Because most philosophies that frown on reproduction don't survive.

Monday, May 16, 2011

Why Doesn't Warren Buffet Pay Extra Taxes?

A friend once complained to me that, "All you ever seem to write about is money and sex." I'm not sure this is entirely the case, but they are certainly topics which I can write about very quickly. So while I'm still working on some travel writing about my sojourn in San Francisco last week (at a conference put on by one of the vendors I work with) I thought I'd throw up a quick post on this WSJ editorial which caught my eye, because it makes a seemingly valid point about wealthy people who call for higher taxes on the rich.
I wish I had a dollar for every time a wealthy liberal has declared he thinks he should pay more taxes. That list includes Warren Buffett, George Soros, Bill Gates Sr., Mark Zuckerberg and even Barack Obama, who now says that not only should rich people like him pay more taxes, they want to pay more. "I believe that most wealthy Americans would agree with me," he said of his tax-hike plan. "They want to give back to the country that's done so much for them."
So why don't they? There is a special fund at the Treasury Department for taxpayers who want to make "gift contributions to reduce debt held by the public." But very few do. Last year that fund and others like it raised a grand total of $300 million. That's a decimal place on Mr. Zuckerberg's net worth and pays for less than two hours worth of federal borrowing.
I understand the basic satisfaction of saying, "Look, mister, if you really want to pay more taxes, no one is stopping you," but I don't think that it's actually a very good argument. The reason why people like Bill Gates and Warren Buffet advocate for higher taxes but don't voluntarily pay higher taxes than the law requires is pretty obvious: If the US raised the top marginal income tax rate and the capital gains rate in order to try to collect more money from people like Buffet and Gates, this would affect all people in that tax bracket. (If the current tax brackets were used, that would man any married couple making more than $379,000/yr.) This would mean that while high tax advocates such as Warren Buffet would pay more taxes, their relative wealth compared to the other wealthy would remain the same. Thus, Buffet's ability to buy or control things via his wealth would not diminish relative to the other wealthy.

On the other hand, if Buffet decided to simply write an extra check to the Feds each year for $10 million, the result would be that his relative income (and thus buying and influencing power) would fall somewhat relative to other members of is class. Now, as someone who makes a number of high profile donations, Buffet is clearly willing to give money away, but when he makes a direct donation to a non-profit he has a pretty good say in how that money will be used. If he simply writes a check to the Feds, he has very little. As someone who supports higher taxes, he's clearly okay with handing more money over to the Feds -- but I think it's pretty rational that he's not willing to do so in a way that reduces his economic power, and doesn't do all that much to stem the budget problems.

So really, I don't see there as being much hypocrisy in the unwillingness of rich high tax advocates to voluntarily pay extra. Though at the same time, it's important to understand there's no virtue in their claim that "they'd be willing to pay more". They are, clearly, willing to pay more (thus the advocacy) but only if they can do so in a way which doesn't reduce their standing versus other rich people (and the rest of the country).


Foxfier said...

So it comes down to power in two different ways-- maintaining their relative power, and the power to force others to do what they think is a good idea.

Anonymous said...

Thanks, Darwin. This is called the Collective Action Problem, and it's much discussed among some of the liberal blogs. I'm glad to see a conservative paying attention to it.


Darwin said...




Agreed -- it's an obvious issue when you're dealing with self interested actors trying to make decisions. That I can certainly get. What frustrates me a bit is when some progressives see advocacy such as Buffets as being selfless rather than simply his policy preference tempered by self interest. (He'd be happy to "reduce inequality" through taxes, not only so long as it's mandatory and thus he remains at the very top of the spectrum.)

Anonymous said...

"He'd be happy to "reduce inequality" through taxes, not only so long as it's mandatory and thus he remains at the very top of the spectrum."

OK, maybe you're not understanding this as well as I thought. Here is the problem:

I would like to see public school teachers paid more. In fact, I would be willing to pay $100 more in taxes every year if I knew it would benefit teachers. But if I just donate that money to schools myself, each teacher would benefit less than $0.01. Not worth the effort. But if the county raises taxes on *everybody* by $100/yr then that adds up to $300M/yr for the local schools, which is enough to give every teacher a nice raise.

Get it? If I do it myself it's too small to matter. But if everybody does it then it makes a difference. That's the collective action problem. Mr. Buffett understands this. His critics don't.


Maiki said...


Yes, but collective action *can* happen through individual action. It happens all the time, every day. That is why people donate to charities, or their parish church.

If the motivation is "to give back" to the country that gave you so much, there is in fact, nothing stopping them.

I think the hypocrisy is not that they aren't willing to pay more, but they want their neighbors to pay more, too. There is a certain lack of virtue to that statement.

Foxfier said...

Forcing others to do what you want.

Incidentally, not only is your own proposed action vs Buffett's a bit off-- to be understate-- you're also comparing a world were only you give what you're willing to give vs one where everyone is forced to give that amount.

Why don't you give more, and/or get others who are passionate about it to give more on their own? Or start a fund to reward good teachers who are paid too little? Or any other action that doesn't involve forcing others to give up what you're willing to lose, since you apparently don't think anyone else is willing to offer the same?

Sounds like Darwin has it down perfectly.

Darwin said...


Okay, well, I get that -- you can tell I didn't do my blogger duty and go wikipedia "collective action problem" after your first comment -- though I think it's not a very compelling point, it's just an actor variant on the heap dilemma.

What I had been getting at was more the game theory issue: It actually doesn't hurt Warren Buffet at all to pay more in taxes so long as everyone else in the top bracket pays more as well. But it does hurt him if only he does.

As for whether Buffet is in fact motivated by the collective action problem -- I'm not sure the case is actually all that strong. Buffet himself has so much money that his contribution could dwarf the collective action of a lot of ordinary tax payers. Further, he's not advocating taxing the middle class more, which is what courageous progressives actually do (since that's what Europe and other high government share of GDP countries do) he's only advocating that "the rich" pay more. And the whole issue that is although that well is certainly not dry, it's no longer the biggest well to turn to given the scale of our budgetary problems.

If he's serious about the collective action problem, he should be advocating that his tax rate goes up, but his secretary's does too.

Darwin said...

Actually, I might go a bit further and suggest that most of the time the collective action problem is simply a mask for the more selfish reality that people don't want to voluntarily take a hit disproportionate to the hit other people are taking.

Brandon said...

Actually, Darwin, I think you were right: Joel seems to be using the term in a way that, while not wrong in itself, is very, very narrow in comparison with the way I've seen the term used.

Collective action problems arise when we have situations where the decision matrix is such that (1) each individual has available an alternative that is recognized as self-beneficial; and (2) there is a collective action alternative such that (a) if everyone chooses this alternative, they will all be better off in their own estimation; and (b) it is less beneficial to the individual than the self-beneficial one if they choose it and no one else does. [There are slight variations depending on, for instance, how strictly it needs to be everyone.] There's a collective action problem in the original scenario, in that everyone would be better off if the wealthy, or at least a sufficient portion of the wealthy, would donate; but if the wealthy choose the donation option and not enough others do, they take more of a hit individually than they receive any collective benefit. In effect, you were arguing that Buffett isn't a hypocrite because self-interest is creating a collective action problem.

There are two standard ways in which a collective action problem is solved in every day life, and both involve in some sense shifting self-interest in the collaborative direction: either because a higher value or principle in a more sophisticated decision matrix makes people more willing to take the hit (if that's what it amounts to); or because of an intervention, which may take the form of either incentive (e.g., rewards) or coercion (e.g., taxation) or both. What we are dealing with in this context is not so much with finding a solution to the collective action problem but with why one possible solution (an altruistic and voluntary one) is less preferred than another possible solution (use of taxation powers). (As both Maiki and Foxfier seem to be pointing out.) And you're exactly right that in a collective action problem the difference between the two is self-interest.

Bernard Brandt said...

The reason why Mr. Buffett and his colleagues do not pay excess taxes is that they are able to pay for the accountants and the attorneys who are able to invest their monies to allow them not to have to pay taxes.

If you want to learn law, accounting, and finance, and have excess cash that you wish to so invest, I suppose you could do so yourself.

One favorite method is tax-exempt municipal bonds. The IRS (and the Congress that made it) appear to hold to the social policy that investments in city development are to be so favored that they are exempt from all federal, and most state, taxes. If you invest wisely, you might be able to avoid tax on the dividends that such bonds offer as well.

And there are a number of other similar dodges, as well. What you need to do is to have the acumen to figure out the social policy behind the exemption, and make sure that you adhere to both the letter and the spirit of that policy.

Ignorance is expensive.

Of course, this has little if anything to do with the moral licitness or the quiddity of a rich person saying that he wants to pay more taxes. But I find this a lot more interesting.

Darwin said...


Good point.

Another issue is that, when he talks about how he pays a lower tax rate than his secretary, Buffet is comparing his effective tax rate (around 16%) with her marginal tax rate (25%). Unless his secretary had no kids, owns no house, and makes no donations, her effective tax rate is probably even lower than his. (Mine has always been under 5%)

And one of the reasons his effective rate is so low is that he makes a salary around 400k and capital gains in excess of $25m. Given that the capital gains rate is 15%, the effectively sets his overall tax rate.

Bernard Brandt said...


Thank you. I've been learning all about such tax matters as a (small) part of the research that I am doing for my first novel, a sort-of Cthulhu-Mythos-cum-comedy.

By the bye, if you are still working on learning Russian, may I commend you to the DLI course in Russian. (As something of an explanation, the DLI (or Defense Language Institute) is to the FSI (or the Foreign Service Institute) as regards teaching languages what the U.S. SEALS are to the U.S. Marines: in short, just a trifle more intensive.

You can find free copies of the DLI Russian Courses here:

And, in the event that you might be interested in the twenty or so other languages that the DLI has made courses on, you might also try this:

Bernard Brandt said...

Excuse me: I stand corrected: the thirty or so language courses.

Darwin said...

Progress on Russian has been slow to non existant over the last 10 months or so -- very much through my own fault, but I do mean to get back to it. I'll keep the links handy, thanks!