Relevant and even prescient commentary on news, politics and the economy.

Regressive Tax Cuts

I found some numbers at ArgMax that are taken from a Brookings report on the distribution of savings from the Senate’s version of the tax cut, and figured I’d make a nice picture (click to enlarge):


The picture somewhat exaggerates the top-heaviness of the benefits because the bins widen as you move right. Still, it’s quite regressive: for example, the $75k-$100k group has roughly double the income that the $40k-$50k group has but their tax savings ($1,597) are 3.6 times larger. This is what happens when you finance dividend tax cuts by shaving cuts for married couples and small businesses.

AB

UPDATE: This is a great example of why you should be suspicious when the administration continually and virtually exclusively talks about the “average benefit”–which is around $1000 for this proposal. In this instance, anybody making less than $75,000 per year doesn’t come close to getting the average benefit.

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Latest Missive from Nigeria

This one contained a small math error (maybe they should join Stephen Moore’s Club for Growth) that presents me with an opportunity to make an extra $3 million:

Regarding the allocation of money you describe, which I quote here:

(1) 18% for you as the account owner
(2) 62% for I and my colleagues
(3) 10% will be set aside to defray all incidental

It appears that 10% of the money is not allocated, can I have it?

This is my first time answering one of these, I’m curious to see what they say.

AB

UPDATE: I’ll give them points for politeness and a prompt reply: the missing 10% goes to charity (click here for the full response–names and numbers deleted to protect the stupid).

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Slow Loading

Mine, and many other BlogSpot blogs seem to be loading slowly, if at all. I find that it’s more reliable to load Angry Bear with the “www” typed in than without, though either way should work. For other BlogSpot blogs, if using the “www” doesn’t work, then trying without seems to help–and vice-versa.

AB

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More from Buffet

I generally trust people a bit more when they are advocating something that will cost them money, because I can infer that they are making an argument about what they think is right. Most strong advocates of the dividend tax cut are wealthy and stand to disproportionately benefit (here’s a nice example using the Bush cabinet). Similarly, it makes sense for the non-wealthy to oppose it because the lost revenue will, either now or in the future, likely come out of their pockets when general tax rates and fees are raised. What’s more interesing is when the wealthy oppose the dividend tax cut (or previously, the estate tax elimination). So it’s imporant when a wealthy person, who is also one of the most successful businessmen in the past 30 years (paralleled only by Gates and Welch), pipes up against the cut. This from CNN:

Through his 31 percent ownership of [Berkshire Hathaway], Buffett said he would receive an additional $310 million in income that would reduce his tax rate from about 30 percent to 3 percent, while his office secretary would still have a tax rate of about 30 percent.

“The 3 percent overall federal tax rate I would pay — if a Berkshire dividend were to be tax free — seems a bit light,” Buffett wrote.

Instead of the Senate’s tax cut plan, Buffett proposed that it provide tax reductions to those who need and will spend the money in the form of a Social Security tax “holiday” or a tax rebate to lower-income people.

AB

P.S. NEW AB contest: who will be the first Righty to say, “if Buffet wants to pay more in taxes, he’s free to give it to the government, just don’t make me do it too”. As wealthy as Buffet is, acting alone, he couldn’t make more than a small dent in the budget deficit.

UPDATE: We have a winner: Matt Stoller identifies Grover Norquist on 5/5/03 as saying,

“If the president’s tax relief plan really is unjust, then Mr. Buffett should be ready and willing to sign a Pledge to his shareholders at Berkshire Hathaway and to every American he harangues that he won’t accept that relief once it becomes law”.

Matt S. blogged about this way back on 5/10/03, but if I get more quotes, I’ll add them to the list…Stephen Moore? Grover also made this stupid statement, “Buffett is so fabulously wealthy he doesn’t remember that half of Americans are stockholders and all will benefit from the president’s plan”–actually, it’s not really stupid, but rather intentionally disingenous. Over half of Americans do have stock, but the vast majority of those hold their stock in 401k’s, Roths, and Traditional IRAs, and so get nothing from the dividend tax cut.

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Sid and Hannity

I Just heard about ten minutes of Sidney Blumenthal on Sean Hannity’s radio show, and now I have to give credit where it’s due…to Sean Hannity! First, for booking Blumenthal, and second for, in my judgment, giving Blumenthal plenty of time, not interrupting excessively, admitting when Blumenthal had a point, and overall giving a very fair hearing with mostly even-handed give and take.

That said, I got tired of sitting in my car and went inside, so I didn’t hear it all. But the part I did hear was, dare I say, fair and balanced.

AB

P.S. Read Blumenthal’s book.

UPDATE: Contrast my assessment of Hannity to CNN’s Judy Woodruff interviewing Blumenthal last night (transcript here; analysis here).

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Hey, There are Books and Links to Your Right

First anger. Yes, tomorrow is the long anticipated TCW-day; get the inside story from a Clinton Administration insider, Sidney Blumenthal. The story some call “The Story the Press Doesn’t Want You to Know“.

Then insight. Read The Gifts of Athena, a book on the history of technology and the evolution of the knowledge economy. The author, esteemed Economic Historian Joel Mokyr, traces the origins of and explanations for the dramatic acceleration in the production, diffusion, and implementation of new knowledge over the last 200 years. I just got this today, so I can’t directly attest to the quality. But his previous book, The Lever of Riches, was a great look at innovation and technological progress in Europe. Mokyr is an economist by training and at heart, but he’s a great writer who uses the economic way of thinking (but, in his books, without formal economics) to bring new insights into the history of knowledge and technology.

Then fear. Orwell’s classic 1984 was re-released about two weeks ago, with a new forward (Thomas Pynchon) and afterward (Erich Fromm). If, like me, you haven’t read this since high school, it might be time to for a re-reading. For those inclined to slippery slope paranoia, think PATRIOT Act (and the contemplated PATRIOT II), and then read James Wolcott’s piece in the current issue of Vanity Fair (not online).

AB

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The Economic News Sucks Today

Look for a rate cut if all this stuff keeps happening. Note to Republicans: I mean “look for an interest rate cut”, not another “tax rate cut”. This on top of already bad news on jobs and bankruptcies.

AB

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Bill Gates: Evil Businessman or Philanthropist Extraordinaire?

Mac Diva has an ongoing dialog on this topic with one of her frequent readers, Jim, as well as some other bloggers. First, a little side note about the blogsphere: I believe techies are distinctly more libertarian than the general public and also distinctly more anti-Microsoft (this observation comes, e.g., from years of reading the comments to ZDNet stories about Gates and MS, which is usually referred to therein as “M$”). And blog-readers are disproportionately techie, giving them a libertarian and anti-MS twist. Keep that in mind if you follow this issue.

The story so far is that Jeanne d’arc of Body and Soul referred to a Salon story that had some good things to say about MS and got her inbox filled with anti-Gates emails. The whole issue came up because Gates’ father came out against repeal of the estate tax, along with Soros, Buffet, and a few other super-rich poeple. Buffet recently also came out against the current Bush tax cut.

Mac Diva’s reader, Jim, came up with a four point critique [slightly abridged]:

  • …he was well known for not giving much of anything until the Justice Department got on Microsoft’s case.
  • …he gives rather less proportionate to his wealth than others in his circumstances often do.
  • …he very often gives in such a way that it benefits his business, giving software or money towards computer instruction in school and things like that.
  • Four, and perhaps most important, is also the point I’m not positive on, as I’m not a tax expert. But as I understand it, changes in the tax code over the past decade or so, made to encourage giving, allow one to deduct the full current market value of stock given, while the income from that stock is valued at the purchase price. This bypasses capital gains. Since Gates’ Microsoft stock was originally purchased for approximately $50,000, and is now worth billions, the value of each dollar’s worth of stock is essentially nil. This, and correct me if I’m wrong, would mean that if he donates Microsoft stock worth a million, he lists as income the purchase price of that stock — this would be what, $50? Yet on the deductions side of his return, he takes a deduction of $1 million, which in a high tax bracket is worth $250,000 or more. Sounds to me like a nearly quarter of a million dollar profit for “giving” to charity.

Mac Diva does a good job on the first three points: 1) yes, he did give before DOJ’s started watching MS. It’s true that giving went up as DOJ’s cases progressed, but the first case came up in 1993, when MS was huge, but not yet a titan. So the three were simultaneous: increased federal scrutiny, increasing wealth, and increasing giving. There may be some confusion because the Bill & Melinda Gates Foundation was created in 2000, but it was an amalgamation of pre-existing charities and foundations paid for by Gates. 2) On the relative size of gifts, The Gates Foundation currently has $32 billion in assets, which puts the value of Gates’ contributions in the ballpark of 25-40% of his wealth, depending on MS’s stock price (and I recall something about his children getting $10m each when he dies, and the rest to charity; here’s one link). This is, I believe, far above the typical level of giving for the wealthy (perhaps comparable with Carnegie, Sloan, and the Annenbergs).

On point (3) the reader and Mac Diva are correct that in-kind technology gifts involve benefits to MS and by extension to Gates. But Bill Gates is very savvy and presumably factors in such benefits when deciding how much to give. That is, he might well be indifferent between giving schools $800 million in cash or $1 billion in technology. As long as the schools were going to spend at least $1 billion on technology (Word, Windows, Wintel PCs, networks,…) anyway, and don’t have a strong intrinsic preference for Macs or Linux, then the schools are better off. Now the schools have their entire budget to spend on non-tech stuff. If they took the $800m cash and spent it on $1b worth of non-MS IT then they would have $200m less to spend on all other goods.

On to point (4), the one I was asked to talk about. I’m not sure what Jim means by the phrase “the income from that stock is valued at the purchase price”. The income tax owed on long run (held over 2 years) capital gains is 20%*(sale price – purchase price). When stock is donated, the giver is allowed deduct the market price of the stock at the time of the gift from income. If a stock is never sold, capital gains taxes are not paid. Suppose Gates had $50 thousand in 1985 stock that is now worth $40 billion: if he sold it then he’d owe roughly $8b in taxes (capital gains are taxed at 20%, for now). If he gives the stock directly to a charity, then he pays no taxes. In order to avoid paying those taxes, however, he had to give $40b away to charity, which seems reasonable to me.

The one question this raises in my mind is something I’ll refer to my friends at A Taxing Blog. Capital gains are taxed at 20% while income is taxed at 36% [in Gates’ bracket]. Suppose Gates has equal amounts of income in a year from capital gains and from regular income. If he donates all his regular income to charity and then sells the stock, at the end of the day, the money he doesn’t give away is taxed at 20%. But if he donates the stock to charity and keeps the regular income then the money he keeps after charitable giving is taxed at 36%. Either way, charities get the same amount, and Gates has the same pre-tax income, but in the former case, he pays substantially less in taxes. Is this correct?

Nothing in this post is a statement about MS’s business practices (e.g., see this article); the point I am making is that, whether obtained by hook or by crook, Gates gives away a lot of money. This is true both in absolute and relative terms. And yes, there are tax benefits to Gates from these gifts, but not enough to offset the value of the gifts. Referring back to the question posed in the title, the answer is either “both” if you dislike MS, or “Businessman and Philanthropist Extraordinaire” if you like MS. Either way, the Philanthropist label seems deserved and will be even more so if at his death he gives all but $10m per child to charity.

AB

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