Fallacies and errors

In recent years, a collection of millionaires has made appeals to the state to increase tax rates on high earners. Among these ostensible champions of the greater good, no voice has been louder, perhaps, than that of celebrated financial guru and Washington insider Warren Buffett.

In his most recent contribution, Buffet argues—largely from a position of anecdotal evidence—that an increase in top tax rates for the wealthy will not disincentivize investment. Although it is difficult to see how such a policy could possibly promote investment, both Buffett and fellow New York Times contributor Paul Krugman have pointed to the boom years following World War II—during which top rates reached as high as 90 percent—as evidence that high taxes can promote economic growth. “America in the 1950s made the rich pay their fair share,” Krugman argues. “It gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.”

The problems with this reading of history are numerous, and there is nowhere near space enough to list them here. It should suffice to point out, however, that even if such a representation were entirely accurate, Buffett and Krugman would still be guilty of basing their arguments on “post hoc ergo propter hoc”—or, “after this, therefore because of this”—logic. To put it more simply, the two make the somewhat basic mistake of assuming that correlation implies causation. If the two of them really would enlist the help of the state to forcibly confiscate the wealth of others, then it must certainly be on them to demonstrate the mechanism behind the relationship between high taxes and economic growth that they are suggesting. For them to merely assert that it is so is, unfortunately, not enough.

On top of these shaky foundations of misinterpreted historical evidence, the arguments of tax enthusiasts such as Buffett often fail to convince due to their selective presentations of numbers and statistics. In his most recent plea, for example, Buffett cites the average income of the super-rich as $202 million before revealing that, in 2009, many of them paid tax rates below 20 percent. Of course, he neglects to mention that, in nominal terms, this 20 percent rate works out to roughly $40 million for each of those individuals. More disturbingly, Buffett complains that, last year, the government brought in only 15.5 percent of GDP in tax revenue, and implies that this is somehow the result of a lenient tax policy on the part of the federal government. A quick look at data from both the Congressional Budget Office and the Office of Management and Budget, however, indicate that this anomalous total comes on the heels of a plunge that occurred, predictably, at the beginning of the recent recession. In fact, not only does the data show that last year’s 15.5 percent total marked an increase over the 2010 total of 15.1 percent, it also demonstrates that tax receipts have held relatively stable at an average of 18.1 percent of GDP going all the way back to 1945. This means that, despite the wild swings in top marginal tax rates we have seen over the past half-century, the government has collected roughly the same amount in revenues—calculated as a percentage of GDP—every year since World War II.

To return to an earlier point, this presents a problem for those who promote the idea that high tax rates were the primary driver of growth in the postwar years. Krugman cites the 1950s as some paragon of both prosperity and progressive ideals, and yet tax receipts as a percentage of GDP were the lowest they have ever been since World War II, at 14.4 percent, in 1950. For almost the entire decade, they remained below average, and never even made it as high as 20 percent of GDP. It remains to be explained, then, how the 90 percent tax rates that led to such historically unremarkable revenues could have been chiefly responsible for the widespread prosperity of that era.

To move—admittedly prematurely—beyond the loose facts of these arguments, it’s important to note as well that commentators like Buffett and Krugman do a poor job of articulating the best arguments against their position, and thus lapse into the sorts of straw man fallacies that are usually emblematic of minds of lesser esteem. The two, for instance, consistently ridicule the notion that the wealthy would pass up investment opportunities on account of higher taxes. A collection of serious free market economists, however, is less concerned with a lack of investment than the fundamental restructuring of investment that such a policy of higher taxation might create. Any intervention into the voluntary market—and especially a forcible binary intervention in the form of property confiscation—serves in the final analysis to redirect resources along paths they otherwise would not have followed. In the case of increased taxation, this often has the effect of diverting capital that would have gone to uses valued highly by consumers instead toward those—such as inherently unworkable green energy boondoggles—that offer no return and, as a result, make the population poorer overall. It remains to be seen how Buffett, Krugman and co. would move beyond their underinvestment caricatures toward a successful refutation of this more serious malinvestment problem.

At the risk of lapsing into my own ad hominem argument, I would like to point out a curious fact that holds true for many of the wealthy advocates of increased taxation: These men and women, like Elizabeth Warren—who, despite a net worth of $14.5 million and a career established on the principles of the progressive movement, has failed to pay the meager voluntary taxes offered in her home state of Massachusetts—almost always fail to freely contribute more to the state than it demands in taxes from them. And Warren Buffett, for instance, allows his readers to believe that when he advocates the abolition of carried interest, he is arguing against his own self-interest for the greater good—despite the fact that it is his competitors in private equity, and not he, who primarily rely on such an arrangement to capture profits.

In “A History of Money and Banking in the United States,” American economist Murray Rothbard warned that we must always respond to arguments for changes in policy by asking, “Cui bono,” or, “Who benefits?” Those who consume and recycle the views of men like Buffett and Krugman would do well to take that advice.