[Nesster]

Saw this provocative article, a good example of the argument on one side of the Venture/Vulture issue... and one IMO goes wrong in several spots.

Opinions?

Should Wealth Creation Be Rewarded? - Forbes

Do we want to motivate people to create wealth or not? It’s the unspoken question, the elephant in the room, when President Obama attempts to whip up the populace with stories of “billionaires paying lower tax rates than their secretaries” and other class-warfare demagoguery.

Mitt Romney recently said his effective tax rate is probably close to 15%, because most of his income comes from long term capital gains. The admission hasn’t helped his campaign much, to be kind. Warren Buffett has famously said similar things, and has become the President’s biggest gift in his drive towards wealth redistribution.

Nearly since the beginning of the income tax, the government has treated long term capital gains differently than “ordinary income.” In 2003 the long term capital gains rate was cut to 15%. Why are we surprised to see that people like Romney and Buffett have matched their behavior to the incentives? Surely even President Obama understands the concept of incentives. Under certain conditions, section 2011 of his Small Business Jobs Act of 2010 establishes a particularly favorable long term capital gains rate: 0%.

Presumably what everyone’s attempting to foster here are wealth creation and capital formation. From wealth comes the ability to invest, which creates jobs and, if created via free market capitalism — as opposed to crony-capitalism — advances society. The opposite of wealth of course is poverty. We see endless government reporting and programs attempting to alleviate the latter, but little understanding of the need to create the former. If we want less poverty, we need to create more wealth.

The other side to that question is - why are we surprised that Romney and Buffet already accumulated / created wealth even at slightly higher marginal tax rates?

And the last sentence gets close to the simplism of 'the number of millionaires is the best measure of a society's wealth' - while producing millionaires and billionaires is a sign of capitalist health, surely the distribution of this wealth (not 'redistribution'!) across society is also such a sign?

So what a great incentive we all have: create wealth over the long term, and pay lower tax rates!

And indeed, this is exactly what Messrs. Romney and Buffett have done. And in creating wealth for themselves, they’ve created wealth for vast numbers of other people as well as jobs and opportunities for countless more. They’ve “given at the office”, so to speak — so why do Obama and his minions beat up on them to “give” again and again to the tax man? Stranger still, why does Buffett believe his money would be put to better use by government than by his own management?

Obama’s beef with the above situation is that not everybody is equal in their ability to create wealth. Yet this is no more an injustice than my permanent inability to dunk a basketball. Do we need to punish Shaquille O’Neal, LeBron James or Kobe Bryant because I can’t jump three feet into the air? While we cheer for O’Neal, James and Byrant on the court, can’t we similarly cheer for the entrepreneurs in the business world who create the jobs that everyone talks about wanting?

In the end it all goes back to Obama’s core belief that government itself can (and should) right the O’Neal vs. Zarras injustice by creating the opportunities for me that The Shaq somehow took away. Notice, however, that if the tax rate “inequality” between Warren and his secretary is too high for Obama, he’s not proposing that we reduce the secretary’s rate to that of Warren’s, and then match government’s spending to the resulting revenue. No, Obama wants Buffett to pay more in taxes and he’s going to figure out a way to give that extra money to the secretary through additional government services, programs and transfer payments.

Note that no additional wealth is being created here. Every dollar that is to somehow benefit the secretary must be raised from Buffett, Romney, and others like them (the nefarious “one percent”), and then somehow appropriated to the secretary’s benefit. Keynesians always point to the visible benefit to the secretary. In stark contrast, followers of Bastiat always “see the unseen” in the additional wealth creation that doesn’t take place.

To really feel good about themselves, Obama and his followers have to assume that the government is going to do something of greater benefit to society than the creator of the wealth would do instead. There’s one small problem though: it doesn’t stand up to scrutiny.

Imagine the government proposes collecting an additional one million dollars in taxes from some rich person. What could the rich person do with that one million dollars instead? They could:

Spend it. Whether it’s spent on luxury goods or candy and gum, it keeps people employed making the stuff.
Bank it. The bank doesn’t just hold onto the money. They loan most of it out for people to buy cars, houses, start businesses and the like. They’ll even loan it out to customers with poor credit ratings if Congress leans on them long enough, but that’s another story.
Donate it. Countless organizations such as hospitals, churches, museums and community centers rely on donations to perform their missions, and society benefits correspondingly.
Invest it. Of the four possibilities, this is where the initial sum of money is transformed into something worth more by someone else — that is, where value is added and wealth is created. Often enough the investments take the form of starting new companies or financing the expansion of existing companies, both of which create more jobs and ultimately put other individuals onto the same decision tree. If the investor succeeds, they’ll circle back to these same four alternatives. Likewise, anywhere along the way, the investor stands to lose some or all of the money. Somehow that fact is often overlooked, and the difference between the investors who can consistently grow wealth over time versus those who can’t is both incredibly instructive and woefully under-appreciated.

Which of the four rich man’s activities above is harmful? Furthermore, in which of the above does government claim to have a better track record when compared to the private sector? I’d suggest that the answer to both questions is: none of the above.

The basketball analogy sounds good, but has its flaws: if the author had the physical abilities, he has no obstacles to being in the NBA. But the NBA has monkeyed with their rules to 'even out' the field a bit - the 3 second rule, the 3 point line, and so on... and also to the benefit of the stars, who after all have to stay on the floor for the paying customers, and so not foul out.

Further, there's a question of what makes a good team, as a team (an even distribution of talents and role players, and thus a more even pay scale) vs. as a business (you have to pay for the star/stars, you have to abide by the salary cap, which can result in one star + a bunch of scrubs).

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Also there's a persistent bias to consider taxation as taking 'my' money... the reason a conservative doesn't understand Buffet is that a conservative doesn't understand that there are other means of benefiting society as a whole, which in turn benefits the capitalist.

Here is where I started to think I had to post this, the crux of the matter:

But lastly, the math behind Obama’s alternative doesn’t work well, either. From each marginal dollar that the government extracts from Buffett, Romney & Co., they actually keep a substantial portion of it for themselves, just to administer everything. So this “investment” in the secretary, as Obama likes to call it, starts off in the red. So much for “Keynesian Multipliers.”

Keeping those four alternatives above in mind, given that only investment actually raises the country’s total standard of living, it’s just plain suicidal to erect barrier after barrier to success. The rational thing to do is to make investment and wealth creation as easy as possible, and just like dangling the proverbial carrot in front of the horse, low tax rates on capital gains need to be a big part of the plan.

Maybe Obama’s “wealth creation” plans are actually completely rational and well-intentioned. He just has a different beneficiary in mind: the government workforce and a permanent voting majority that depends on it.

Clearly there is a bias against 'ordinary' workers as having anything to contribute to the economy... wages I suppose don't amount to anything? And that 'overhead': first of all, the overhead is in private business as well, and secondly, the 'overhead' is in fact a) contracts to businesses and b) salaries that create demand.

So while there's nothing intrinsically wrong with what a wealth generator does with his/her money, making that the sole objective of policy (and life) is unbalanced and inaccurate.

[GeneV]

Let's see. Romney pays 13.9% on investment income of $45mm. President Obama pays 25% on his income of far less. Is Romney almost twice as motivated as the President?

[jeffkrol]

the U.S. continued to lead with more than 4.7 million "millionaire households," followed by Japan and China. Singapore, a country with a population of about 5.1 million, had the greatest concentration of millionaire households: 11.4 percent of the country’s total.
Countries with the Most Millionaires 2010: Global Wealth Surges - BusinessWeek

and:

Countries with the Most Billionaires

No. 1: United States

2009 Population: 306.8 million*

2009 number of millionaire households: 4,715,000**
Percentage increase: 15.1 percent YOY**
Share of country’s wealth held by millionaire households: 56 percent**


No. 2: Japan

Population: 127.6 million

2009 number of millionaire households: 1,230,000
Percentage increase: 5.9 percent YOY
Share of country’s wealth held by millionaire households: 21 percent

No. 3: China

Population: 1,331.4 million

2009 number of millionaire households: 670,000
Percentage increase: 30.7 percent YOY
Share of country’s wealth held by millionaire households: 50 percent

http://images.businessweek.com/ss/10/06/0615_global_millionaires/3.htm

[normhead]

Wealth is the reward. Why would you reward a reward?

[Nesster]

Wealth is the reward. Why would you reward a reward?

Why to provide more reward of course

But rewarding the ordinary citizen is a subsidy, a redistribution, and and a reward of mediocrity.

However, the mediocre wealthy need lots of added rewards and incentives in order to motivate themselves to be wealthier. We can't have only the exceptional become truly wealthy, now can we? Therefore we have to help the lesser talents get theirs.

[Nesster]

Let's see. Romney pays 13.9% on investment income of $45mm. President Obama pays 25% on his income of far less. Is Romney almost twice as motivated as the President?

Since Romney is a Job Creator and Obama a Community Organizer Who Never Created A Single Job (COWNCASJ), the income and tax rates are about right. However, the tax percentages should be more like 0.5% and 15%, in order to create even more Wealth... um Job Creating Wealth (JCW).

As a Content Provider, however, Obama does indirectly create jobs with his books, and provides content for the capitalist internet wealth creation machine (CIWCM). This aspect is conveniently ignored by the Republicans. However, I'm not sure they should; as this puts Obama in the Talent category (together with Newt), and Romney in the Owner one.

However, since St. Ronnie was also Talent maybe they don't want to go there.

[jolepp]

Saw this provocative article, a good example of the argument on one side of the Venture/Vulture issue... and one IMO goes wrong in several spots.
...
Also there's a persistent bias to consider taxation as taking 'my' money... the reason a conservative doesn't understand Buffet is that a conservative doesn't understand that there are other means of benefiting society as a whole, which in turn benefits the capitalist.

Here is where I started to think I had to post this, the crux of the matter:

Clearly there is a bias against 'ordinary' workers as having anything to contribute to the economy... wages I suppose don't amount to anything? And that 'overhead': first of all, the overhead is in private business as well, and secondly, the 'overhead' is in fact a) contracts to businesses and b) salaries that create demand.

So while there's nothing intrinsically wrong with what a wealth generator does with his/her money, making that the sole objective of policy (and life) is unbalanced and inaccurate.

Indeed. This would have us to believe that the money collected as taxes goes over the event horizon of a black hole. In reality, of course, it gets fed back to the economy in the very same ways as the wealthy individual's money. The mix between "spend, bank, donate and invest" is likely to be different, but then there is investment in "public goods" like education that is still a good investment and would not happen otherwise. Also, the money will again find itself into the hands of the wealthy individual(s) who will use it in one of the ways listed (and pay taxes).

Also, collecting taxes from Buffet and using them so that it benefits the secretary is not the only way to increase the relative income of the latter (What effect would increasing her salary have? How might that happen?).

In general, I suppose there is the core issue of what is fair and whether the system as a whole can be so described when the material rewards from full time work vary by several orders of magnitude between individuals, that is, can one person's work really be that much more (or less) valuable than the other's?

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Last edited by jolepp; 01-26-2012 at 01:44 AM.

[kswier]

Also, collecting taxes from Buffet and using them so that it benefits the secretary is not the only way to increase the relative income of the latter (What effect would increasing her salary have? How might that happen?).

I think you nailed the question. I think raising salary would be better for the country than reliance on social programs (or at least some social programs). It would allow those who are currently receiving government aid to choose how to spend the money they receive, and more importantly I think there would be huge psychological benefits (pride in earning money, increased pride in job, etc.).

And if you think about it, why can't the person who works 8 hours a day in a factory earn a living wage? Why can't the person who works 8 hours a day picking up your trash earn a living wage? Why can't the person at Wall-mart make a living wage? These people work for their money. I think we can start by making sure all government employees and contractors are paid a living wage, but this will not solve the problem.

How to motivate this is the million dollar question.

[GeneV]

I think you nailed the question. I think raising salary would be better for the country than reliance on social programs (or at least some social programs). It would allow those who are currently receiving government aid to choose how to spend the money they receive, and more importantly I think there would be huge psychological benefits (pride in earning money, increased pride in job, etc.).

And if you think about it, why can't the person who works 8 hours a day in a factory earn a living wage? Why can't the person who works 8 hours a day picking up your trash earn a living wage? Why can't the person at Wall-mart make a living wage? These people work for their money. I think we can start by making sure all government employees and contractors are paid a living wage, but this will not solve the problem.

How to motivate this is the million dollar question.

Government can help to bring this about in a number of ways. The direct way is through the minimum wage. Another way is to help with certain non-discretionary expenditures such as health care. A final way is through the tax code. In point of fact, the lower the marginal tax rates at the top, the higher the net salary of an employee appears to the person or entity paying it.

[Nesster]

We - and the media - went through this sort of question last year or two... Remember the 'information' put out and reported that government workers were overpaid? (When for decades we'd understood the opposite - that you gave up pay to work for the govt in exchange for security and a pension?)

There are other factors at work keeping wages low: the decline of unions, technology that permits offshoring, as Gene mentions, the cost of health care benefits... Add to that immigration / visa policy. The latter seems to be designed with business interests in mind. There are limited numbers of slots each year, the green card process is extremely restrictive relative to employee mobility... but not so limited that big corporations can't import significant numbers of workers, who then are in effect indentured servants, and at a lower wage than US citizens.

Note that the psychology of bigger wages has a different long term effect on the economy than the steepness of a progressive tax. More aggregate pay to the middle class drums up demand and increases tax revenues... but these people are, in the terms of today's Ayn Rand disciples, effectively dis-incentivized from doing better because their taxes are so high. Those who take more than 1 week to reach the FICA maximum each year understand this...

So larger wages are a good thing, sure. But even with the same wage, a better tax system has other effects: there's not a discouraging to wealth generation by the go-getters (this has never been the case) but rather a discouragement to the looting of the economy by the go-getter class. This is more psychology than direct cause and effect....


We have to keep in mind the interests of the large corporations. Their whole purpose in life is to a) keep the quarterly earnings stream meeting analyst expectations b) produce the widget at ever lower cost c) safeguard their market share by careful innovation (in some industries this is more hectic than in others) and the purchase of possible competitors. Part of safeguarding their market share plays out in politics, e.g. the stance of oil companies. Lower cost has obvious connotations, as does the quarterly earnings thing - both result in ever downward pressure on both wages and the number of jobs.

[newarts]

Wealth creation implies that the creator of wealth is the owner of it or a lot of it. But that need not be the way of the world.

The trick is to figure out a reward system so the person who transfers the most wealth to the common good receives great reward, or perhaps an ownership system that rewards sharing.

Or wealth creation system isn't nearly as broken as our distribution system; imagine the infrastructural gains possible if much private wealth were invested in or dedicated to the common good.

[Nesster]

There's so much mis-information and partial information and different assumptions made on all sides of this issue - by the press and especially by the politicians.

This is also a lession in just how complicated the US tax code really is.

1) How much does Buffet's secretary get paid?
Does Warren Buffett's Secretary Really Make Over $200,000? - Yahoo! Finance

Forbes contributor Paul Roderick Gregory got some attention with his post Wednesday afternoon headlined "Warren Buffett's Secretary Likely Makes Between $200,000 and $500,000/Year."

Buffett's assistant, Debbie Bosanek, is in the news after sitting in Michelle Obama's box for Tuesday's State of the Union address in which President Obama repeated what Buffett has been saying for years: "Right now, Warren Buffett pays a lower tax rate than his secretary."

It's part of Obama and Buffett's argument for higher tax rates on the nation's wealthiest taxpayers, with the implication that a secretary doesn't get paid all that much and thus it is unfair she is paying a higher tax rate than her extremely wealthy employer.

Gregory appears to be trying to poke a hole in that argument by saying that at her supposed income of $200K to $500K, Bosanek "is scarcely the symbol of unjustice that Obama wishes her to project."

He assumes Buffett's tax rate is around 15 percent since most of his income comes from capital gains. Then, looking at IRS data, Gregory finds that:

"... taxpayers earning an adjusted gross income between $100,000 and $200,000 pay an average rate of twelve percent. This is below Buffett's rate; so she must earn more than that. Taxpayers earning adjusted gross incomes of $200,000 to $500,000, pay an average tax rate of nineteen percent. Therefore Buffett must pay Debbie Bosanek a salary above two hundred thousand."

While we have no idea what Bosanek's compensation actually is, it does appear that Gregory's argument is based on an "apples to oranges" comparison.


Buffett's "office staff" example, as laid out in his New York Times op-ed last fall, is that his total 2010 federal tax bill - "the income tax I paid, as well as payroll taxes paid by me and on my behalf" - was 17.4 percent of his taxable income.

In that op-ed, Buffett says that using the same calculation method, that was 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."

Gregory's conclusion is based on just income tax rates, not payroll taxes, compared to adjusted gross income, not taxable income.

As Forbes personal finance staffer Janet Novack wrote in October, based on a letter Buffett sent to Rep. Tim Huelskamp, Buffett's effective federal tax rate was just 11.06 percent of his AGI. Novack writes in a comment under Gregory's post that "just based on AGI" Buffett "pays an income tax rate below the rate for those with AGI of $100,000 to $200,000."

While it is possible Buffett pays his assistant a six-digit salary higher than his own $100,000 per year, there does not appear to be any real evidence to support a claim that she "must" be making more than $200,000 a year.

In other words, while the secretary is well paid, these are wages not capital gains (mostly, for she may have Berkshire stock) and so get taxed at the federal marginal rates PLUS the payroll tax. The payroll tax is regressive, in that it takes a flat percentage of income up to a maximum amount. Thus that component of the total taxation is HIGHER for anyone making up to the maximum; above that the percentage of TOTAL AGI goes down (the dollar amount of the tax remains constant).

It's beyond my math and interest, but it is entirely possible that someone with an AGI of $200K has a lower overall % of their income go to federal taxes than someone making $75K. And entirely probable that someone making their money mainly from capital gains (or tax free interest) will pay a far lower total %.

The Forbes columnist ignored the payroll social security tax.

2) How do you become a 15%er?
Could You Be a 15-Percenter? Decoding Tax Rates - Yahoo! Finance

TAX RATE BASICS

Although it's common to grumble about taxes, taxpayers often don't know precisely what percentage of their income goes to the government. So an essential starting point is to look at how tax rates are applied.

Taxpayers can currently fall into one of six federal tax brackets depending on their taxable income. This amount includes items such as wages and distributions from retirement accounts. The tax rate for each bracket ranges from 10 percent to 35 percent. This is the most basic building block of tax planning because your taxable income can be reduced considerably by various credits, exemptions and deductions.

Here's the breakdown of how much single filers would pay in federal income taxes depending on their taxable income for 2011:

1. 10 percent - income up to $8,500

2. 15 percent - over $8,500 up to $34,500

3. 25 percent - over $34,500 up to $83,600

4. 28 percent - over $83,600 up to $174,000

5. 33 percent - over $174,400 up to $379,150

6. 35 percent - amount over $379,150

Keep in mind that these are marginal rates, meaning your income is taxed in tiers. The first $10,000 you earn, for example, is taxed at a lower rate than the next $10,000.

So let's say you earned $100,000, putting you in the 28 percent tax bracket. This doesn't mean you'd fork over $28,000 in federal income taxes. It means that the amount you earn above a certain threshold is taxed at 28 percent. Your federal income taxes would actually be closer to about 22 percent of your income.

The current federal rates are set to expire at the end of this year. If Congress doesn't act by then, the rates would revert to levels from before the Bush-era tax cuts, which ranged from 15 percent to 39.6 percent.

For now, federal income tax rates overall are near historic lows, says Joseph Rosenberg, a research associate at the Tax Policy Center in Washington, D.C. He also said that nearly half of Americans do not pay any federal income taxes as a result of various exemptions given to those with dependents and limited incomes.

Federal income taxes are only a piece of the larger tax picture, however. Payroll taxes, which go toward Social Security and Medicare, eat up another 5.65 percent of wages. That rate returns to 7.65 percent if the payroll tax cut pushed by Obama isn't extended past February.

State taxes are another factor and can vary widely, with rates ranging from as low as 3.4 percent in Indiana to 11 percent in Hawaii and Oregon, according to H&R Block's Tax Institute. A handful of states, including Alaska and Florida, do not have an income tax.

THE EXCEPTIONS

Not all income is taxed at the rates outlined above. A key exception is any money earned from long-term investments, such as stocks, mutual funds and real estate held for at least a year. This income is classified as capital gains and is taxed at a flat 15 percent. That's regardless of whether it's $100 or $1 million.

"This is why someone who's a millionaire might have an effective tax rate that's lower," said Gil Charney, a tax analyst with H&R Block's Tax Institute. "A higher percentage of their income is going to be from long-term investment income."

In Romney's case, a chunk of his income in 2010 and 2011 came from Bain Capital, the private equity firm he founded and managed between 1984 and 1999.

Bain still pays Romney "carried interest," which is a classification of pay for managers of hedge fund and private equity firms. Critics say this type of compensation and should be taxed as salary at ordinary rates. But as it stands, carried interest is considered capital gains because it's profit in excess of what investors paid into the fund, Charney said.

The tax rate for capital gains wasn't always 15 percent. The rate has moved up and down through the years. In the 1970s, for example, the figure was close to 40 percent. And if Congress doesn't act by the end of the year, the capital gains tax rate will revert back to 20 percent.

[GeneV]

The right seems to constantly ignore the payroll tax. Forbes should know better.