First his argument, then my rebuttal. Most of you have already read the article by Warren Buffet: Stop Coddling the Super Rich.

Jeffery Miron rebuts that with Why Buffet Was Wrong

Encapsulated (read the whole in the link above), Miron says Buffet was wrong because

1) number of $uper-rich too few to make a deficit dent.
2) focusing on the $uper-rich fosters a counter-productive attitude towards material success;
3) focusing on the $uper-rich distracts us from the real problems: “policies that make no sense”;
4) the tax on capital gains needs to be zero prevent economic stalemate.
5) High taxes on income/capital gains, drive investment overseas.
6) Buffet errs by focusing on outcomes, not policies…

His closing jab…. In economics, as in sports, we should adopt good rules and insist that everyone play by them. Then we should stand back and applaud the winners.

Agreed: As in sports, we should adopt good rules and insist that everyone play by them……

But which rules?

Take football. Formulated in 1873 the original rules representatives from Yale, Princeton, and Rutgers met to discuss formulating rules for this new game of football. The new rules consisted of reducing the number of men on the field from fifteen to eleven. Adding a fourth down before surrendering the ball. Tackling below the waist was allowed. …..

Yet the first legal forward pass wasn’t attempted until 1906, 33 years later… after a change in rules. So when one discusses following the rules, the immediate question is, which rules are we going to go by?

When it comes to football, obviously not the purest approach, instead we go by those rules reached by a consensus by those who represent those on the field who will be playing… (Incidentally, the previous year’s (1905) season saw several on-field football deaths and serious injuries around the country. President Theodore Roosevelt (The Bull Moose) met with universities officials to find ways to make the game safer. That’s when rules were modified to allow passing.) One can see why they would want to change…..

So something like the forward pass which we take for granted, was added as an innovation 33 years after the game was formulated…

Whose rules is Miron talking about? Keynes? The Chicago School of Business? This Libertarian’s Take?

Here are the fallacies of Miron’s argument.

Are the number of the $uper-rich too few to make a difference? Miron takes Buffets 10% surcharge and multiplies it out giving an optimistic $73 billion off of the top 1% adjusted gross income of $727 billion.

Allow me to ask a question? Would it be easier to balance the budget and cut back on the deficit if we had this additional $73 billion, or if we didn’t?

That is a no-brainer. Is $73 billion everything that we need? No, it is not $4 Trillion.. It is a $73 billion that should have already been in our system had the Bush Tax Cuts not been extended…. It is one simple step towards that $4 Trillion.

Furthermore, just playing with averages, taking this $73 billion in taxes, that Warren Buffet says his group would feel good about giving, especially since 99% of the population are suffering so much,…. This top 1% would at the end of one year…(.assuming they paid Buffet’s average of 17%, plus the proposed 10% surcharge, ie 123 billion plus 73 billion) ….be responsible for $196 billion of America’s Revenue.

Leaving $531 billion of their aggregate income left over for private investment. If receiving a return of 3% on that money (I earned 40%), just sitting their money gains an additional profit of $16 billion the subsequent year, which will will in itself, yield the following year at (17% + 10%), an additional 4.3 billion in revenue once it is taxed…..

So exactly the amount the Bush Tax Cuts are costing us per year of income by continuing them for the top 1% using the figures compiled by the extinguished Mr. Miron, is…. $75 billion if their rate of return that year, was 3%.

This year alone, we will be borrowing $1,270 Billion just to fund our Federal Government Spending…. So how can someone realistically say ,,, NO NEW TAXES! and continue borrowing $1270 Billion at hopefully less than 3% ($38 Billion) when they have the $uper-rich lining up to cut them a check for $73 Billion? And all they need to be, is asked? Instantly our budget deficit drops slightly and we now only have to borrow $1195 Billion which costs us at 3%, $35 Billion… We just saved $3 Billion in interest a year!….

How can anyone say this is a bad plan? Especially when it impacts ONLY 236,833 taxpayers….a number slightly less then the number of citizens of the nation’s second smallest state (Delaware), who have a bachelor’s degree or higher (246,932)

So Take Down 1: Miron says Buffet is wrong because the $uper-rich can’t make up all the difference! Correct: but that doesn’t make Buffet wrong; it makes not raising taxes on the wealthiest 1% wrong, because that $75 billion that is a difference, is one that will be paid at some point by 99% of Americans making less than $1 million a year.

Next:

2) Focusing on the $uper-rich, fosters a counter-productive attitude towards material success.

No offense to the distinguished Mr.Miron, but this is simply a stab in the dark. It, believe it or not, is attempting of all things, to use… the discipline of psychology, as an economic instrument. Most psychologists, can’t tell me what psychology is… As a science, it is very imprecise. In fact, I remember back in the day, when psychology was called “the discipline without discipline.” because it was mostly made up. Those students who could make up theories on a dime, and find threads of reality to defend those theories, did well. Back then, it wasn’t real science. There was no way to invade the brain to test ones theories… (Seriously, everything we do, is phallic? That’s what that discipline’s founder Freud said…)

Miron’s own words: The way to promote a hard-working, entrepreneurial and innovative society is to celebrate great wealth so long as it has been earned by legitimate means. When this is not the case, policy should target the wrongdoing directly, not demonize everyone who hits it big. This is called: preaching to the choir; it is repeating back what those listening want to hear; it is not something based in reality.

I know where he is coming from. Anyone who’d stood in West Berlin, and looked out across East Berlin, knows that the economics used on West Berlin side, were the more preferable. Communism wiped out wealth, and eventually they had no bread. But they had to actually kill millions of citizens to reach that point.

Denmark is pretty cool place to live; it’s top tax rate is 51$. Norway is ranked the best place to live in the world: it has a 40% tax rate. Belgium is a marvelous place: taxed at 50%… So there is a balance that can be achieved. Higher taxes do not necessarily imply an East Berlin. In fact, these three countries, for its own citizens, are the equivalent of a cruise ship. You pay one price (taxes) that you can afford, and everything thereafter is free. Really, if there was something wrong with that concept, why would so many Americans take cruises?

With those two myths out of the way, let’s look at his statement stripped of bluster, and poke at the skeleton of fact…. A quick question rather illustrates the inanity of the remark…

Dear Reader: you who can barely pay your bills, if you could make $28 Billion a year, would you want to? (Oh, I forgot the part where you really make $56 billion but give $28 back to the government, but that doesn’t really affect your choice now, does it?) Are you really going to stick with your $30,000 assembly line job, because if you made $56 billion, the government would take 50%?

So that line, that celebrating wealth is a requirement to motivate an entrepreneurial society, I can buy only if confined in certain contexts. It certainly doesn’t mean that the out-paying by the top 1%, of 10% more of their income to the Federal Government is going to stop all entrepreneurial activity… Did every business close its door, when our local electric company jumped its rates 60% over the previous year? No? Not one? And those same businesses won’t shut down if taxes go up. Paying taxes is just an additional cost of business. Fortunately people will always worship money, and will always work to make it, irregardless of the amount they pay out in taxes, provided that the amount they do make, is still deemed worth their effort…

Remember, the top marginal rate in 1944 was 94%… Back then the economy was booming; an entire Liberty ship was being built in 17 days! Again, we had boom years during the 1950’s (top marginal rate 82%) and again in the 1960’s (70%) and again in the 1970’s (70%)…. Real History disputes that statement by the distinguished Mr. Miron and his implication that increasing taxes on the wealthy, cause a lack of effort and growth.

Take down number 2: Just because a person says values are important for entrepreneurship and a productive economic system, doesn’t mean they are. The Amish do quite well in their business endeavors, but I doubt anyone would believe they worship and celebrate wealth. Certainly taking 10% more from the top 1%, will not destroy America’s work ethic and cause people to stop trying to better their financial lot.

So next.

3) Focusing on the $uper-rich draws our focus away from the real problems: policies that don’t make sense. Most specifically, policies that make no sense in the first place because they inhibit economic growth and that simultaneously redistribute from low-income households to the middle and upper classes.

Examples he offers: The deductibility of home interest rates; the favorable tax treatment of employer-paid health insurance; numerous loopholes for favored industries; Excessive licensing requirements, permitting fees, restrictive examinations and other barriers to entry into medicine, law, plumbing, hair styling and many other professions; crony capitalism; the too big to fail doctrine.. all of which inhibit an entirely free market place from functioning as it theoretically could.

He argues; the home interest rates benefit upper income levels, because the poor continue to rent. Employer based health insurance gives the wealthier greater benefit than the poor, causes excessive use, raises the cost for all; loopholes for favored industries, interfere with economics because what you sell, is not as important as “who you know”.
Excessive permits restrict competition, raising prices for the privileged few. Being too big to fail props up bad companies and swells executives salaries.

He argues these policies are what shifts the money flow upward: benefiting those more who make more, and taking money from those who now make less…. For example, bailouts allow a few to receive great gains in times of good, and taxpayers to pay the costs in times that are bad… Obviously a big shift of money upward.

Back to his original statement: focusing on the rich draws our attention away from these real problems…

No it doesn’t… Take Down #3: Each of these factors is a piece of the puzzle. Just taxing the wealthy 1$ an additional 10% does not take attention off or away from these problems. All pieces of the puzzle need to be in place before the puzzle is deemed completed. And though some of those other items mentioned might theoretically cause an upward shift of money, it appears you failed to see that a majority of these items pump extra money into our economy at the bottom. That money flowing upward through the economy, is the best thing that can happen for the two quintiles of Americans resting on the bottom.

Fourth, he argues that capital gains needs to be taxed at zero. Reminds me of my Santa Clause wishes when I was tiny. Of course anyone with money, would “wish” that capital gains need to be untaxed… The inherent problem with that scenario, is that it benefits only those already endowed with wealth. Those others who can’t save, see no benefit aat all, from it…

Mr. Miron states: Economists agree broadly that an efficient tax system should avoid taxing income, dividends and capital gains to promote savings, investment and growth… But are they right? If so… why then does it never work?

When tax rates were extremely high, the economy boomed. Think about that. Of course it would. If you were about to be charged 94% of everything you made after expenses, ….. you would do everything within your power to raise your expenses higher so that you had little or no income to be taxed!… You might build another factory; you might add on to your business; you might increase your sales force figuring more salesmen, more sales possibilities; you might decide to give a raise or two or three, because better to have experience by your side, than have it walk because someone else was less stingy with their money that they had to spend or lose too. Great things happen when you raise the top marginal tax rate.. And they happen for this very reason: so the amount of tax paid to the entity demanding it, is as small as possible….

Does this decrease the amount corporations pay to the treasury? Yes, but, those new, additional people now working for that corporation, will be paying income taxes; all that money was unavailable before. And once those people who are now working, are buying, the sales tax revenues climb back into each state’s coffers.

But lets look at the opposite spectrum. What happens when capital gains actually go to zero? In a global economy, money does flee the country. And it should. Why should a business build a manufacturing plant here, when he can build overseas for 1/10 of what his cost would be if built domestically? Currently, the unfortunate truth is this: there is no reason to build here in the US, unless one is forced to by a higher tax rate.

After all, what’s the point in building a US factory with ones current profits, a factory that may lose money it’s first ten years (costing you to have opened it), only to barely break even in it’s tenth year?

When instead, one could put those profits into a high-growth foreign investment fund and make 40% this past year alone! When tax rates are low, or close to zero… what incentive is there to invest in the United States? Absolute zero.

Conversely, if one owns a manufacturing site overseas when tax rates go up, one is better off to close it down, move back here, and open a new plant in the US, where one can expand, then write-off their taxes to zero because of all those expansion expenses.

And that is the problem that occurs when one follows the Chicago Business School’s model in a global economy. It doesn’t keep money in the US. If Reagonomics had said,”we will cut taxes but only on that amount of physical capital you put inside this country, then it might have worked. Unfortunately when it passed, it didn’t make that specification.

But that is exactly what higher tax rates do. If you raise the corporate and top marginal tax rates, expansion quickly follows as all that profit (1.7 Trillion this past quarter) tries to find somewhere to go… For example, if you are a bank, you make loans. Capital suddenly becomes available again.

Take down number 4: Contrary to what economists say, historians are right when they point out that an economy was far more lively and productive, and investment in physical capital flourished, when tax rates were higher. As soon as taxes were cut, jobs were as well.

Buffet is scolded in this remark.

“Buffet asserts that taxing capital income has never deterred anyone from investing. Well, then he has never discussed the issue with me or many of my friends.”

Again, a shallow statement. Are you telling me that you really expect us to believe that those with money put it under their mattress, in a tree with a hole, or under their squeaky floorboard, because tax rates go up?

You really expect us to believe that a person is going to choose to settle for a loss, just because tax rates are going up, instead of settling for some solid wins, minus the amount taxed off the gains?

If so, your friends are fools.. No personal offense; it’s just that only fools would pursue such a policy. Granted, I’ve met some; they are out there.

But I highly agree with you on this point.

More importantly, taxing investment returns plays a huge role in what kinds of investments occur, and where, even if it has minor effects on the amounts..

It sure does. If you want economic growth, and put that 2nd quarter’s $1.7 Trillion dollars of profit back into the economy where it can grow jobs, then you’d better raise the rates on capital gains and the top marginal tax rate of the top 1% of income. Suddenly there is an incentive, one that has been missing since 2003, to build and expand your business here in America.

Take Down Number 5: high taxation of investment drives investment overseas…. History proves this wrong: high taxes keep businesses here. Low taxes send companies overseas because that is where the higher profit is. If you can keep more of your money by burying it back into your business, then that’s what you do. If you build overseas, and Uncle Sam insists that you pay 40$ of that profit over here to this fed, you soon will realize it is better off to have put that profit into an expansion facility here in the US, and make more money per day, per week, per year through increased volume (all of which comes to you), as opposed to investing and then turning 40% over to the IRS…

Take down #6: Buffet focuses on outcomes; not on policies.

In fact, most citizens of this country are tired of policies being argued back and forth. They want outcomes.

Outcomes are what it’s about. All proper focuses need to be on outcomes. The outcome is what is important. Whatever policy which can reach that desired outcome is desirable. Some policies may work at different time and different people. Some policies may not work at all. But focusing on the outcome is exactly what the American people are saying they want. Forget policies and philosophies.

Fix it please…Make the top 1% bear more of the burden, please? It worked so well before, make it work that well again, please?

So it comes down to deciding which set of rules we are to follow. A set of rules desired for by a very small select group of people, the top 1% of the wealthy? Or… rules that will benefit the other 99%…

Sometimes when the results don’t quite work out, changing the rules is deemed a good thing…….

It’s time to tax the wealthy. We’ve starved the economy long enough.

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