Gary Becker Asks a Penetrating Question

by Don Boudreaux on September 3, 2011

in Other People's Money, Politics, Taxes

From Gary Becker’s latest blog post:

Warren Buffett has persuaded 68 other billionaires to follow his example and promise to give at least half their wealth to charities. But why hasn’t Buffett proposed also that the very rich make large gifts to the federal government to offset what he considers ridiculously low taxes on their incomes and wealth? My guess is that he and the others who pledged to give away their wealth to charity would have little confidence in how the government would spend such gifts. Buffett, for example, is giving most of his wealth to the Gates Foundation, not to the federal government, and is relying on how this foundation will spend his vast gift. Given this reluctance to make large gifts to the federal government, why should anyone have confidence that the federal government will spend additional tax revenue in a sensible way?

[HT Joe Swanson]

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{ 65 comments }

Adam September 3, 2011 at 9:36 am

I’ve never understood why (with extremely minor exceptions) no one ever donates money to the government that so many of them profess to be such a humanitarian undertaking. Frankly, if it’s even half as great as they say it is then one wonders why anyone would ever give a dime to private charity.

The Other Tim September 3, 2011 at 1:45 pm

It’s cognitive dissonance between their stated beliefs and their demonstrated preference.

Pfloyd September 3, 2011 at 9:39 am

In line with the rest of his blog post, I think it would be nigh to impossible to get a consumption-style tax as Becker proposes as a *replacement* for an income tax because all the special interests on both sides of the authoritarian two-party fence would howl with outrage.

Of course plenty of presidential advisors support a consumption tax as an *additional* tax on top of what we now pay.

*groan*

Dan J September 3, 2011 at 6:30 pm

The new Princeton economist for Obama Loves a VAT on top of all current taxes. Tax, tax, tax, tax, tax…… Govt knows best….

Underwriterguy September 3, 2011 at 9:45 am

I would also like to see an explanation of how much money the Federal government doesn’t get by virtue of Buffett’s (and others) donations to charity and/or foundations. It is hard to see the virtue of aggressively managing your tax bill and then complaining that you pay too little.

norman September 4, 2011 at 10:58 pm

You’ve hit the nail on the head: Buffett’s and Gates’ contributions virtually insure that they will never have any tax liability for ever. In their scheme they still control the funds that they have allocated to their charitable funds. It just transferring the money from one account to another. I don’t begrudge them the right to do with their money as they wish, but Buffett’s call for higher taxes is so hypocritical .

Joe September 3, 2011 at 10:19 am

I wasn’t aware that you could ‘donate’ to government. As far as I’m aware, if you try to overpay tax, you get reimbursed more-or-less automatically.

mrDIRK49 September 3, 2011 at 10:40 am

Actualy there are several ways. Here’s one http://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm

Joe September 3, 2011 at 12:21 pm

I’d have to do some research but I’m reasonably sure that isn’t possible in the UK (and maybe other western countries).

Emil September 3, 2011 at 4:32 pm

It is possible also in the UK, Tim Worstall has raised this several times on his (excellent) blog

mfb9066 September 3, 2011 at 11:25 am

Another way I could pay more taxes than I currently am is to not take every deduction available to me. Just because deductions are permissible doesn’t mean that they are mandatory and the IRS is not going to force them on me (some of course would be required to be taken, for example, in calculating capital gains you would have to reduce your gain by your basis). MAYBE they would recalculate based on mortgage interest reported to them and adjust a return and issue a refund, but I doubt that is likely. Even if they did, I wouldn’t have to cash the check.

Mr. Buffett should fire the big accounting firm who prepares his personal returns or have them just calculate his income and figure his taxes on the gross figure. Obviously he could not do this with Berkshire Hathaway, but he could on the personal level.

Isn’t it ironic that Mr. Buffett’s contributions to foundations will reduce his estate taxes? Again, not required.

vikingvista September 3, 2011 at 2:20 pm

http://www.fms.treas.gov/faq/moretopics_gifts.html

In addition, it is easy enough to restructure a business in such a way as to greatly increase your tax burden. And as already mentioned, deductions are usually not mandatory.

As far as I am aware, Buffet has not availed himself of any of these opportunities. The reason is clear. Anyone who ever proclaims that he should pay more taxes is really proclaiming that the government should confiscate or extort more property from those who disagree with him.

Buffet’s legacy could have been that of a brilliantly astute and productive businessman. He has chosen instead to be known as a monumental hypocrite and thug. By advocating violence against his fellow countrymen he can be considered no friend of Americans.

Krishnan September 3, 2011 at 10:25 am

On the one hand, they (the billionaires) know that Government has NO idea how to spend money – and that it does it badly – On the other hand, they feel guilty that they have money and so by talking about giving more money to Government, it makes them feel good …

So, it is about their feeling good and not about reality.

Yes, Buffett may feel good about how the Gates Foundation spends his money – but he still feels guilty that he has money when others do not – so he writes all these platitudes about increasing taxes while not changing what he does – Buffett continues to do whatever it would take for Berkshire Hathaway to reduce it’s tax burdens

It is extraordinarily simple for Buffett to pay more taxes – Just Do it.

But we know, he will not.

(Yes, there is no doubt that a private foundation WILL spend money far, far more wisely and effectively than the Government)

Seth September 3, 2011 at 10:34 am

Buffett’s tax policy missives are inconsistent with his own business thinking in several regards. But, they cost him nothing and they get him a lot of attention, something he likes.

If the pig wants to be eaten, us wolves should vote for a net worth tax for those folks with over $40 billion in net worth. It will be a 50% tax on all net worth. Forget taxable income. Forget charitable donations. Forget charitable foundations. If they have net worth (including in charitable foundations) above $40 billion on the day the new law passes, 50% will go to the Fed gov’t.

This tax, of course, would apply to only two Americans. I don’t propose this because I actually want to see it happen. Rather, I’d just like to call Buffett on his bluff and see if he’d change his tune, since he doesn’t seem at all interested in voluntarily carrying out his tax policy wishes.

Invisible Backhand September 3, 2011 at 10:45 am

But why hasn’t Buffett proposed also that the very rich make large gifts to the federal government…

My guess is that he and the others who pledged to give away their wealth to charity would have little confidence…

Instead of guessing, Becker could have googled. But I suspect he already had his narrative and straw man set up and didn’t want facts to get in the way.

“Becky: OK, there were a couple of emails that came in that people that said if you think the government should be able to tax more money, why don’t you just give your money away to the government instead of charity.

Buffett: Well, that’s a choice and it’s an option that… If I had to give it to a single individual, or make some young Buffett a multi-billionnaire, or give it to the government, I’d absolutely give it to the government. I think that on balance the Gates Foundation, my daughter’s foundation, my two sons’ foundations, will do a better job with lower adminsitrative costs and better selection of beneficiaries than the government. ”

http://www.cnbc.com/id/22199472/Warren_Buffett_to_CNBC_Giving_Money_to_Charity_Isn_t_a_Tax_Dodge

Chris O'Leary September 3, 2011 at 11:03 am

So he’ll only do it if he’s forced to do it, which goes to Becker’s point.

Invisible Backhand September 3, 2011 at 11:49 am

You’ll have to cite your assertion.

My point is that he didn’t bother to check.

Seth September 4, 2011 at 1:52 am

“But I suspect he already had his narrative and straw man set up and didn’t want facts to get in the way.”

What fact got in the way? That Buffett said he has more confidence in government than a trust fund child, but less than four charitable foundations that he named? Not sure how you read that, but it seems to support Becker’s claim of ‘little confidence’.

SweetLiberty September 3, 2011 at 11:12 am

But isn’t this an admission that government is in almost every way less efficient than a private charity? If this is Buffet’s thinking, why not set up (or support an existing) charitable foundation for seniors with an eye on replacing Social Security and Medicare with something more efficient?

Invisible Backhand September 3, 2011 at 11:55 am

There are more factors that ‘efficiency’ to consider.

Ironically, you mentioned Social Security, which is very effiecient:

“SSA expenses have always been a small fraction of benefits paid. As a percentage of assets, the administration costs are 0.39%”

http://en.wikipedia.org/wiki/Social_Security_Administration

The Other Tim September 3, 2011 at 1:43 pm

Efficiency estimates have to include more than just administrative costs. Things like the deadweight loss of taxation and perverse incentives have to be measured as well.

rbd September 3, 2011 at 3:36 pm

Factor into that fraud, waste, and abuse, and you’ll get much more than 0.39%.

SweetLiberty September 3, 2011 at 4:59 pm

IB,

There are more factors that ‘efficiency’ to consider.

What other “factors” do you believe Buffett considers when he willingly donates his money to the Gates Foundation, yet does not willingly donate it to the Federal Government?

Ken September 3, 2011 at 11:51 am

“If I had to give it to a single individual, or make some young Buffett a multi-billionnaire, or give it to the government, I’d absolutely give it to the government. ”

Of course this is an outrageous lie. As he admits that’s one option, but since there are many others he opts not to give to the gov. Listening to what people say is a poor substitute for observing behavior. However, Buffet knows what a sucker YOU are, so says one thing but acts in a completely different manner. It’s like he knows fools like you will ignore what he actually does and focus on the pretty lies he tells.

Regards,
Ken

Invisible Backhand September 3, 2011 at 11:56 am

“had to” does not mean “option” Ken

Ken September 3, 2011 at 12:22 pm

Can you point to where I said “had to”? Of course not. And that’s the point. Buffet beng the evil mam that he is chooses NOT to give his money to the gov, all the while calling for laws FORCING others to give their money to the gov.

He lies and says he would give his mnoey to the gov. We all know it’s a lie because when the talk turns to the walk he walks a different path than the one he talked about. Always and without exception. He constantly talks about rich people like him should be forced to pay more money to the gov, implying that money is better used by the gov than by private individuals, yet he fights sometimes for yeqrs to keep his tax bill as small as possible. Additionally he stands to gain immensely from at least one of the taxes he endorses (the death tax).

Why do you defend such blatant hypocrisy? Are you just not smart enough to know what hypocrisy is?

Regards,
Ken

Invisible Backhand September 3, 2011 at 12:40 pm

Can you point to where I said “had to”?

Not you, Buffet, you moron.

You’re that guy who shows up to a party alone and already drunk, aren’t you?

Ken September 3, 2011 at 3:42 pm

Wow. You really got me there didn’t you?

Ken September 3, 2011 at 3:47 pm

And really, what are you talking about. According to YOUR Buffet quote, Buffet said ” Well, that’s a choice and it’s an option….” He clearly said “option” you asshole. Are you sure you’re not drunk? Or are you this bad at english sober?

Regards,
Ken

Dan J September 3, 2011 at 6:33 pm

Buffet can write a check anytime he wants. He doesn’t, so shut the #%!@ up!

indianajim September 4, 2011 at 3:37 pm

**Liked**

Invisible Backhand September 3, 2011 at 12:02 pm

Oh, here’s that information you wanted from yesterday:

http://i.imgur.com/gu9yL.png

Regarding this:

http://i.imgur.com/Qajdr.png

Invisible Backhand September 3, 2011 at 12:03 pm
GhengisKhak September 4, 2011 at 5:26 am

LOL! Wow! Your blog is actually named Kochtopus! I thought someone was joking about this when they mentioned it a while back.

So another piece of the puzzle falls into place. Do you understand that the name Koch is pronounced like the soft drink coke? “coke-ta-pus” is the name of your blog, which very much does not rhyme with “oc-to-pus”.

Now for the actual content of the blog, which appears to be nothing more than a creepy attempt to troll CafeHayek from afar. And I guess by the name you are trying to say that Don and Russ (and even us commenters?) are the tendrils of the evil Koch (again, that’s pronounced “coke”) brothers?

I use my weekly Koch Brothers check to purchase two deaf orphans. I cover them with bells and make then fight to the death, then I, of course, sacrifice the winner with my own hand, lest I displease The Brothers.

Invisible Backhand September 4, 2011 at 12:15 pm

Yes I am aware of the correct pronunciation. The html title I change periodically. I just changed it for you.

GhengisKhak September 4, 2011 at 10:34 pm

The correct title change in response to this was clearly “Khaktopus”

Invisible Backhand September 3, 2011 at 12:03 pm
GhengisKhak September 4, 2011 at 5:09 am

You seem to have an obsession with the fact that some of your comments get held for approval.

Do you understand why this happens? It isn’t some conspiracy to shut you up (though that might do the rest of us a service), it is because your comment contains several links.

Invisible Backhand September 4, 2011 at 12:11 pm

They don’t get approved, they disappear.

Methinks1776 September 5, 2011 at 12:02 pm

They don’t get approved, they disappear.

Making us all better off.

dsylexic September 3, 2011 at 12:21 pm

agree. demonstrated preference is all that matters.if i had an option,i would have lived in the playboy mansion. duh. talk is cheap.

Pfloyd September 3, 2011 at 11:53 am

You’d think someone who seems to think the government should be a better steward of society would not trust himself or his administrators for his charities to properly address the needs of the populace.

But since he doesn’t think that way, his central conceit is that “I’m far better at managing *my* money (by giving it directly to a charitable foundation) but the rest of society is not and thus the government should handle that for them (by taking the money from us and spending it as they will).”

What’s good for the goose is NOT good for the gander, apparently.

Dano September 3, 2011 at 12:00 pm

“Buffett: Well, I’m really a little perplexed that somebody that might be putting ten dollars in a collection plate this Sunday would be doing it as a tax dodge. I think a tax shelter is something where you design a transaction so you end up keeping the money and somehow you get a deduction or something. (Laughs.)

If giving money away is a tax dodge then we’ve probably got maybe 200 million tax dodgers in the United States.”

Nice little Tu Quoque argument there — I suppose if 200 million people are jumping off a bridge, he’d do it too.

House of Cards September 3, 2011 at 11:00 am

“Given this reluctance to make large gifts to the federal government, why should anyone have confidence that the federal government will spend additional tax revenue in a sensible way?”

This is a poorly framed question because these are two separate issues.

1) The rich are reluctant to make large gifts to the federal government. Why?

2) Why should anyone have confidence that the government will spend additional tax revenue wisely?

I don’t like question 2 very much either because is a leading question. Government spends some of it’s current revenue wisely and some of it unwisely with a lot of disagreement about wise/unwise spending. Some think the Pentagon’s budget is obscene. Posner, from his comment, wouldn’t cut a penny from the defense budget. So, why would you expect government to do much differently with additional revenue?

A billionaire, who has excess income, CAN be expected to become more extravagant or profligate with their bloated resources. Because she knows that she can’t take her money with her when she croaks.

SweetLiberty September 3, 2011 at 11:25 am

Buffet (and other liberal) advocates for higher taxation are always calling for forcing others to “share the pain” that they themselves will not willingly shoulder as individuals. It is truly insightful to the liberal mindset. I won’t offer to pay more taxes personally unless everyone is forced to do so. Liberals know that most of the wasteful expenditures – especially Federal – are something no one would willingly donate to. But their collective hive mentality changes if they can force everyone else to ante up as well.

Why are liberals so against personal choice?

vikingvista September 3, 2011 at 2:30 pm

They truly believe that human beings are resources to be violently harvested for the benefit of the collective. There can be no other reason. They oppose the option of independent living–to live with regard to others as though you never existed. The very idea that there exists an unutilized human resource is completely unacceptable to them.

SweetLiberty September 3, 2011 at 5:39 pm

Human beings are resources – the best ones! The question is, are human resources best managed willingly by Smith’s Invisible Hand wherein everyone works towards their own subjective ends and, as a consequential byproduct, improve society; or are human resources to be “harvested for the benefit of the collective” based upon what elected officials think is best for all?

To me, the answer is clear – but I am continually outvoted.

vikingvista September 3, 2011 at 6:54 pm

The question is, are you your own resource, or someone else’s livestock to be slaughtered for their ends?

SweetLiberty September 3, 2011 at 9:34 pm

I’ll slaughter myself, thank you very much.

Wait a minute… Oh, you know what I mean.

vikingvista September 5, 2011 at 9:07 pm

Although I intended the proverbial “slaughter”, it is well known to frequently be literally true.

Marie September 3, 2011 at 12:38 pm

I understand that it is easy to criticize Buffett for not being willing to give extra money to the federal government based on his belief that the extreme wealthy do not get taxed enough. However, I think he is quite rational in his statement and action. 1 – I believe that Becker is correct in that most people know the government will not use money as efficiently as most non-profits will and therefore, getting his cohorts to donate money to the government will not work the way it did when he got them to donate more to charity. 2 – In this case, one person’s contribution will not make a difference – it has to be the whole group and in order to do that, it will have to be changed from the top (tax code) down. Buffett knows that him alone paying more in taxes does NOT fix the problem and will not change others behavior.
I think what is really sad is how inefficient governments are at using their money – but this is not unique to the US government, or even federal governments. A cleaner and clearer tax system that taxes more honestly and less politically is what is really needed. Too bad it will not happen.

vikingvista September 3, 2011 at 2:32 pm

Sad, but inevitable, given the nature of government. What is needed, is less government.

Per Kurowski September 3, 2011 at 12:38 pm

What would be interesting to know, just for the record, is whether when Buffett donated to the Gates Foundation he claimed a tax deduction that reduced the governments income

ArrowSmith September 3, 2011 at 1:16 pm

IB is a sucker for anything government. No waste, fraud and abuse there!

Tim Vande September 3, 2011 at 3:27 pm

Why don’t Buffet and other wealthy people not collect social security and medicare? that would do more to help the country’s finances than raising the tax rates.

kyle8 September 3, 2011 at 3:56 pm

I will answer Gary Becker’s Question. Because to the political left they always say soak the rich, but what they really want is “screw you middle class”

Progressivism is a conspiracy of wealthy elites, wannabees and the poor against the middle class. It has always been that way.

Marx and his followers never hated the rich, they hated the Bourgeoisie.

rhhardin September 3, 2011 at 4:40 pm

I assume that any additional tax revenue would retire debt rather than increase spending, given that the spending is so much out of line that additional spending is politically impossible. At least I hope so.

Dan J September 3, 2011 at 10:41 pm

Additional spending is politically impossible…….

Hahaha……. On Thursday Obama will lay out his plan for ‘jobs’. His plan will mostly consist of….. SPENDING!!!!!!!

One cannot debauch the currency unless one were to spend like a trillion dollars is ‘chump change’.

Spending is the key to elected officials powers. They will not willingly give it up. That is like asking Clinton to give up ‘booty calls’ with interns or Sean Penn to give up on befriending dictators. Not gonna happen.

kyle8 September 4, 2011 at 8:54 am

Bad assumption. It has never been the case in the past that increased revenues were used for retiring debt, at least not in the last 40-50 years.

Ivan September 4, 2011 at 6:00 am

Simple.
Most charities go to poorer countries than yours. Therefore they must be targeted at third world countries. The US Government gives charity mostly when it is in its own National Interest and subject to a lot of conditions.

Who would consider charity to the richest government in the world? Only you of all guys

Craig from Belvidere September 4, 2011 at 7:06 am

When a very wealthy person donates to a charity they create a tax sheltered lifestyle for their children, grand children and down the line.
The gift to the charity puts the givers descendants on the board of the charity or gets the children a paid position with the charity.
The charity owns houses and properties around the world that the descendants are not just allowed to use but are paid to use in their official positions.
Setting up a charitable foundation is the surest and best way to keep the family fortune in the family control for the benefit of the heirs.

Sandra September 4, 2011 at 11:39 am

Spot on. Nobody is willing to give money to the state voluntarily, because we know deep inside that money will be wasted.

And on the other side, charity itself is a business for rich people, people are giving more and more into charity yet more and more poor people are in this world. Something is wrong with this system.

Emil September 4, 2011 at 2:05 pm

I agree with most of what you are saying except the factual error of claiming that the number of poor people in this world is increasing – it is not. (Although that has very little to do with charity which either has no or limited impact or is even destructive for everything except the feelings of the givers)

Nick September 4, 2011 at 12:04 pm

How about we accept Buffet’s plan if he in turn promises that he won’t take any more government bailout funds? He said he wants the government fiscal solvent, right?

Buffet made a fortune off TARP 1.0 (far more than a lifetime of taxes), and from his recent investment in BoA, looks like he is going to be involved in TARP 2.0 (BoA and Citi bailout that is coming).

The little people pay in, and crony capitalists like buffet get the benefits. No wonder he wants more taxes.

Economic Freedom September 4, 2011 at 9:53 pm

The Value-Added Tax, or VAT, is a horrible idea. I’m surprised Becker favors it. Here’s an interesting article on the VAT by Murray Rothbard, which originally appeared in The Freeman during the Nixon administration (1972), which was considering a limited form of the VAT:

http://mises.org/daily/4 2 9 6

“The VAT is essentially a national sales tax, levied in proportion to the goods and services produced and sold. But its delightful concealment comes from the fact that the VAT is levied at each step of the way in the production process: on farmer, manufacturer, jobber and wholesaler, and only slightly on the retailer.

The difference is that when a consumer pays a 7 percent sales tax on every purchase, his indignation rises and he points the finger of resentment at the politicians in charge of government; but if the 7 percent tax is hidden and paid by every firm rather than just at retail, the inevitably higher prices will be charged, not to the government where it belongs, but to grasping businessmen and avaricious trade unions.

While consumers, businessmen, and unions all blame each other for inflation like Kilkenny cats, Papa government is able to preserve its lofty moral purity, and to join in denouncing all of these groups for “causing inflation.”

It is now easy to see the enthusiasm of the federal government and its economic advisers for the new scheme for a VAT. It allows the government to extract many more funds from the public — to bring about higher prices, lower production, and lower incomes — and yet totally escape the blame, which can easily be loaded on business, unions, or the consumer as the particular administration sees fit.”

Some points made by Rothbard in this article:

1. Like the sales tax, the VAT is regressive, falling mainly on the poor and the middle-class. To alleviate this burden, no doubt some form of “rebate” — to the poor, to be paid mainly by the middle-class — would be instituted. Thus, the VAT would probably require (i.e., politically) yet more income redistribution, and possibly be one step closer to a policy of guaranteed minimum income.

2. Proponents of the VAT argue that it taxes producers in proportion to the value they add to the product at each step along the production process. In theory, if Corporation A adds $1,000 value to a widget, and Corporation B adds $1,000 to that widget in a subsequent step in producing it, and if the VAT, for example, were 10%, Corporation A would pay $100 to Uncle Sam and Corporation B would also pay $100 to Uncle Sam. But this ignores the fact that each has to absorb administration costs for tracking and collection involved in the VAT, leading to incentives for vertical mergers. The effect of a VAT would be to disincentivize small businesses and startups, and to incentivize vertical mergers into large conglomerates — all of which would become yet more fodder for antitrust suits.

3. At the time of writing (1972) Rothboard points out a problem with the VAT in Europe: “In the VAT, every firm sends its invoices to the federal government, and gets credit for the VAT embodied in its invoices for the goods bought from other firms. The result is an irresistible opening for cheating, and in Western Europe there are special firms whose business is to write out fake invoices which can reduce the tax liabilities of their “customer.” Those businesses more willing to cheat will then be favored in the competitive struggle of the market.”

4. While higher costs of production will undoubtedly be passed on to consumers who will then pay higher prices, there are 2 additional effects of a VAT mentioned in the article: (i) a large, short-run reduction in business profits; (ii) a long-run fall in wage incomes. Re profits: The reduction in business profits will take place during a time of recession when profits are already reduced, or when many businesses actually incur losses; these businesses will be severely affected by a VAT. Also, innovative startups, which usually have low profits, will be severely affected, too. Re wages: unemployment is already high during a recession. Firms can deduct the VAT from their own tax liability, but they cannot do so if they hire more workers; thus, there will be an incentive for “over-mechanization” and a firing of workers. The long-run effect of this will be to lower the demand for wage-incomes, and since union practices and minimum-wage laws would no doubt still apply, there would be higher unemployment.

In sum, with a VAT we could probably expect to see: (i) higher consumer prices, (ii) lower demand for wage-incomes therefore a lower wage rate in general, (iii) short-run reduction in business profits, (iv) tendency for more firms to vertically integrate therefore less competition especially from small, innovative firms (that might be one reason big firms are often in favor of a VAT), (v) the move to vertical integration would spur yet more pointless antitrust suits, (vi) incentives to over-mechanize and fire more workers hence higher unemployment.

Rothbard quotes one of Parkson’s Laws of bureaucracy: “for government, expenditure rises to meet income.” If classical liberals, libertarians, and fiscal conservatives wish to shrink the size and scope of government, implementing a VAT is the exact opposite of what they should do.

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