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Buffett and Taxes for the (800th??) Time

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November 26, 2012 – Comments (17)

Warren Buffett was back at it again with the whole "rich people need to pay more taxes" thing. For those with trouble connecting the dots, well, The Fool's Morgan Housel is here to help out (http://www.fool.com/investing/general/2012/11/26/warren-buffett-on-taxes.aspx). 

What's so darn frustrating about Morgan is that the guy loves to pull up actual numbers and statistics rather than just spouting rhetoric. In this case, he's shown that despite the fact that top end tax rates have been higher in the past, the economy did not, in fact fall into the abyss. The nerve of some people!

17 Comments – Post Your Own

#1) On November 27, 2012 at 10:12 AM, whereaminow (42.76) wrote:

Yeah, except that those numbers have been thoroughly debunked. No one actually paid those rates.

Darn facts always getting in the way of Morgan's superficial research!

Dear Motley Fool,

There is something called Google.

David in Liberty

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#2) On November 27, 2012 at 12:56 PM, Valyooo (99.63) wrote:

How is it possible that you have 11 blogs on the front page right now

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#3) On November 27, 2012 at 1:17 PM, eddietheinvestor (< 20) wrote:

I fully agree with David.  Morgan's numbers are far from conclusive or convincing.  TMFKopp's suggestion that Morgan must be correct and his argument is infallible because he shows numbers and statistics is absurd.  Come to think of it, Morgan's blog, which the Fool kept up for several days before the election, which implied that Obama has been a great president for the stock market, contained lots of numbers, but it was very unconvincing.  Obama took office at the end of a recession, so it's natural that the market would then go up. Anyone can find statistics or charts to make an argument. Ross Perot had charts too. I don't think the sardonic tone of TMFKopp's email (i.e, "The nerve of some people!") is professional, even if he feels the need to support Morgan or the Motley Fool mantra that higher taxes are necessary and that Warren Buffet is always correct. 

 

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#4) On November 27, 2012 at 1:37 PM, whereaminow (42.76) wrote:

Eddie,

The link up in TMFKopps's blog is broken, but like you, I read Morgan's original piece.

Quite a few commented that actual effective tax rates in those periods were pretty much the same as they are today.  Like a stubborn mule, Morgan kept saying so what.  He simply could not grasp that marginal rates are hypothetical, while actual rates are the reality.

The slogan of Progressives should be "everyone is stubborn and unscientific but me!!!!"

David in Liberty

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#5) On November 27, 2012 at 1:40 PM, EnigmaDude (98.06) wrote:

I would like to read what Morgan has to say but get an error when I click the link above:

Requested URL: /investing/general/2012/11/26/warren-buffett-on-taxes.aspx).

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#6) On November 27, 2012 at 1:50 PM, TMFMorgan (< 20) wrote:

Average effective capital gains rate from the 1960 through 2000 was 17.9% versus 13.8% today. 

Pretty much the same.

 

 

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#7) On November 27, 2012 at 1:58 PM, whereaminow (42.76) wrote:

Yep same with top marginal tax rates.

The argument that economy did fine with higher tax rates is not only unscientific, non-rational, correlation-is-not-causation, nonsense, it's also misleading.

David in Liberty

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#8) On November 27, 2012 at 2:01 PM, TMFKopp (98.93) wrote:

Folks, here's a link to Morgan's article: http://www.fool.com/investing/general/2012/11/26/warren-buffett-on-taxes.aspx

 Sorry for the broken link.

Matt 

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#9) On November 27, 2012 at 2:04 PM, TMFKopp (98.93) wrote:

17.9% and 13.8% don't strike me as the same at all... methinks Morgan was being sarcastic.

David, do you have numbers to link to on the average effective rates of then versus now?

Matt 

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#10) On November 27, 2012 at 2:05 PM, JakilaTheHun (99.94) wrote:

As David already pointed out, Housel's analysis is extraordinarily flawed, since he only focuses on the top nominal rates, rather than effective tax rates or the total tax burden (which is probably the best measure to look at). 

I would look at government spending as a % of GDP as the true gauge of "total tax burden".  The reason I would pick "spending" rather than "revenues" is because budget deficits are financed via new money creation (a stealth tax) in a currency system such as our own.  So total spending as a % of GDP ends up being the best measure of the true tax burden. 

Tax revenues as a % of GDP would probably be the next best measure, but I view spending as a better gauge.  But looking solely at the top nominal income tax rates, and ignore the vast complexity of the tax codes is foolish.  Under that standard, one could conclude 100% taxes are more beneficial than 20% taxes,when the effective tax rate was 3% in the former scenario and 20% in the latter.

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#11) On November 27, 2012 at 2:31 PM, TMFMorgan (< 20) wrote:

<< But looking solely at the top nominal income tax rates, and ignore the vast complexity of the tax codes is foolish. >>

Yes, it is foolish. But that article doesn't do that. It specifically says the charts don't show causation because several other factors -- including tax deductions -- are more important than changes in rates. And as the article clearly states, half of all securitites are held in tax-defered accounts like IRAs and 401ks, which pay no capital gains tax at all

I don't think we disagree on much. If there's anything, it's the idea that "no one paid those rates" is an argument that only applies to decades past. That's true today, too.  Out of 4.5 million tax filers who earned more than $200k in 2007, 3.7 million had an effective rate below 25%. Out of 142 million tax returns, only 114k paid an effective rate of 30-35%. 

 

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#12) On November 27, 2012 at 2:38 PM, whereaminow (42.76) wrote:

If there's anything, it's the idea that "no one paid those rates" is an argument that only applies to decades past. That's true today, too

Exactly.  

But Morgan you have to understand that this nonsense debate was brought to us by Elitist Progressives like Krugam and Buffett who intentionally left ou the part about effective tax rates.

So even though you weren't as dishonest and misleading as they were, you still pretty much played their card for them.  

David in Liberty

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#13) On November 27, 2012 at 3:54 PM, JakilaTheHun (99.94) wrote:

Morgan,

I owe you a partial apology, because I assumed TMFKopp was referring to a prior article you wrote:

3 Huge Economic Misconceptions From Election Season

But I did just read your recent article, and in both articles, you make a strong insinuation that it's been 'disproven' that lower taxes lead to higher growth. (Particularly in the "economic misconceptions" article.)  What you've actually disproven is that the top nominal tax rates aren't that relevant, which shouldn't be a huge shock.

I'm doing some research on this issue right now, but I haven't published it yet.  My analysis shows a very different conclusion.  But my analysis focuses on total tax burden (government spending as a % of GDP) rather than nominal tax rates.  When I focus on nominal tax rates, I come up with similar results to you.  But it's a very flawed methodology. 

When I focus on total tax burden, my results show significantly higher growth GDP when the size of the Federal government is smaller. This connection becomes even stronger when I focus on not only the total size of the Federal government, but the change in the size of the Federal government from the prior year.  

For instance, in the early years of the Great Depression, the Federal government was "small" compared to the modern era.  But the size of the Federal government was expanding dramatically year-over-year, particularly during the Hoover Administration.  

The amazing thing is that even including the Hoover years in the analysis (which would seem to skew the data downward unfairly, since Hoover dramatically increased government spending and taxes), I still show higher growth in the years with smaller Federal government expenditures.  Once I remove the Hoover years, GDP growth when Federal spending was under 17% of GDP actually averaged 4.4%!  With the Hoover years and early FDR years, it averages 3.2%.  

But that's still better than the 3.1% when it averages between 17% -  20% of GDP.  And it's dramatically better than years where spending averages over 20% of GDP, where the growth rate is a paltry 1.3%. 

I'm just spouting out preliminary data right now, but everything I'm looking at shows that GDP growth is significantly less when Federal spending and taxes are higher.  This is a data set that runs from 1914 - 2011 (which is about as far back as I can get reliable Federal spending and economic growth data). My three "Federal government size" groups have an equal number of results in them (31 years --- I chose the groupings mostly so that I'd have enough data in each one to be meaningful). 

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#14) On November 27, 2012 at 4:00 PM, whereaminow (42.76) wrote:

But the size of the Federal government was expanding dramatically year-over-year, particularly during the Hoover Administration.

Not only is that an excellent point, Jakila, it is also widely believed (or they're just lying) among Progressive economists that Hoover was a small government laissez faire President. 

Nothing could be further from the truth.  Hoover was a mad interventionist and big gov guy, and FDR actually campaigned against Hoover's big spending in 1932.

Hoover's sec Mellon wanted him to "liquidate the bad debt", and Mellon's quote is often used as evidence that the Great Depression was caused by cutting gov spending.  But Hoover never followed Mellon's advice, and in fact did everything he could to keep the spending going.

David in Liberty

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#15) On November 27, 2012 at 6:04 PM, TMFMorgan (< 20) wrote:

OK, so le'ts look at what that article said:

"First, there's a difference between the top statutory tax rate and the top effective tax rate. Statutory is the rate that's advertised; effective is the rate people actually pay. Because of deductions, write-offs, loopholes, and high marginal barriers, the difference between the two can be huge. Since 1979, the top statutory tax rate has been as high as 70% and as low as 28%, but the average effective income tax rate for the top percentile of households has hovered between and 18% and 24% -- much less variance. A spike in effective tax rates would almost certainly thump the economy, but we simply haven't seen that despite big changes in statutory rates." 

For which you accused me of only looking at statutory rates and not effective rates.

I think you owe another appology.  

 

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#16) On November 27, 2012 at 6:05 PM, TMFMorgan (< 20) wrote:

Sorry, that last comment was for Jakila, who wrote "I owe you a partial apology, because I assumed TMFKopp was referring to a prior article you wrote"

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#17) On November 27, 2012 at 7:38 PM, JakilaTheHun (99.94) wrote:

For which you accused me of only looking at statutory rates and not effective rates.I think you owe another appology. 

No, I absolutely don't. 

 

Your article is titled:

"3 HUGE Economic Misceonceptions from Election Season"

Emphasis mine. 

 

Your first bullet point reads:

"Lower Taxes Lead to Economic Growth."

Hence, your article makes an explicit case that there's no evidence that lower taxes lead to higher economic growth.  Your case is made by citing a lack of evidence between nominal tax rates and GDP growth. 

 

You allude to effective tax rates at the end, almost as an afterthought.  But even that misses the point. A narrow tax on cigarette and alcohol sales is different than an expensive tax that hits all income. And you still ignore any sort of realistic measure of "tax burden" and how that might impact economic growth.

So basically, you make a dramatic declaration that taxes don't impact growth, based on data that you yourself admit couldn't possibly measure that.  You then suggest that there might be other data (effective tax rates) that is more meaningful.  But if that's the case, why even bother writing an article about the great "economic myth" that "low taxes result in higher growth"? 

At best, you're being extremely misleading here and using a sensationalistic argument to drum up page views. At worse, your argument is lazy and demonstrably inaccurate. 

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