Warren Buffett has said something along the lines of, “I never heard anyone say, ‘I don’t want to earn $1 M because I’ll just have to give half of it to the government.’”
Does he have a good point here? Why would anyone be deterred from earning $1 million even if they only get to keep half of it?
You’re right. Slaves will tolerate slavery because they need to survive and have unlimited desires. This validates slavery. Let’s have all the blacks arrested again.
Because if you’re giving half of your income to the government, then you have to pull in $2 million to earn $1 million.
It may be news to a person like Warren Buffet, but making $1 million can be hard work. If it is simply a matter of labor (and less a flash of entrepreneurial genius), then the expected benefits may not outweigh the disutility of labor. If in reality your labor only gets you $500,000, the sacrifices required bear a greater weight on your decision. Say, then, that a person making $1000k only receives $500k after taxes, but a person making $500k receives $300k after taxes. If the former requires more than double the effort of the latter, a person may indeed choose to work hard enough for $500k and spare himself the additional work.
When it does come to an entrepreneur, a ‘million dollar idea’ may require taking a great risk. If your million dollar idea is really only a half-million dollar idea, then again, the risk is more pronounced and the expected benefits may no longer outweigh the possible costs.
Regardless, that heavy taxation deters productive work is less worrisome than what it is the state does with the money taxed. What of people who make $1 million satisfying a want of the state (for, say, Hellfire missiles) rather than satisfying a want of the consumers (for, say, medical equipment)?
because of the disutility of labor
First, you should know that Warren Buffett is just another economic ignoramus.
Second, he’s right. Nobody would not want to earn another $1 Million just because he has to give half of it to the government. (almost no one). But he is presenting a false choice.
Out of his sheer ignorance, he neglects a few things. Here are just a few of them:
The added cost of the work itself since labor is a disutility and its benefits must constantly be weighed against the utility of leisure.
The uncertainty component of entrepreneurship which constantly must be weighed against the expected return, which in this case is already half no matter what it will turn out to be.
That taxes divert capital from productive use to non-productive use by diverting capital from productive to non-productive, thus, resulting in capital consumption.
It is a shame that Warren fell so far from his fathers tree…
IMO most people believe that taxes go towards worthy goals. they don’t see the evil caused by them
Mainstream economics is loaded with criticisms of labor taxation (income tax). Taxation of labor services causes deadweight loss - less labor is purchased at the higher, post-tax price than would be purchased in the absence of labor taxation and less labor is sold at the lower, post-tax price than would be sold in the absence of labor taxation. In other words, income taxes reduce employment (and productivity generally). This can cause people to self-produce services that would otherwise be purchased on the market… for example, you might clean your own house rather than pay someone (a maid) to do it for you.
Buffett’s remark regarding $1M income works because the effects of taxation are always marginal. The jobs that are affected are jobs where a small increase in price is just enough to make it no longer worthwhile to hire someone or (from the point of view of laborers) where a small decrease in price is just enough to make taking one’s leisure a more attractive alternative than working. Jobs which fetch million dollar salaries are, naturally, unaffected by small fluctuations in the tax rate. But since there are millions of jobs which are potentially affected by such deadweight loss, Buffett’s argument makes the opposite of the point he wants to make, namely, that it does hurt people a lot to raise taxes since people less valuable than the lowest price which can be paid for labor plus income tax will be unemployed. And those lucky enough to be employed will have fewer jobs to choose from and must accept less desirable terms of employment as labor becomes a buyers’ market. Employers face a similar problem in that those who are dissuaded from working by the marginal decrease in wages force employers to choose from a smaller pool of willing workers who can demand less desirable (from the employer’s PoV) terms of employment, pay higher wages (accept lower profits), self-produce (e.g. housecleaning) or replace the laborious task with an investment in capital equipment.
Warren Buffoon should restrict his remarks to what he actually knows, which is business investing, not economics.
Clayton -
I suspect quite a few people deliberately work fewer hours in order to pay less in taxes. A quick search turned up this: http://abcnews.go.com/Business/Economy/story?id=6975547&page=1
It’s anecdotal, but at least one lawyer and a dentist have decided to work fewer hours rather than pay more taxes.
sweet. 2 people working less means at least 1 person working more (assuming the work has to be done). So… more taxes = more employment?
Haha. no, Im just bein a smart-a**.
Buffet also said he was paying less in income taxes than his secratary (tho I suspect WAY more in capital gains tax). So that goes to show you how awesome and fair our tax code is!
Michael Green and DD5 answered the question. I’m essentially saying the same thing, in slightly different terms.
A venture that makes a $1 million profit will require capital investment, a combination of equipment and working capital.
A return on investment will be required, else the capital investment would never have been made in the first place.
Perhaps a $10 million capital investment is required to generate this $1 million return.
If the tax rate is 50%, it no longer makes sense to invest in this venture at all! I believe that is the point Green and DD5 are making. Media pundits and politicians ignore the simple fact that capital is required in order to generate a profit. Since they think that profit results from worker exploitation, the income tax is justified and necessary. They fail to realize that profit is a signal, a signal that directs capital into the activities being demanded.
Also, these pundits who think the income tax is a good idea ignore the concept of WORKING CAPITAL. Growing businesses experience increases in accounts receivable and inventory. This creates a need FOR ADDITIONAL WORKING CAPITAL. Profit is a source of this additional working capital. A tax on the profit prevents this working capital form accumulating, thus strangling growth.
The business could borrow money, but this only increases leverage and the risk to the capital structure of the business. If anything goes wrong, there is no working capital cushion, and the business is in greater danger of going broke.
Analysts and commentators only look at the evil profit (the result of exploitation, noted above). They look at the “social benefits” that the venture supposedly takes from society (ie, law, defense, schools, traffic lights, clean air, etc.) and the tax on profit is therefore justified as a payment for these benefits. In reality, the venture benefits the consumers it serves, and in that sense it is society that benefits from the venture, not the other way around.
In summary, the tax on profit actually causes ventures: a) TO NEVER GET STARTED and b) STRAINS THE WORKING CAPITAL OF EXISTING VENTURES, restricting growth, employment, and raising the risk to capital structure of the business. This source of funding, which would have remained in the business or distributed to the owners for their own use and investment, is then squandered by government spending.
The income tax. Ugly situation, isn’t it?
