The Buffett Tax Rule

The tax rule named after Warren Buffett, chairman and CEO of Berkshire Hathaway, prescribes that a U.S. person receiving an income equal to or greater than $1 million should pay an average income tax rate of at least 30 percent. This tax rule is being promoted by the Democratic Senatorial Campaign Committee and other redistributionism advocates. They want all Americans to pay a “fair share” of public revenues. After Warren Buffett commented that he pays a lower average tax rate than his secretary, president Barack Obama proposed in 2011 to implement the Buffett Rule in the tax code. This rule was proposed in the Senate as the “Paying a Fair Share Act of 2012" in April, but was blocked by a filibuster that required a passage by 60 votes. The Buffet Rule would reduce the federal deficit by less than one percent, especially since wealthy taxpayers would respond by seeking out tax-free income such as interest on municipal bonds, and other ways to avoid the tax by bringing their taxable income to below $1 million. The alternative minimum tax (AMT) was supposed to tax the wealthy by eliminating tax loopholes, but that has failed, since Buffett and other rich taxpayers still pay a lower tax rate on dividends and capital gains. The Buffett Misrule will be no more successful at “fair share” taxing the rich than is the AMT. The Buffett Rule is an absurd measure that overturns long-established principles of U.S. income taxation. The federal and state income taxes are graduated, so that higher income brackets have a higher tax rate. Thus the tax rate on extra income, the marginal tax rate, rises with higher income, and so the marginal tax rate is higher than the average tax rate (total taxes divided by total income). The Buffett Rule does not affect marginal tax rates, but rather average tax rates. If a person receives $999,999 in income and pays an average tax rate of 20 percent, then if he receives $1 more, he would pay an extra $100,000 in taxes. If he receives $500,000 of income, his tax would be $100,000, and then for $1 million in income, it would be $300,000. thus an extra $500,000 of income would impose an extra $200,000 in tax, for a marginal tax rate of 40 percent. Thus going from $500,000 to $1 million in income would reduce the marginal tax rate from 40 to 30 percent. The Buffet Rule destroys the concept of a progressive tax system that levies higher marginal tax rates on higher income. Also, if the Buffett Rule is applied to all income, then interest on municipal bonds would become taxable at incomes over $1 million, and rich taxpayers would switch to corporate bonds that pay higher interest. This would force cities that are already broke to pay much higher interest on their bonds. The Buffet Misrule does not confront the biggest redistribution of all, the transfer of wealth from the poor and middle class to the rich from real estate. Government spending for public goods and welfare pump up land rents and values, so the rich, who tend to own much of the land value, get their taxes back implicitly in the form of higher land values and rentals. The Buffett Rule would not touch the subsidies to landowners in the form of fictional depreciation deductions, tax-free property sales, and deductions from taxable income from property taxes and mortgage interest. Most redistributionists seek the appearance of fairness rather than the substance. Superficially, fairness seems equivalent to equal shares, so it seems fair for the rich to have an average tax rate higher than that of those with lower income. But those who advocate superficial “fairness” in taxation have never explained why taxing any earned income is fair in the first place. What is truly fair is to respect the self-ownership of a worker and not tax his wage, no matter how high the earned income. What is truly fair is to also equally benefit from natural resources and from values created by communities. That benefit is measured by the amount of land rent that people are willing to pay to occupy an location. A truly fair tax share is the paying back to the people the land rent the title holder receives from the community population, commerce, and public goods, and to have all persons benefit equally from the gifts of nature. It is both fair and efficient to use the rent surplus from the economy for public revenue, and avoid the tax punishment of labor and enterprise. The fact that the ridiculous Buffet Rule is being seriously considered demonstrates the ideological blindness of the superficial redistributionists and their failure to learn a bit of economics and to apply simple analysis to their proposals. The Buffet Rule is more of a reflex like sneezing than a policy choice based on reason. Has America become a nation of non-thinkers?

Taxing Mail Orders and Barter

Where there is a sales tax, in order for it to be effective, it has to be consistent. This is why, for example, in California, the state sales tax applies also to mail orders. If you purchase goods from a company that has no presence in the state, the buyer is legally obligated to pay the sales tax even if the seller does not charge it. This is called a “use tax,” but few people pay it on goods personally imported except for cars.

The state does not bother to enforce the use tax, because the enforcement would be expensive and intrusive. But if the federal government switched from income taxation to a national sales tax, then the tax evasion would be much greater, and the benefit-cost ratio would swing to the national enforcement of taxes on personal purchases from abroad.

With a national sales tax, goods directly purchased from a firm in another state would be taxed, and the federal tax records would be used by the US states to enforce their sales taxes, so the evasion of use taxes by mail order from other states would end. However, there would be a problem with goods directly purchased from foreign sellers.

The US federal government is spending $6.3 trillion dollars in 2012. The gross domestic product is $15.4 trillion. The ratio of federal spending to GDP is about 40 percent. Half of that is for transfer payments, so private spending for goods is 80 percent of GDP, or $12.3 trillion. If all the $6.3 federal spending is from sales taxes, the sales tax rate on the $12.3 trillion spending is 51 percent. Add a national state sales tax average rate of over 9 percent, and the sales tax rate becomes 60 percent.

However, the “Fair [Sales] Tax” movement says that business-to-business purchases would be exempt from the national sales tax, because it is “fair” to tax households, but “unfair” for firms to pay sales taxes. Under the FairTax (HR25), government spending is taxed, but Congress would most likely make spending by government tax exempt, or else governments would shift the provision of public goods to subsidized public utilities..

Since household spending is 70 percent of GDP, business and government spending is 30 percent. Since 70 percent of $15.4 trillion is $10.8 trillion, to pay for the federal spending of $6.3 trillion, the private sales tax rate would have to be 6.3/ 10.8 = .58, or a sales tax rate of 58 percent. Add the state sales tax of 9 percent to get the total sales tax rate of 67 percent. If some states switched from taxing income to higher taxes on sales, the combined rate would be even greater.

With a tax rate of 67 percent on goods, there would be massive tax evasion. People would order goods directly from foreign firms. To prevent tax evasion, the federal government would have to open all packages shipped in from abroad. There would also be colossal amounts of smuggling of goods. To fully enforce the “Fair Tax,” the government would have to randomly send FBI agents into people’s homes. If you did not have a sales receipt, you would be presumed to be a tax cheater, and have to pay the tax plus a big fine. There would also have to be intrusive audits on enterprise to make sure they are not buying goods tax-free for personal use.

It would be political suicide for any establishment political party to advocate a national sales tax. Only minor parties such as the Libertarian Party would be foolish enough to campaign for a national sales tax that would so greatly destroy privacy. Moreover, the combined tax rate of 67 percent would destroy millions of firms that are unable to pass sales taxes on to customers.

But it gets worse. Barter transactions are subject to both income and sales taxes. If you make shoes that sell for $100, but trade them for carrots, you pay the same income tax as you would selling them for cash, and the same sales tax. But many such informal exchanges currently escape both taxes. But with the federal government depending on sales taxes, the federal government would have to prevent barter tax evasion with extreme penalties along with rewards for snitches who inform on others. As with snitching for drug-law enforcement, snitching would be so lucrative that there would be much fraudulent snitching. Only minarcho-capitalist allodial libertarians would favor such a destruction of public trust.

Thus the switch from federal income taxes to a national sales tax would be so ruinous to the economy and to personal liberty that even state socialists are opposed to it. The real reason why the “Fair Tax” movement and its libertarian allies are for a national sales tax is to prevent a discussion of land value taxation. For that goal they have been successful, because the national debate on tax reform only discusses economy-crushing sales versus income taxes, and utterly ignores the free-market economy-enhancing policy of public revenue from land rent.

The Logic of Logic

Logic means inference, consistency, and inevitability. By inference, one proposition implies another. For example, if California is within the United States, then being located in California implies being located in the United States. By consistency, if A = B and B = C, then A = C. By inevitable determinism, the constants of the universe must be what they are, and cannot be otherwise.

The word "logic" derives from the Greek "logos," meaning "reason." In dictionaries "logic" is often defined as "reason," but then "reason" is defined as "logic," which makes that definition circular and meaningless. Dictionaries also say that logic is about validity, but that too is circular. The meaning of logic cannot logically come from the implications of logic.

In the application of logic, there are "truth tables" for various logical functions such as "and" and "inclusive or." For the "and" function, if propositions x and y are each true, then "x and y" are true. All other combinations are false, e.g. if x is true and y is false, then "x and y" is false because for the combination to be true, both have to be true. That is inference.

Another example of inference is the "contrapositive." For example, if California is within the USA, then by the contrapositive, if one is not in the USA, one is not in California.

Reason is the application of logic to observation. The ultimate basis of evidence is observation filtered through logic. Facts are always tempered by interpretation, and logic should be applied to interpretation in order for the observation to be objective. Bias and stereotypes can make observations subjective, since the bias may apply to some but not all occurrences.

Reasoning can be deductive or inductive. Deduction starts with premises, to which logic is applied, and conclusions inferred. Induction begins with observations, and then a generalization is inferred with some probability. The premises for deduction are based on evidence, ultimately from observations to which inductive logic is applied. If one starts with a conclusion and infers a cause, that is "abduction" as a combination of deduction and induction. "Lateral reasoning" seeks to find out if the premises for deduction are complete or adequate.

There are constant numbers in the universe that have a logical foundation. For example, pi equals the circumference of a circle divided by the diameter. This natural number is a logical necessity, inevitable and determinist. One could also say that pi determines the ratio of the circumference divided by the diameter. Another logical number is e, which determines the rates of growth and decay. If a population is continuously growing at a rate of 100 percent, then one year later, it will have increased by e, or 2.71+. The number e is a logical necessity.

Physical constants such as the speed of light, gravitational attraction, and the energy and mass of subatomic particles are what they are by logical inevitability. Scientists do not yet understand the ultimate reality of these particles. In some cases, such as string theory, their existence is inferred by the logic of mathematics, using the principle of consistency, but the problem there is that there are multiple hypotheses, and physicists do not yet have the ultimate logic which would find the "true" string or other ultimate reality.

Ultimately, the physical constants are determined by logic. Although logic is immaterial, it determines the nature of the material world. Physics determines the nature and evolution of the universe, and logic determines the laws of physics.

Logic too determines the laws of biology and the genetic programming of DNA. Animal brains were developed to apply logic to life. Animal hunters understand, by genetic programming, the logic of economizing, of not wasting energy chasing creatures that cannot be caught. So too the human brain is programmed to understand and apply logic.

There is a branch of economics that applies psychology to human action. Behavioral economics finds that much of human action is driven by emotion and the irrationality of being over-confident, being anchored to some previous or recent experience, herd behavior, and seeking short-term pleasure over long-term well-being. Human action is based on reason, yet people are often foolish.

But human action is inherently rational. People rank their ends or goals into those most important to those less important, and at the moment of choice, they economize in reaching the most important ends. Economic rationality is based on consistency and economizing. If preferences are inconsistent and people do not economize, then economics cannot explain that behavior, and we send those people to the department of psychology, perhaps abnormal psychology.

Thus there are people who, sometimes under the influence of drugs, other times due to mis-programmed brains, are not in touch with reality, refuse to accept facts, or mis-apply reason. Perhaps some international negotiations fail due to one or both parties being "crazy." But the logic of inference implies that there is a reason for everything. Every effect has a cause. Therefore there is a logical explanation for craziness or seemingly irrational behavior.

We see the paradox in economics of people wanting to live well, yet being subjected to poverty, unemployment, crime, war, pollution, and waste. There are laws of economics that explain how to optimize, how to maximize well being, but these law are ignored by governments. The logic of human action has two motivations, self-interest and sympathy for others. Social and political evolution has brought us to a mass democracy that inherently exploits ignorance and apathy to reward greed. But people optimize by being too lazy to think for themselves and seek truth.

What is seemingly illogical has logical explanations. But the logic of how to reform the world and move it towards peace and justice is illusive, and perhaps the social logic is that people are genetically anchored to their beliefs and will only be shaken by experience rather than by reason.