply: plan (a) warren donates $10 and we get $10 of government income; plan (b) warren is taxed +$10 and we get $10K of new government income.

The rest of the blog is well characterized as Dunning Kruger in action.

lionhearted3• 15 years ago

You picked the least interesting point of Markham's to disagree with.

These two were more interesting:

> Ok, I'm calling bullshit. What does "sensible investment" mean? Does it mean the amount invested, the risk, and the amount expected in return? Because last I checked, you'd take the amount you're getting in return and decrease it by your tax rate.

He then goes on to note tax-deferred and tax-advantaged investments will see capital move to them if tax rates are changed.

Which is a good point. And yes, every serious investor calculates their after-tax return and makes it one of their decisionmaking criteria. That's a crucial point that's obvious when written out, but many people miss it.

> The rest of the blog is well characterized as Dunning Kruger in action.

This should be Godwin's Law II: Whoever accuses someone else of Dunning Kruger loses the argument. There were interesting points in there. You apparently disagree, but that's not a good reason to be flippant. Just address the points you disagree with. Changing tax laws changes the suitability of investments and changes the allocation of investments made and legal structures used. Those are good points and seem correct on a glance.

cjy2• 15 years ago

Well said. The guy also makes a good point that Buffett isn't clear what he is advocating. Does he want to raise the capital gains tax only on the mega rich or raise capital gains taxes for everyone which would have a disproportionate impact on the mega rich who get most of their income from capital gains? The former wouldn't raise that much revenue. The latter would encourage people to consume instead of investing their money.

pyoung3• 15 years ago

Anyone who has the imprudence to argue with Warren Buffett, the savviest investor of all-time, is most likely a victim of the Dunning-Kruger effect. If you can't understand why, then you also may be a victim of the same effect.

Astrohacker• 15 years ago

Force is unethical. The government's fundamental tool--which distinguishes it from most other organizations--is that it forces people to do stuff under the threat of violence (and it often actually employs violence to demonstrate that it is serious). The government is therefore unethical. Taxes shouldn't exist at all, because it just a protection racket from a scaled up version of the mafia. The answer is not to scale the taxes on the rich up, but to scale the taxes on everyone down to zero. Exchanges between people should be voluntary only. This is the only ethical solution. This will require a cultural change where everyone realizes how unethical it is to employ force to get things done.

/controversial view

Locke16895• 15 years ago

This is not initiation of force. It is enforcement of contract, in this case an explicit social contract. Many libertarians make a big deal of "men with guns" enforcing laws, yet try to overlook the fact that "men with guns" are the basis of enforcement of any complete social system. Even if libertarians reduced all law to "don't commit fraud or initiate force", they would still enforce with guns.

glenra8• 15 years ago

> in this case an explicit social contract

It's explicit? Great! Can you tell me exactly what this explicit contract says, who signed it, and how it is that whoever signed it managed to get my power of attorney?

geebee• 15 years ago

I think this post may understate the economic impact of low taxes on high incomes. While I agree that in the short term, the deficit actually isn't the biggest threat to the US economy, I do think we need to close it long term, and the main options are 1) spending less and 2) raising revenues. If you can get the second through growth, that's much better, but you have to be realistic about how much growth you're going to get.

If you agree that some revenues are an inevitable part of good governance, then taxes become inevitable. So while I'd agree that taxes (usually) deter desirable behavior such as work, investing, saving, spending, and so forth, it doesn't really make sense to talk about how taxes are innately bad. You need to think about what level of taxation you can get away with, and where taxation will do the least damage.

This is where I tend to part ways with most fiscal conservatives (though I like to think of myself as one).

My take on it is: estate tax? No, I don't like it. I'd much rather allow a person who has created great wealth to decide who to give it to.

Payroll taxes? No, don't like them. I'd much rather not deter work and put an immediate regressive tax burden on people who get off their asses and work poorly paid jobs.

So which is worse. A 10% tax on estates above $5 million, or a 13% tax on the lowest income workers in America?

Which tax cut provides more benefit to the economy? A decrease in capital gains from 15% to 10%, or a decrease in marginal tax rates for the middle class? Which one would lead to more spending if you need to jump start the economy?

You can tell which way I lean, I'm sure, but I consider these good questions for reasonable debate. But I do think that a higher tax rate on very wealthy individuals that enables a lower tax rate on low income individuals (through, say, a reduction in the payroll tax) could bring a lot of tax relief where it is needed most, and might be a better jump start to the economy than "trickle down" economics.

Yxven• 15 years ago

Buffet says the mega rich aren't being taxed enough. Daniel assumes this means "raise the capital gains tax" and argues that it'd hurt a lot more than the mega rich.

If there's anything government can do well, it's the ability to tax creatively. A simple solution (and I'm not saying it's the best solution) would be to expand the income tax to cover all forms of income (lowering it in the process) and eliminate the capital gains tax.

DanielBMarkham6• 15 years ago

I didn't want to get into the discussion here on HN -- seems like everybody wants to fight the battle of taxes 2012.

But I did want to point out that the purpose of my article was to demonstrate my confusion and ask you guys for help, not necessarily to state that policy would hurt more than the mega rich. I understand the reasons pro and con for tax reform -- it's a great topic. What I didn't understand is what the hell Buffett was trying to argue: fairness, social efficiency, marxist philosophy, what?

As part of that, I felt that I had to come clean and show my position -- I think the entire debate is phony and just a way to control the masses. But I really, really didn't want to get into the politics. My interest as a writer and outhouse philosopher was the clarity of his piece, not the validity of the argument. (Commenter Ron came by the blog and made a great defense of Buffett's position. You should read it if you're interested.) Once we state our case clearly, then productive discussion has a chance to begin.

And it beats the living shit out of me how asking questions can somehow be taken as challenging Buffett or talking outside my expertise. The whole idea of asking questions is to demonstrate you don't have knowledge and to ask for help. People act as if I somehow called Buffett out. Geesh.

festivusr6• 15 years ago

You said "I understand that people want higher taxes on the rich. I think it's stupid, but I'm not going to argue about it." This is not a question, it's a statement, and a provocative one at that. Saying you're not going to argue about it is not going to stop discussion on exactly that point.

You also said "His real argument is probably too snooty of an argument to make in print, but something tells me that's what he's really getting at. I wished he'd have just come out with it, though. It would have been a lot more honest."

This strongly implies that the author (Buffett) is dishonest in his arguments. I'd say that's calling him out.

lionhearted3• 15 years ago

For people saying "It won't make a difference on capital investment" I point you to the Windfall Profits Tax in Mongolia. It was a 68% tax on any mining deposits found.

Well, so what? If you're profitable, who cares if some is taken off the top?

But if you thought that, you'd be mistaken. Simplified example:

You're thinking of building a mine. It's going to cost you $100M. There's a 50% chance the mine contains $220M in deposits and a 50% chance it's a total dud.

With no windfall profit tax, your average return is:

.5(-$100M) + .5($220M-$100M) = +$65M profit, for a 65% return.

Of course, you'll never get $65M. You'll either wind up -$100M or +$120M.

Buuuut, if the government taxes that at 50%, your new EV is:

.5(-$100M) + .5[($220M-100M)/2] = -$40M average return, for -40%.

Those aren't funny numbers. A 50% tax on profits drives capital out of risky-but-lucrative industries, since you're holding the bill if it fails but you're writing a fat check if it succeeds.

It's a simplification. In theory, you could maybe create a conglomerate that averages all sorts of bets like that together. But in reality, there will be some companies that have a 50% chance of losing everything, and a 50% chance of more than doubling your money... that work out mathematically with low-ish taxes, but aren't endeavored with higher taxes.

Mongolia repealed the windfall profits tax a few years ago, by the way, and billions of investment capital went in almost immediately into mining.

_dps• 15 years ago

I agree with the reduction in expected value, and on its effect in reducing investment in risky-but-lucrative industries, but I think even as a simplified calculation you should consider the tax deduction from the capital loss which can usually be carried over several years.

If I have (say) a 5 year period to carry forward capital losses and that over that time I can open several mines (as you suggest), then the tax is essentially applied to the average profit as opposed to the peak profit. I suspect this tax-efficiency of scale is a significant reason for why you end up with huge corporations in such industries (oil and gas, minerals). Opening a single "mine", the failure of which results in bankruptcy and no future profits from which to deduct losses, is essentially taxed out of viability in an expected-value sense, whereas a large portfolio in an enduring profitable company is profitable in an expected sense.

tzs4• 15 years ago

That doesn't seem correct. For the second case, where the mine contains $220M in deposits, shouldn't it be:

    -$100M cost to build mine
    +$220M revenue from sale of deposits
    ------------------------------------
     $110M profit

That leaves you with $220M from the sale of deposits less $55 million for the 50% tax on the $110M profit, so you end up with $165 million.

So, starting with $100M to invest, half the time you end up with $0, half the time you end up with $165M, giving an average outcome of $82.5M, for an average return of -17.5%.

Without a tax, half the time you end up with $0, and half the time you end up with $220M, so the average outcome is $110M, for an average return of 10%.

cjy2• 15 years ago

When the blog author argues that "Warren Buffet should write a check" he is not oblivious to the fact that asking everyone in your tax bracket to pay more taxes generates more revenue than making a voluntary contribution. Rather, he is arguing that Warren Buffet feeling guilty about not paying enough taxes is not a good basis for rasiing taxes on everyone in that category.

Rather, taxes should be placed where they will do the least harm to the economy. Check out http://en.wikipedia.org/wiki/Optimal_tax. Ideally, taxes should be placed where they will not distort people's behavior. So, the relevant question is whether increasing taxes on capital gains will have a change investors behavior making the economy less efficient. Buffet says "My rich friends will invest no matter what!" But, he provides no evidence to support this. On the margin, some investments will not be worth it with a higher tax (as described by lionhearted). How big of a problem this is up for debate. But we shouldn't make tax decisions based on Buffet's anecdotal experience with rich friends.

chairface2• 15 years ago

> So, the relevant question is whether increasing taxes on capital gains will have a change investors behavior making the economy less efficient.

This presumes that we currently have an optimally efficient economy. You're not allowing for the possibility that increasing the capital gains tax will make the economy more efficient, seeing as how, in your own view, the system is plenty distorted.

aterimperator• 15 years ago

> Investing is the science and art of placing money where it does the most good

Err, no it isn't. It's the science and art of placing money where it will grow the most. That is neither equivalent nor synonymous with "does the most good".

tzs4• 15 years ago

Here's where the author gets lost:

   Either Buffett is making a point so fine I have missed it,
   or he's just blowing smoke up my ass. He doesn't know people
   who don't invest when you decrease their return by a
   significant percentage? What? If he's not fighting for
   each percentage point here and there, just what the
   heck kind of investing is he doing? Can I get in on
   some of this action?

This is in response to this statement of Buffet's:

   I didn't refuse, nor did others. I have worked with
   investors for 60 years and I have yet to see anyone
   -- not even when capital gains rates were 39.9 percent
   in 1976-77 -- shy away from a sensible investment
   because of the tax rate on the potential gain.
   People invest to make money, and potential taxes have
   never scared them off...

What the author has overlooked is that taxes lower the effective return on all investments. If capital gains generating investment X is better than capital gains generating investment Y when capital gains is taxed at 15%, X will still be better than Y if capital gains is raise to 20% or even to the 39.9% it was in 1976, and so in choosing between X and Y, the rational investor will still choose X.

DanielBMarkham6• 15 years ago

This certainly might be a true statement, or not, depending on the specific tax policy. Can you tell me exactly what policy Buffett was advocating? Because I couldn't find it.

There are 3 possible arguments here.

Argument 1: I, being rich, should pay more money. I don't think Buffett is saying that, because if he felt that way he would just pay more.

Argument 2: The government needs money. We have it. They should come and take it. I couldn't find any mention of government need. He's not saying that the super rich should pay more because it's needed. He's saying they should pay because it's the right thing to do.

Argument 3: The rules should change so that things are "fairer". If this is his argument, which I think it is, then what, exactly does he want to change? Without knowing that, you can't make heads or tails of whether or not tax policy would effect everybody the same or not. Note that if he's arguing for specific policy, it might be that he personally ends up paying no more, or even less. If this is his thesis, then how much he or his buddies actually end up paying has nothing to do with it. He should describe what exactly would be "fair".

There's no argument here, really. It's just Buffett saying he should pay more of his fair share and some friendly poking at the Republicans. His piece seeks to convey feeling, not make a case and support it (Note the folksy telling of how much experience he has and how rates don't matter.) That't great -- it could still be an awesome article. But it doesn't hold together well to try to take the ideas and go somewhere with them.

festivusr6• 15 years ago

"But for those making more than $1 million -- there were 236,883 such households in 2009 -- I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more -- there were 8,274 in 2009 -- I would suggest an additional increase in rate."

That is his recommendation. Is it not specific enough?

Hyena• 15 years ago

Note bene: since the effective tax rate on the wealthiest Americans is lower than that of almost everyone else because of how tax law treats investment income, Buffett's argument is for the time being indifferent between progressive and flat taxation.

Warren Buffett has me Confused

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