Buffett’s Moral Foundation Shapes Tax Idea: Roger Lowenstein

Roger Lowenstein is writing a book on the origins of the Federal Reserve System.
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Howard Buffett, a Republican congressman from Nebraska and the future billionaire’s father, once gave back a $2,000 annual pay raise because, he insisted, he had been elected at the lower salary and it would be wrong to take the money. Perhaps that was a forerunner of his famous son, who is publicly advocating higher taxes on the wealthy, including, potentially, on himself.

If so, the political likeness ends there. Howard (elected four times, beginning in 1942), was an arch-conservative opponent of U.S. involvement overseas and of government spending in general. Though tainted by the isolationism of the era, Howard Buffett was a principled and generous man; he was his son’s role model and the person he admired most.

No surprise that Warren started adulthood as a conservative. But his politics evolved. Today, the 81-year-old billionaire will take his politics to a newly partisan level, when he co-hosts a $10,000-a-plate fundraiser for President Barack Obama at the Four Seasons restaurant in New York.

Attention has focused on Buffett’s claim that he, a billionaire, pays a lower proportion of his taxable income -- he specified 17.4 percent -- to the federal government than do the 20 other employees at the Omaha office of Berkshire Hathaway Inc. It has also centered on Obama’s so-called Buffett Rule: the president’s pledge to raise taxes on people making $1 million and more so that nobody in this group would pay a lower rate than people in the middle class.

Political Evolution

The details of how he would accomplish this are unclear, and however it is crafted, an incremental tax on millionaires isn’t likely to raise a lot of money. But lost in the thicket of such considerations is the larger story of Buffett’s political evolution -- which underlines the central problem in America’s economy today. That problem is a lack of jobs, particularly well-paid ones, for all but the very rich. It’s also described as income equality because the gap between very rich and everyone else keeps growing. What does this have to do with the so-called Oracle of Omaha’s politics?

Buffett’s evolution was shaped by two central episodes. First, as a Depression baby, he saw that the larger federal government wrought by the New Deal, including its safety-net provisions, gave rise, in the postwar period, to a more stable and prosperous society -- one in which millions of blue-collar workers achieved a middle-class lifestyle that was previously beyond their dreams.

Based on Merit

Second was Buffett’s deeply held belief in individual merit. You can understand why a nerdy kid who was good at numbers thought people should be judged on performance. This is one reason he became a money manager, a profession in which performance is arithmetically measurable. In the 1960s, he was galvanized by civil rights -- the issue that sealed his break with the Republican Party -- because it was the ultimate test of merit versus birth.

Buffett took the attachment to merit to a new level. He scorned the rich for showering their kids with money, which he thought gave them an unfair edge. Even before he had made a fortune, he agonized over what to do with his own money. He knew he would be rich and he didn’t want to spoil his kids. He favored a steep inheritance tax and lampooned trust-fund babies for being “born in the right womb.”

But Buffett has never been an economic radical. He was early to sound the alarm on Social Security obligations, and he inherited from his father a deep fear that political pressure would lead to runaway inflation. He didn’t want imprudent government to jeopardize the system; capitalism has been good to Buffett, and he knows it.

No Better Off

But Buffett came of age in a society in which millions of Americans were -- like him, though to a lesser extent -- able to rise on merit. The door hasn’t closed, but it has seriously narrowed. After you adjust for inflation, the typical American household is no better off than it was two decades ago. This problem was aggravated by the recent recession, but it is deeper and longer in the making.

Median household income today -- $49,445 -- is roughly the same as it was in 1989 adjusted for inflation. From 1999 to 2007, before the recession began, median household income actually fell. For the first time, it dropped during a period of growth. All of the gains were captured by those at the very top. This story has been going on for three decades.

In 2007, the top 1 percent of wage earners grabbed 19 percent of total income -- twice the share they had in 1979. You can pile such statistics to the sky; what they show, consistently, is that income distribution is skewing toward the very top, and progress for the middle to modestly prosperous bulk of the country has stopped.

Rising Inequality

Income equality isn’t just a partisan or Democratic issue; former Treasury Secretary Henry Paulson cited it as a big concern before the financial crisis. In a sense, it helped to cause the crisis; one way of viewing the mortgage bubble is that middle Americans, unable to raise their incomes, maneuvered (with the help of complicit bankers and asleep-at-the-switch regulators) to compensate by borrowing more on their homes.

Nor is this just a blue-collar issue. Matthew Slaughter, an economist at Tuck School of Business at Dartmouth, has showed that even people with a college degree are losing ground. From 2000 to 2010, only those with advanced professional qualifications, such as an M.B.A. or a doctorate, gained in income; as a group, college graduates, even those with master’s degrees, declined.

Slaughter’s tentative diagnosis is that technology has increased the returns for knowledge, while globalization has reduced incomes for others. This has long been true of factory workers; it is now becoming true for white-collar ones. For instance, rudimentary legal research can now be done by computers staffed overseas, replacing the need for pricey law-firm associates to pore over boxes of legal papers.

New Malthusianism

In a sense, America faces a Malthusian dilemma: not overpopulation within our borders, but competition with a growing population outside. Men face a particular problem; competition with a new population of educated women. The median full-time male worker earns less today, adjusted for inflation, than in 1973.

The way to deal with Malthusian populations (as Sylvia Nasar showed in her recent book, “Grand Pursuit”) is to invest in industry, raising the productivity of workers and, as a result, wages. This is how England managed to avoid the dire prophecies of Karl Marx in the 19th century.

The way to do it now, Slaughter says, “is with a broad set of policies that will encourage companies to put high-wage, high value-added knowledge jobs in the U.S.” It will take time, and there is no silver bullet, but in general, such policies would be set for a long time, and be aimed at improving the quality of education, upgrading infrastructure and simplifying corporate taxes.

Common Ground

Some policies would be favored by conservatives, such as incentives for manufacturing and exports. Others, such as removing the tax break for carried interest for investment partnerships, would gain the support of liberals. Maybe both camps could agree to invest in schools. The solutions will be far more nuanced and longer-lasting that a temporary spate of deficit spending, or a tweaking of interest rates. For instance, is there a way to level the college-application process between favored legacy students and everybody else?

Buffett isn’t wrong that the wealthy are getting off easy, even if most millionaires do pay more than ordinary wage earners. According to an estimate by the Tax Policy Center, people making $1 million will pay an effective federal tax rate this year of 20 percent of cash income. People bringing in $75,000 to $100,000 will pay only slightly less: 18 percent. (Two caveats: the center estimates that millionaires will also pay 9 percent in imputed corporate taxes -- levies paid by companies in which the rich own shares -- but that doesn’t come directly out of pocket. And its calculations include both the employee and the employer portion of the payroll tax.)

Flat Tax Dreams

Those figures -- 20 percent and 18 percent -- are pretty close to the flat tax of conservatives’ dreams. Moreover, they don’t include federal excises on gasoline, or state and local sales taxes, all of which are regressive.

Taxes are important as a source of revenue for doing good things (such as education). They are needed, too, to fund the government safety net and, hopefully, finance federal jobs until the economy recovers. But taxes won’t of themselves fix the problem of bad private-sector jobs or too few jobs. Confiscation isn’t a cure.

Robert Rodriguez, the chief executive officer of Los Angeles-based First Pacific Advisors LLC and one of the very few people who predicted the mortgage bust with specificity, says that, in the past decade, America achieved a kind of false prosperity through individual borrowing, mostly on mortgages and credit cards. Such debt soared to 135 percent of household income, far above its historic norm. It created the illusion of middle-class progress, but it wasn’t sustainable. The goal of policy makers shouldn’t be to return to that illusion, but to foster a society, similar to the one that Buffett remembers, in which there was room and opportunity to progress.

(Roger Lowenstein is the author of “Buffett: The Making of an American Capitalist.” He owns Berkshire Hathaway stock. The opinions expressed are his own.)

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David Shipley at davidshipley@bloomberg.net