Tuesday, August 23, 2011

Warren Buffett, Math Genius

Let's hear it for Lawyer Richard Epstein who unlocks the secret of algebra for Billionaire Warren Buffett, who believes that, having reached the deck of the luxury liner, it's time to pull up the ladder for everyone else trying to get there by making them pay higher taxes. (Buffett himself could always write a check to the U.S. Treasury to sooth his own social conscience).

Here is Buffett's argument:

"In 1992, the top 400 [tax filers] had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent."

Here's the algebra:

1992 ) .292 * 16.9 billion = 4.93 billion paid in taxes

2008 ) .215 * 90.9 billion = 19.54 billion paid in taxes

What Epstein didn't do is to adjust for inflation, which my quick calculation of the CPI shows that, even in inflation adjusted terms, the 400 top filers paid 12.53 billion in "real 1992" taxes in 2008 compared to 4.93 billion in taxes in 1992. So, while lowering the tax rates we more than doubled the tax collections from wealthy Americans. Buffett's argument, both explicitly and implicitly, is that these two things have nothing to do with one another. In other words, Warren Buffett believes that there is zero response in anyone's behavior due to after-tax returns.

And, to repeat, if Warren Buffett believes that he is underpaying for the services and/or satisfaction he receives from the federal government at the current tax rates, by all means let him write a check to the U.S. Treasury. The instructions on how to do so are here. Now, Doug and I have research which shows that people look upon taxes as a group commitment device. But, as one of America's wealthiest men, does Buffett really need to know that all of the little people of the world are falling into line before he steps forward and takes the lead on helping to do whatever it is that his increasing the federal general Treasury receipts will do? (Of course, Epstein's argument is essentially that following Buffett's prescription about raising tax rates may actually lower tax receipts anyway).

Can someone be as successful as Warren Buffett and NOT understand this basic math? It should not go without comment that Buffett's Berkshire-Hathaway's business lines are likely to increase in profits if there are expansions in things like life insurance, tax-deferred annuities, and municipal bonds, time-tested ways by which wealthy people avoid paying more taxes from higher (estate tax and marginal income tax) rates. The link in the previous sentence shows that B-H explicitly markets their products with an eye to helping customers legally reduce the taxes they pay to Uncle Sam. Maybe Buffett is a math genius after all.

Notice also that the first part of Epstein's article is a critique of Pope Benedict's economic comments. I plan to talk more about that in a later post.

Hat Tip to Andrew Stuttaford at NRO for the tip on Epstein's article.

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