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Warren’s World
It's as whacky as Krugman's.


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Donald L. Luskin

The Krugman Truth Squad doesn’t believe in idle capacity. Since Paul Krugman, America’s most dangerous liberal pundit, didn’t file his regular New York Times column on Tuesday, the Squad will focus its firepower on another left-liberal hypocrite — Warren Buffett.

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That’s right, the beloved Warren Buffett. He’s the second richest man in the world according to Forbes, and he’s America’s self-appointed corporate virtue czar — the Bill Bennett of the executive suite. He’s the one whose folksy annual reports for Berkshire Hathaway Corp. sermonize against the sins of stock options, demonize the coming debacle in derivatives, and preach against the perils of pension accounting. And he’s the one who wrote an op-ed in the Washington Post Tuesday blasting President Bush’s plan to eliminate the unfair double taxation of dividends. And he used arguments based on accounting tricks that would make Arthur Andersen blush.

It’s ironic. In the column he talks about “voodoo economics” and “Enron-style accounting” — but that’s precisely what Buffett has to embrace in order to justify his position that eliminating dividend taxes “would further tilt the tax scales toward the rich.” Tilt? Further? According to the Internal Revenue Service, the top 10 percent of American households, ranked by income, pays 66 percent of all the income taxes. According to the Congressional Budget Office, the relative burden on the highest income-earners has gotten heavier over the last two decades.

Yet Buffett makes the extraordinary claim that he and his receptionist currently both pay the same 30 percent of their very different incomes to the federal government. This is pretty much impossible unless receptionists in Omaha are paid more than the CEOs of the companies they work for. Buffett takes a salary of $100,000 from Berkshire Hathaway (according to the company’s most recent proxy statement) — and assuming that his receptionist makes the same amount, then her average federal tax rate would be something like 16 percent, according to the IRS’s online calculator. Adding the 6.2 percent payroll tax paid by her employer, we get to about 22 percent. Her salary would have to be about $250,000 to get up to the 30 percent Buffett claims. Can I have her job?

Okay, let’s give Buffett a pass on that one, and assume he’s got the highest-paid receptionist in Omaha (or anywhere else). Even if he and she are both paying 30 percent of their income in federal taxes, are they in any sense equal as taxpayers? No — because the dollar amounts of their payments are vastly different. At 30 percent of $250,000, the receptionist is paying $75,000 in taxes. Working backward from figures provided by Buffett in his column, we can guess that his income must be something like $50.3 million. Thirty percent of that is $15.1 million.

Buffett isn’t paying the same as his receptionist — he’s paying 201 times more.

Now let’s see how that would change if taxes on dividends were eliminated. Buffett looked at a scenario in which Berkshire Hathaway declares a $1 billion dividend (it actually pays no dividend currently), to which 31 percent stakeholder Buffett would be entitled to $310 million tax-free. That would raise his total income to $360.3 million, on which Buffett says he’d pay an average tax rate of 3 percent. Buffett wrote, “And our receptionist? She’d still be paying about 30 percent, which means she would be contributing about 10 times the proportion of her income that I would to such government pursuits as fighting terrorism, waging wars, and supporting the elderly.”

But 3 percent of $360.3 million is $10.8 million — still 144 times what the receptionist would pay.

But be that as it may, here’s Buffett’s big accounting trick: What he doesn’t tell you is that, because Berkshire Hathaway pays no dividend now, if it were to pay one tax-free in the future nothing would change! Yes, Buffett’s money would be transferred from his corporate pocket to his personal pocket — but if he wanted to transfer it back, Berkshire Hathaway could issue more stock and he could buy it. Nothing would change except that he’d probably get some capital gains tax savings, potentially in the distant future, because the cash will have been paid out of the company.

Buffett’s average tax rate would not even change in the way he claimed it would. Yes, income from dividends he’s already receiving would become tax-free. But other than that, if he claimed that his new tax rate would be 3 percent, then it must be pretty close to 3 percent now — except that Buffett is choosing to arbitrarily not consider as income his money, already being earned inside Berkshire Hathaway, that is simply not being paid out. It’s still his.

In that sense, Berkshire’s failure to pay that money out to him right now and subject it to today’s dividend tax rates is, at heart, a tax shelter (of which Buffett said in the column: “I’ve never used any”).

And Buffett pulled another big accounting swindle when he recommended what he would do rather than eliminate dividend taxes. “Instead,” he wrote,”give reductions to those who both need and will spend the money gained. . . . Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets.”

The swindle? Buffett pretends the proposed tax cut was the entire $310 million value of the dividend, not just the elimination of the current tax on the dividend. Bush’s plan would never have put $310 million in Buffett’s pocket — all it would have done is save him the tax on $310 million — call it $110 million. Sound familiar? Paul Krugman made Bush’s tax cuts look expensive by “forgetting” to divide by ten. Buffett’s not a Ph.D. economist, so he only “forgot” to divide by 3.

Buffett moralized, “When I was young, President Kennedy asked Americans to ‘pay any price, bear any burden’ for our country.” Yet for all his moralizing, Buffett’s column never dealt with the moral problem at the core of the current double taxation of dividends. Money paid out to shareholders as dividends was the shareholder’s money all along — money that has already been taxed when the corporation paid its corporate income tax. The payment of a dividend is nothing but a transfer of someone’s already-taxed money to himself.

If Buffett wants to make the judgment that the rich should pay more for government services to be enjoyed by all, then let him do so, and let him suggest optimal ways that such taxes should be levied in the future. In the meantime, he should feel free do a little leading by example by personally paying more taxes voluntarily. But even if he’s not quite that sincere, if he has any moral convictions about such things he should at least refrain from the hypocrisy of making his arguments using the kind of accounting tricks he rightly damns others for.

DIVIDE BY TEN, ONCE AGAIN
The controversy over the lies about the Bush tax cuts in Paul Krugman’s April 22 column in the New York Times seemingly will not die. I and the editors of National Review Online continue to be flooded by emails from “Bobby” — the devoted operator of a sycophantic fan-site — begging us to publish his flimsy refutation of our exposé of that now-infamous column (our NRO columns on it are here, here, here, and here). Okay, “Bobby,” the Truth Squad has no fear: here’s the link to the refutation.

But when “Bobby” sees this development, I’m not sure he’ll want you to click on that link.

Ex-officio Krugman Truth Squad member Thomas O. Miller has come up with evidence that definitively proves that Paul Krugman knew all along — by his own admission — that he was lying about the tax cuts. Remember, in the April 22 column, he claimed that the 1.4 million jobs created by President Bush’s $726 billion tax cuts, over ten years, would cost $500,000 per each $40,000 a year job they create. To justify, after the fact, why he didn’t divide the $500,000 by ten — thus making Bush’s tax cuts seem absurdly expensive — Krugman was forced to pretend that he believed all along the jobs created would only last a single year (a case he tried to make over ten increasingly desperate apologias spread over eight postings on his personal site: one, two, three, four, five, six, seven and eight).

Miller discovered a transcript of Krugman’s January 31, 2003, appearance on PBS’s Wall Street Week, in which he was interviewed by Geoff Colvin.

KRUGMAN: …of course, it’s an enormous expense. The administration’s own estimate — we’re now told we don’t know how they get this — is that this thing is going to add half a million jobs in the next year. Now you take that or leave that, but a $674 billion plan for 500,000 jobs, even with fuzzy math that’s more than $1 million per job. Something is wrong here.

COLVIN: Well, but it’s going to go for longer than just this one year, right?

KRUGMAN: Well, yeah, but then the question is, if we’re thinking about the long run, we’ve got to ask ourselves how are we going to pay for this thing?

Back then Krugman was working with a smaller number of jobs that were expected to be created, so the lie was $1 million per job, not $500,000. But it’s the same lie, and Colvin immediately caught Krugman when he suggested that “it’s going to go for longer than just this one year”.

And how did Krugman respond? Did he talk about liquidity traps and IS/LM curves and all the other econobabble he’s spewed in all his apologias? Did he even simply say, “No, Geoff, I can’t explain all the details, but those jobs will vanish after one year”?

No. He admitted that “it’s going to go for longer that just this one year.”

He admitted it before the April 22 column was even written.

Game over. The Truth Squad wins.



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