Ruminations, August 28, 2011
Warren Buffet knows how to throw a curve ball …
… but Ted Williams knew more about curves. Williams was one of baseball’s greatest hitters in part because he worked at it. Williams prepared for each game, knew the opposing pitchers and knew why pitches moved as they did. For example, Williams said of a curve ball in his book The science of hitting, “The more seams that spin in the direction of the pitch, the more resistance to the rotation of the pitch, the greater the curve. The curve itself ties in with Bernoulli’s principle: As speed increases, pressure decreases.”
When Williams managed the Washington Senators in 1969, he had a young pitcher who studiously avoided him. That pitcher was Joe Coleman, a good pitcher who was a two-time 20-game winner. Coleman knew how to throw a curve but couldn’t remember why a curve ball curved and didn’t know what Bernoulli’s principle was – and was “scared to death” that Williams would ask him.
Joe Coleman has a parallel in Warren Buffet. If we think of high financing and investing as a baseball game, Buffet is certainly an accomplished pitcher. But, while Buffet has a repertoire of effective pitches, his understanding of the economic arguments for lower taxes is on a par with Coleman’s understanding of Bernoulli’s Principle.
In an opinion piece that Buffet wrote for The New York Times two weeks ago, he made the following wild pitches:
- “I have yet to see anyone … shy away from a sensible investment because of the tax rate on the potential gain.” Buffet’s argument is that a tax rate of 25, 35 or 45 percent will not stop someone from making a sensible investment. The truth of Buffet’s statement seems unassailable but it misses the point. If the nation is well served by increased private investment, then it stands to reason that the more private money available, the more investments that will take place; conversely, the higher taxes, the less money available for investment. So, higher taxes do deter the amount of investment by reducing the money supply.
- “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 … but the rate paid had fallen to 21.5 percent.” So, using Buffet’s numbers, tax revenue on the top 400 totaled $4.9 billion in 1992 and $19.5 billion in 2008 – an increase in tax revenues of almost $15 billion – not bad. Now supply-side economists would tell us that a good part of that increase is attributable to lower tax rates. An arguable point to be sure but one that Buffet avoids addressing.
- “Last year my federal tax bill — the income tax I paid … was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.” Hold it. The maximum federal tax rate is 35 percent. How did these office people pay more – unless Buffet is counting (as apparently he is) their entire tax burden (local and state, etc.) and comparing it with his “federal tax bill” (my emphasis). It looks like he is throwing a curve — manipulating numbers to make his point seem better.
- “[T]he poor and middle class fight for us in Afghanistan…” There is some truth to this. While some of the wealthy, like Ted Williams and former NFL player Pat Tillman volunteer to fight for their country, other wealthy individuals, like Warren Buffet, are too busy making money to serve their country. (I know, I know – this has nothing to do with tax policy but Buffet said it, and deserves to be called on it).
Now, if you believe that the Federal government can do a better job of allocating money than you can, that is a valid point in advocating higher taxes. But even Buffet doesn’t believe that, since he allocates a great part of his wealth to tax-free foundations that, he believes, do a better job of allocating and spending money.
There are many intelligent people who advocate higher taxes. While I disagree with them, their points should be addressed and debated. But when someone throws a curve and doesn’t understand why it curves, we need to explain Bernoulli’s principle to him. Ted Williams would scare Buffet to death.
Payroll tax cut – the bad side and the bad side
President Obama is taking a page from President George W. Bush’s recession-fighting book: provide a quick shot of money to the consumer and hope it will be the spark that gets the economy going again. Maybe if you keep trying the same thing over and over again hoping for a different result, one of these times it will work. On the other hand, maybe it won’t, but at least it will give the impression that you are doing something.
Economists tell us that the big consumer spur to the economy comes when consumers feel that they are economically flush and see a promising future. As such, Bush’s one-time $200 tax rebate had little effect and Obama’s – extending the payroll tax credit – was only slightly better and was not really simulative. So Obama may try it again.
Some pundits (PBS’s David Chalian, for one) can’t understand why fiscal conservatives would oppose the payroll tax cut; it is, after all, a tax cut. The problem Chalian has is that he has constructed a conservative straw man and therefore does not delve into any potential reasoning behind the position.
First of all, we need to consider what the payroll tax is. This is the tax that workers pay to fund Social Security. Each employee pays 6.2 percent of wages up to a maximum of $6,620. Then there is the hidden tax — each employer also pays 6.2 percent tax for each employee.
The payroll tax cut reduces the employee portion of the tax to 4.2 percent, saving the average employee $1,000 per year.
It’s temporary and restoring it when it expires would not be, technically, raising taxes. But consider the reaction of a worker who, when the tax is restored, sees his take-home pay reduced by $1,000. That looks like a tax hike.
But more important, the payroll tax cut is a revenue cut to a financially strapped Social Security (SS) program. In fact, according to Stephen Goss, Chief Actuary of the Social Security Administration, in 2010, total SS retirement payouts exceeded total SS receipts. With the economic downturn and the Congressional Budget Office predicting tough times for years to come, people are retiring sooner and fewer people are employed to add revenue to the system.
Is this the time to reduce SS revenue payments by $60 billion annually (the amount of revenue that the two percentage point reduction in the payroll tax cut would remove from SS)?
Not to worry, says the Administration. SS will be reimbursed from general tax revenues. Really? We are spending more than we are taking in right now and running a huge deficit, so a SS payback from general tax revenues really means that we will borrow $120 billion (the payroll tax cut is proposed for two years). And then, at some future date, we will have to pay back that $120 billion plus interest. Will that help get our AAA credit rating restored?
Perhaps worse, knowing how Congress works, the payroll tax cut could become permanent. Taxpayers, becoming used to lower payroll taxes, will probably not react kindly to those who seek to reimpose those taxes (Congress). And it seems reasonable to assume that Congress could very well make the reduction permanent and further jeopardize SS’s solvency.
Extending the payroll tax cut doesn’t sound like something that has been thought through and it should be because it won’t stimulate the economy and it further jeopardizes Social Security solvency.
Quote without comment
President Calvin Coolidge, to the American Society of Newspaper Editors, January 17th, 1925: “Wealth is the product of industry, ambition, character and untiring effort. In all experience, the accumulation of wealth means the multiplication of schools, the increase of knowledge, the dissemination of intelligence, the encouragement of science, the broadening of outlook, the expansion of liberties, the widening of culture. Of course, the accumulation of wealth can not be justified as the chief end of existence. But we are compelled to recognize it as a means to well nigh every desirable achievement. So long as wealth is made the means and not the end, we need not greatly fear it.”