The Other Buffett Rule

The blogosphere is all a-twitter about “the Buffett Rule”, fact-checking this and that, accusing each other of hair-splitting while furiously splitting hairs themselves.

What they’re arguing about is whether millionaires and billionaires pay less in taxes as a proportion of their income than their secretaries. Leaving alone the point that millionaires have secretaries, which I suspect is what bothers some of the critics, there’s something about Mr. Buffett’s formulation that bugs me.

Mr. Buffett claims that he pays less as a proportion of his income than his secretary. He also, presumably, believes that is unjust, that he can afford to pay more. He also says that he doesn’t employ a tax accountant and is just following the rules that Congress has set out for paying his taxes.

To the best of my knowledge although Congress requires that wages be declared as wages (because W-2 wage income is subject to FICA) it does not require that some of Mr. Buffett’s income be declared as regular wage income while he takes other of his income in the form of dividends, capital gains, and so on. Most of us don’t have that alternative but Mr. Buffett does. He has structured his income to limit his tax liability. Were he simply to take all of his income in the form of ordinary wage income it would raise the proportion of his income taken as taxes without other voluntarism on his part.

Consequently, what Mr. Buffett is saying is that without the penalty of law to restrain him he is unable to resist his compulsion to minimize his tax liability. Two points. First, why would that be any different regardless of what laws Congress passed? Because it’s a compulsion he’d continue to minimize his tax liability and whatever Congress did he might continue to pay a lower proportion of his income than his secretary.

Second, isn’t that a sad commentary? He needs the threat of civil or criminal penalties to do what he thinks is right?

I have no idea whether he’s right or wrong in that assessment but I don’t think there’s any substitute for a conscience.


Then there’s the other other Buffett rule: “Some people claim that there’s a woman to blame but you know it’s your own damn fault.”

20 comments… add one
  • steve

    Free rider issue. No one will pay more tax than they need to pay. Goes the other way also. You find lots of conservatives claiming we spend too much, but you never find any of them volunteering to give up their benefits.


  • Considering that Berkshire Hathaway also has a serious track record of not paying their taxes in full and on time, I think you are on to something here Dave. Right now Berkshire Hathaway is expecting to cough up about $1 billion in taxes from the 2002 – 2009. Since they’ve been caught so often it makes one wonder, is this company policy? And if it is, does it rise to the level of tax evasion?

  • steve,

    I’d gladly give up my rights to Social Security to get the 12.4% extra to invest on my own. Added to what I’m already putting away for retirement I’d get close to Dave’s magic number of 25%.

  • steve

    No Steve, you still have to pay in if we are to make this equivalent. If you want people to pay extra tax, with no extra services, you need to take your cut in services, with no cut in taxes.


  • Drew

    “No Steve, you still have to pay in if we are to make this equivalent. If you want people to pay extra tax, with no extra services, you need to take your cut in services, with no cut in taxes.”………………which makes me, to my knowledge, the only frequent commenter to adopt this position.

    But as we all know (courtesy a certain M Reynolds) I’m a “fraud, fraud, fraud,” greedy bastard, only caring about Drew and so on……….

    Back to counting my money and slaughtering babies and grandmas……

  • Oh I see steve, I still have to pay, but not get the benefits. See, that is the problem, you liberals just want to rob people. I on the other hand don’t. I’d prefer to simply opt out and take the risks and also whatever rewards there are.

    Right up there with Buffet trying to dodge a $1 billion tax bill, while trying to raise taxes for everybody else. How magnanimous of you.

  • Sam

    There’s a big difference between wanting all your peers and yourself to pay more tax and volunteering it from yourself but not having your peers pay the same. Similarly, the Koch’s should only drive on toll roads, and only land their private jets at private airports out of principle.

    Scott Sumner’s point is far better than this distraction. Buffet consumes very little and reinvests a ton, he SHOULDN’T pay much tax. We need to differentiate between the Buffets and the Trumps through a progressive consumption tax.

  • Icepick

    Steve V, you don’t have to give up all benefits to fit the description. For SS, means testing, raising retirement ages, changing how inflation is calculated, etc. You know, the kind of stuff discussed here often when talking about SS. Less benefits, no cut in taxes. For the most part, little ‘s’ (s)teve wins this point, I think.

  • Icepick

    The big thing is this – the tax code is a system, and any human system will be gamed. Some are simple and solved (think tic-tac-toe), some are complex, finite and essentially unsolvable (chess), and some have very malleable rules which themselves are subject to gaming, like the tax system. No tax system will be ungameable.

  • Problem is Icepick is I have no other recourse than many of these benefits. I can’t hire my own security firm to take the place of the cops. I could hire a firm to install a security system and check out the house if it goes off and is not shut off, but I can’t hire a firm that has all the powers and rights of a police department (i.e. carry firearms of various sizes, have arrest powers that are pretty much limitless nowadays, etc.). Such a private police force does not exist. So I either make do with what is available or get…nothing. Same thing for roads. Due to various legal issues the idea of somebody starting up a private toll road system that could compete with what the government can take via eminent domain is extremely limited. So again, no real viable choice due to prior institutional and legal outcomes. So even in cases where a private provision could exists at some level, the government using it monopoly on the legal use of force and violence prevents me from going that route.

  • Icepick

    Okay, true as far as it goes, Steve V. But I really don’t think (s)teve* was implying one had to give up all services and benefits of government. How about taking some benefit cuts. And really, when we’re talking about benefits most of us think “entitlements”, and in my case I also think of rent-seeking. The point is this: There is a hell of a lot of sentiment that the other guy needs to take cuts to his government benefits. How about some reciprocity?

    Like I frequently say, “No social contract? Check!” Just remember that government only has a monopoly on legal use of force. Rioters, and revolutionary mobs, don’t really give a shit about legalities.

    * Spelled that way just for the distinction.

  • Drew

    I dono, Icepick…..

    I think Steve V is pointing out that he is boxed in by granted monopoly power, sometimes warranted and sometimes not, to use publicly provided services. Further, he is observing that this construction might not be the most efficient. And further that its accepted “wisdom” and there’s not a damned thing he can do about it, despite his reservations.

    I happen to agree.

    I suspect we could all agree that the cops function has to be centralized. Can you imagine us all with private “protective services?” Philosophically, the problem I have – and I don’t want to put words in his mouth but I suspect Steve V has – is that the perfectly rational notion of collective services naturally morphs through the political process (“vote for me and I’ll set you free” – the Temptations. 60’s vintage – Brilliant.) into intrusion into areas that are no business of government………..and lead to inefficiencies, state dependancy, and intrusions to personal liberty and eventually to state bankruptcy…………….all in the name of “caring.”

    Call me crazy. Hello? Greece calling.

  • PD Shaw

    I think my fundamental difference with Steve V and Drew is that I believe Social Security is a form of insurance against living beyond your means to an age at which you no longer have the ability to earn wages. I think they see SS as an alternative to private savings.

    Basically though:

    (A) I don’t trust Steve V (nothing personal). He’ll blow the money on booze and porn and bad investments, and be in desperate straits by the age of 77.


    (B) I don’t trust society not to help Steve V when he promises not to rely upon any further government help and blows the money on booze and porn and bad investments.


    (C) Since man is a social animal, any attempt to ensure Steve V dies in the streets to prove a point will primarily be felt by his family who won’t let that happen, even if it takes away resources from children who had nothing to do with any of it.

  • Drew

    I’ve obviously done a really crappy job, PD, of stating my views on the safety net, and SS in particular.

    I don’t view SS as an alternative, or a backstop to poor retirement planning. It simply is a necessary mechanism for those who need it. My actual problems are these: 1) it’s an awful investment, 2) being a political creature it does not modify its payouts with the realities of the human condition, or at least it has only a one-way bias: more benefits 3) its falsely advertised as everone pays / everyone gets for political cover purposes……..until its broke. This is why I’d like to see the light of day on it for where its headed – just a bait and switch away from a retroactive welfare scheme funded by the financially successful. But no one in their right mind would want to see grandma out in the snow.

  • Drew

    PS – I want to go to Steve V’s party…….

  • I suspect we could all agree that the cops function has to be centralized. Can you imagine us all with private “protective services?”

    Frankly, I’d want a protective service that saw using violence as an absolute last resort. David Friedman’s example was where when a crime happens, I’d report it to my protective service. They’d come and gather evidence. Supposing they find evidence that Joe did it instead of rushing in and grabbing Joe, they’d see if Joe has himself hired a protective service. If so, they’d contact that service with the evidence. Then Joe’s own service might actually be the ones making contact, showing him the evidence and discussing what would happen from there on.

    I know if I were running such a service it would be in the contract, if you steal from another person we wont protect you. It isn’t a blanket of protection no matter what, but conditional that you respect the private property of others. So, if another protective service contacts me and says you took something, I’ll look at the evidence and if it is convincing…bad news we are standing down. In fact, we are going to suggest taking things to arbitration.

    You can find much more detail in his book the Machinery of Freedom which is available in pdf form. Maybe Friedman is full of Bravo Sierra, but he has looked at this issue before.

  • PD,

    Drew has captured much of my reservations of your views. While laudable and the emotional part of me says, “Yeah, we should make sure that people who either made bad decisions or had bad luck aren’t left in misery on the streets,” my problem is mission creep. It is always in a politician’s interest to say, “Lets expand the program this way…oh and that way…oh and here is yet another way….”

    People often say things like, well making bad investments and blowing your money on booze, porn and hookers is not something most people are going to see as a desirable outcome. Much like teenage pregnancy is not a good thing either, so if we help them, it wont do much other than help young women and especially their children in a time of need. We’ll head off future problems from these kids as well. Its a great idea. Except when you subsidize something you always seem to get more of it.

    So you end up subsidizing my party of booze, porn and hookers…and look Drew wants in now too. And not to worry if our (risky) investments don’t pan out, we wont be homeless/destitute.

  • PD Shaw

    Thanks for the replies Steve V and Drew; maybe we can pick this up again some time on a social-security related thread.

  • Sure PD, and when I have my next booze, porn and hooker party, I’m calling you right after Drew.

  • Drew

    “Sure PD, and when I have my next booze, porn and hooker party, I’m calling you right after Drew.”

    Damned straight, buddy, no sloppy seconds……..


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