Learning and the Buffett Tax

Posted by Jeff Carter
on September 19th, 2011

Learning-is acquiring new or modifying existing knowledge, behaviors, skills, values, or preferences and may involve synthesizing different types of information. The ability to learn is possessed by humans, animals and some machines. Progress over time tends to follow learning curves.
Human learning may occur as part of education, personal development, school or training. It may be goal-oriented and may be aided by motivation. The study of how learning occurs is part of neuropsychology, educational psychology, learning theory, and pedagogy. Learning may occur as a result of habituation or classical conditioning, seen in many animal species, or as a result of more complex activities such as play, seen only in relatively intelligent animals.[1][2] Learning may occur consciously or without conscious awareness. There is evidence for human behavioral learning prenatally, in which habituation has been observed as early as 32 weeks into gestation, indicating that the central nervous system is sufficiently developed and primed for learning and memory to occur very early on in development.

Everyone told me in 2007-08 that Obama was “pragmatic”, “different”, “smart”. I knew better.

His economic programs might have more appropriate adjectives to describe his persona and style of leadership. You might call him, “unimaginative”, “dense”, “fixed”, or “bourgeois”.

The new economic package combined with today’s speech on what’s being called the Buffett tax is just more evidence of how backward Obama really is.

The economic package he announced last week is simply more stimulus. It does nothing for anyone, except state and local governments allowing them to shore up short term budgets. The multiplier effect of government spending is 0. It will have no effect, and the targeted tax cuts he offers with regard to hiring will have no long lasting, or even short term effect on employment. In February of 2009, we tried stimulus. It didn’t work. We have tried payroll tax cuts. They haven’t worked. As many have said, “My dog has created more shovel ready projects than Obama”. Instead of pivoting and trying something different, we get more of the same.

Now he brings the Buffett Tax to try and pay off the deficit. Just a point, if we capriciously seized all the assets of all the millionaires, and billionaires in the US we wouldn’t even begin to pay off the deficit. This is just a different attempt at higher taxation. Throughout the campaign, he said he would only raise taxes on people that made $250,000 a year or more. That flew over like a lead balloon when the public woke up and realized that $250,000 isn’t a lot of money in certain areas of the country. Now he has just changed the benchmark. $1,000,000. Nice round number and a smaller group to isolate.

Many liberals have made this argument: A millionaire won’t quit working if there is an extra 5% tax on income. I think they are wrong.

The majority of people that make over a million a year are not guaranteed to make that amount in perpetuity. Income mobility is very real in the US. A fair amount of top corporate management jobs do make over $1,000,000. They are not the bulk of high earners. In fairness to the top corporate fat cats that haul in the cash, they hold in their hands the ability to make or lose billions for shareholders. That responsibility should go with it a high level of pay.

Let’s look at the others. Independent people like myself, fund managers, small business and medium size business owners, professional people (like consultants, lawyers, and doctors) and entrepreneurs. That is really who this tax is targeting. Our income is extremely variable.

People in that second category don’t make a million dollars every year. Some years you do, some years you don’t. They also assume a high degree of risk to make their money. Trading my own money, I have had extremely variable income over the last 25 years. The volatility of income is off the charts. Just like other entrepreneurs, there is no contract on January 1 that says you are going to make a dime. As a matter of fact, usually you have a stream of fixed and variable costs that you have to overcome before you net your first dime of income. Then there are taxes!

Entrepreneurs assume a lot of risk for their money. Raising the tax increases the marginal cost for the next dollar. It changes the risk parameters by quite a bit.

Ask yourself, if you were a trader and up $999,999 for the year, would you take the risk to put on a position to try and make or lose another $100,000-knowing that instead of giving away 40% to the government, you would now be giving away 45%? Doing back of the envelope calculations, your net income could look like this.

Don’t do any more trades for the year: 999*.61=609 (my net income)

Do the trade gives me two possibilities. 100*.55=55K; 55+609=664

or 999-100=899*.61=548

Where is the trader better off?

I am risking a loss in net income of 61k to make an income of 55K (-6K). Do you do the trade? Is your life any better or worse with the extra money should you be successful? Is there a faster jet, a better first class seat, a better boat, a better hotel room, a better restaurant that you couldn’t already afford?

Entrepreneurs will make similar calculations with investment in their businesses. In most cases, they won’t invest, or won’t work. In the case of independent litigators, they might not take on new cases. Doctors may close their doors to new patients. Independent Venture capitalists might not make investments. No investment means no expansion. No expansion means no jobs.

So, yeah, people will work less. They will take less risk. Is this a good policy when the economy is in a Depression?

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.