Tag Archives: wealth

Two Fed Economists Sound the Alarm

When a former Fed Reserve Chairman and a [recovering Keynesian] Fed economist sound the alarm, one should take heed.

A Little Inflation Can Be a Dangerous ThingPaul Volcker (New York Times, Sep 18, 2011)

At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.

The Soothsayers of MacroeconometricsArnold Kling (The American, Sep 19, 2011)

Until the press, the public, and policy makers understand the utter unreliability of macroeconometric estimates of the impact of policies on employment and growth, the answers provided by the usual suspects are worse than nothing. They give policy makers the illusion of precise control over the economy, based on methods that are no more reliable than soothsaying or entrail-reading.

Interesting Graph: Share of Total Wealth Gain, 1983 – 2009 (Source: Economic Policy Institute)

Related GraphEffective Federal Funds Rate, 1983-2009 (Source: St. Louis Fed)

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Filed under Economics, Politics, Zeitgeist

Warren Buffett, Wealth, Income and Taxes

Mr. Buffett doesn’t make income like the rest of us, and much of his wealth is tied up in unrealized capital gains. While his office colleagues may face an individual effective tax rate averaging 36%, they do not own companies the same way Mr. Buffett does. If he did decide to realize some capital gains by liquidating ownership shares, he would face a very different tax, the capital gains tax. As other journalists have pointed out, Mr. Buffett has openly acknowledged his preference for delaying capital gains taxes:

Our favorite holding period is forever.

In an unbelievably fortunate move, he avoided capital gains taxes on the appreciation of his stock with the donation of up to 85% of his holdings in BRK-A to the Bill & Melinda Gates Foundation (a tax-exempt 501(c)(3) organization) in 2006, just before the “financial crisis”. Mr Buffett is now a trustee for the foundation, which had $189M in management and general expenses (in 2010).*

For capitalists (like Buffett), corporate taxes should be considered part of their effective tax rate, as they would otherwise have a right to take that as profit along with other owners. To be explicit, the corporate taxes paid by companies Mr. Buffett owns should be added (proportionally, based on his share in ownership) to his effective individual tax rateIf corporations aren’t paying taxes, that’s a separate public discussion from the one Mr. Buffett has created.

I believe Warren Buffett’s intent to be malicious as he is deliberately creating at least one “straw man”:

According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

It’s not a question of whether or not to invest, but to what use (ex. cash dividends, growth, expansion) corporate profits are directed. Higher taxes on dividends can increase corporate size as companies reinvest their profits for expansion instead of redistribution – further consolidating wealth and power.

If Mr. Buffett believes that current mechanisms of government finance have created a society in which not just income, but more importantly wealth, seems unfairly consolidated, then he must engage society at a deeper level than doing back-of-the-envelope math comparing himself against his wage-earning staff.

For example, is the corporate legal form good for society? John Bogle (founder and retired CEO of The Vanguard Group) has questioned the value of manager’s capitalism versus owner’s capitalism and showed that privately owned mutual funds outperformed public ones. Yes, he performed that analysis some time ago, but the high-level incentives have not changed.

As others have noted, Mr. Buffett is free to pay more taxes than are required of him by law or statute.

NYT: Stop Coddling the Super Rich, Aug 15, 2011

*According to PETA, stock donations can actually generate tax deductions equal to the market value of the stock, not just the unrealized gain at the time of transfer.

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Filed under Economics, Politics, Rant, Zeitgeist

Re: China Swallows Obama Stimulus…

A few thoughts in response to Andy Xie’s opinion piece on Bloomberg (via The Third Rail):

I disagree with his statement at the end, that “The Smiths and the Gonzalezes have wealth and won’t accept Third World wages.”

Just as a company doesn’t price its products according to its market cap, individuals don’t price their labor according to their wealth. Wages are determined by costs – rent, education, transportation, food – in the short term I must make enough to cover these and then some. These have all increased in price due to policy decisions. It isn’t the absolute level of wealth but the attendant arrogance that led us to enact ‘progressive’ policies.

The first alarm bells should have gone off when people claimed that domestic labor was ‘above’ performing any type of work. What was implied in those claims is that fixed foundational costs priced domestic labor out of the market.

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Filed under Consumer, Economics, Zeitgeist