Let’s do the math. Buffett, in his analysis, overstated his office workers’ “federal tax rate” by including irrelevant payroll taxes (7.65 percent) and employer-paid payroll taxes (7.65 percent). In actuality, his office workers’ relevant 2010 “federal tax rate” was 20.7 percent, not 36.0 percent.
Buffett, in his analysis, ignored his share of corporate income taxes paid by the company he owns a third of. By doing so, he understated his “federal tax rate” by 7.56 percentage points. In addition, he ignored his share of Social Security and Medicare taxes paid by Berkshire. In doing so, he understated his “federal tax rate” by an additional 6.16 percentage points. If you’re keeping score, Buffett’s relevant 2010 “federal tax rate” was actually 31.12 percent, not 17.4 percent. Bottom line: Buffett’s 2010 relevant “federal tax rate” was actually at least 10.4 percentage points higher than the average rate paid by his office workers.
Who knew?
It is quite troubling that Buffett’s original Times op-ed piece, based upon such a flawed and very incomplete analysis, has gained such unchallenged visibility and credibility within the landscape of American politics. While Buffett should be chastised for putting out such an inaccurate and misleading analysis, political commentators on the right should be faulted for not doing their research and for not effectively raising a challenge against the flawed thinking underlying Buffett’s op-ed.
(Editor’s Note: This essay originally appeared in Forbes in October, 2013.)
SUMMARY
•Warren Buffett created a new tax metric by combining individual income taxes and payroll taxes into one “federal tax rate”. He then asserted that his 2010 “federal tax rate” of 17.4 percent was 18.6 percentage points lower than the 36.0 percent average “federal tax rate” paid by his office workers
•The 2010 Social Security and Medicare taxing mechanisms in place in 2010 were inherently fair. Ascribing a “federal tax rate” differential to employee-paid payroll taxes, as Buffett did, is analytically incorrect. This 7.65 percentage point “federal tax rate” differential is a mirage
•Incredibly, Buffett included employer-paid (matching) payroll taxes into his calculations as well, thus doubling the 7.65 percentage point differential
•Buffett ignored, in his calculations, roughly $1.6 billion in corporate income taxes borne by him in 2010 as a one-third owner of Berkshire Hathaway. He also ignored his share (roughly $400 million) of Social Security and Medicare matching taxes paid by Berkshire Hathaway
•The analytically correct comparison, excluding individual payroll taxes and including corporate income and payroll taxes, shows that Buffett’s “federal tax rate” was actually over 10 percentage points higher than the average rate of his office workers in 2010
#45
“PROFIT IS EVIDENCE OF SUSPICIOUS BEHAVIOR”
BY LAWRENCE W. REED
A GREAT TRUTH IS ENCAPSULATED IN THIS COMMENT WIDELY ATTRIBUTED TO Samuel Gompers, “The worst crime against working people is a company which fails to operate at a profit.”
Gompers was the founder of the American Federation of Labor. He appreciated something back then that many of today’s progressives don’t: An economy without profit is an economy in deep, deep depression.
Perhaps no progressive ever actually put it in the same terms as the title of this essay, but it’s a fact that progressives routinely frown at the very mention of profit. To them, it’s a dirty word (mainly if other people earn one, but not when they do).
Here’s another related comment:
“The economic situation of enterprises will have to depend directly on profit, and profit cannot fulfill its function until prices are liberated from subsidies. Over the centuries, humankind has found no more effective measure of work than profit. Only profit can measure the quantity and quality of economic activity and permit us to relate production costs to results effectively and unambiguously. . . . Our suspicious attitude toward profit is a historical misunderstanding, the result of the economic illiteracy of people . . . ”
Those words were written by economist Nikolaay Shmelyov in the June 1987 issue of Novy Mir, the leading political and literary journal of the then-Soviet Union, no less. The Soviets, after years of anti-profit propaganda and policies that produced a world-class basket case economy, were showing signs of shedding some of that economic illiteracy by the late 1980s.
The settlers at the Plymouth colony whose legendary feast led to the Thanksgiving holiday tradition nearly wiped themselves out when they set up a communal, socialistic economy. Each person was producing for everybody else and received an equal share of the total production. In the absence of a strong profit motive, the settlers starved until Gov. Bradford altered the arrangement. Thereafter, men and women produced for profit and the result was bountiful harvests with full Thanksgiving tables.
The people who don’t like profit prefer to extol the virtue of selflessness, the charitable motive. A loving, caring concern for others can be a beautiful thing, especially when it’s genuinely from the heart. Of their own free will, Americans have always been the most charitable, giving people on the planet. But the fact remains that profit is responsible for more good things—by a long shot—than all the charity in the world.
As you read this, gaze around the room in which you’re seated. Notice the furniture, the building itself, your computer and smart phone, the clothing you’re wearing. How much of what you see came into being because someone wanted to break even or lose money just to make you comfortable?
Consider this the next time you feast at the Thanksgiving table. The people who raised the turkey didn’t do so because they wanted to help you out. The others who grew the cranberries and the yams didn’t go to the trouble and expense out of some sacrificial or even charitable impulse. If you think those folks and the others who made almost everything else you own performed their tasks as sacrificial rituals, then you probably believe the old McDonald’s slogan when they said in their commercials a while back, “We do it all for you.”
Here’s a simple, layman’s way of viewing profit: Imagine you have a hundred dollars’ worth of raw material. You shake it up, add your ingenuity and labor, and end up with a final product that people in the marketplace will pay $150 for. You’ve added value to society and earned a profit because of it. Now imagine that you take that same hundred dollars’ worth of stuff, shake it up, and produce a final product worth only $50. You’ve certainly made no profit, and have actually subtracted from total value in society. How can that possibly be virtuous? And furthermore, which do you think is easier to accomplish year-after-year—a profit or a loss? I assure you that it takes no special skill or talent to consistently generate a loss. It’s often tough just to break even.
Economists see profit in an even more insightful way. To them, profit is not some amorphous lump of what’s left over after costs are paid. It’s actually composed of several important components. In a typical small business in which the owner is also the manager, what he pays himself out of profit is “managerial remuneration.” It may be small or nonexistent in the early, formative stages of the business but in most cases, it must ultimately be substantial enough to keep him from giving up and finding employment elsewhere. A second component of profit is interest on capital invested. Over the long run, any business must earn enough to pay a competitive return to its investors or they will take their capital someplace else.
If a business generates profit above and beyond what it takes to pay its owners, managers and investors a competitive return, then it has earned a third component that economists call “entrepreneurial profit” (sometimes called “economic profit”). When a particular business comes to market with a new or greatly improved product before anyone else thinks of it, meeting genuine needs and desires in ways that attract eager customers, the resulting “entrepreneurial profits” may at first be sizable. But the bigger they are, the more they attract additional supply (from the original provider as well as from competitors), and those
high profits soon evaporate. In hindsight, it’s apparent that the high profits acted as a signal to producers that declared, “Hey, look over here! People really want this thing, and more of it!”
Sometimes, people turn up their noses at a big firm that earns a bottom-line profit that sounds like a big number. “Walmart made an astonishing $16 billion in profit in 2014! Such greed! That’s way too much!” These are the rants of the prejudiced and uninformed. Yes, Walmart profits in 2014 were about $16 billion. But they were earned on sales of $476 billion, resulting in profits as a percentage of sales of a mere 3.4 percent. The company paid far more in taxes and in wages than it earned in profits. Likewise, energy companies pay many times more in direct and hidden taxes on every gallon of gasoline, yet they are vilified for it while government, which took none of the risk and produced none of the product, rakes in its taxes and earns the praise of progressives for having done so.
In Marxist North Korea, there’s a regime that works night and day to see that nobody makes a profit. There won’t be anything like Thanksgiving dinner in North Korea this year, and that’s no coincidence.
The hostility toward profit, whether motivated by envy or ignorance or demagoguery, is undeserved with this exception: when it’s generated because of a firm’s use of political connections to rig the market or attain subsidies and special favors from politicians at the expense of others. Otherwise, in free markets, it’s more than just healthy—it’s indispensable to the process of enhancing life and progress. It’s what all of us seek when we try to improve our well-being by improving that of others through peaceful commerce.
Profit is not evidence of suspicious behavior, but raising fears and unfounded accusations against it certainly is.
SUMMARY
•Profit earned in free and competitive markets is the target of the misinformed and the uninformed; it’s evidence of value added, not value subtracted
•Profit is a great motivator and incentivizer
•As most economists see it, profit is composed of managerial remunerations, interest on capital invested and “entrepreneurial” or “economic” profits
•By itself, the sheer dollar amount of a firm’s profits tells you nothing about profit as a portion of sales or as a return on capital invested
#46
“ROBOTS AND COMPUTERIZATION CAUSE UNEMPLOYMENT”
BY WENDY R. MCELROY
“REPORT SUGGESTS NEARLY HALF OF U.S. JOBS ARE VULNERABLE TO COMPUTERIZATION,” screams a headline. The cry of “robots are coming to take our jobs!” is ringing across North America. But the concern reveals nothing so much as a fear—and misunderstanding—of the free market.
In the short term, robotics will cause some job dislocation; in the long term, labor patterns will simply shift. The use of robotics to increase productivity while decreasing costs works basically the same way as past technological advances, like the production line, have worked. Those advances improved the quality of life of billions of people and created new forms of employment that were unimaginable at the time.
Given that reality, the cry that should be heard is, “Beware of monopolies controlling technology through restrictive patents or other government-granted privilege.”
Actually, they are here already. Technological advance is an inherent aspect of a free market in which innovators seeks to produce more value at a lower cost. Entrepreneurs want a market edge. Computerization, industrial control systems, and robotics have become an integral part of that quest. Many manual jobs, such as factory-line assembly, have been phased out and replaced by others, such jobs related to technology, the Internet, and games. For a number of reasons, however, robots are poised to become villains of unemployment. Two reasons come to mind:
1.Robots are now highly developed and less expensive. Such traits make them an increasingly popular option. The Banque de Luxembourg News offered a snapshot:
The currently-estimated average unit cost of around $50,000 should certainly decrease further with the arrival of “low-cost” robots on the market. This is particularly the case for “Baxter,” the humanoid robot with evolving artificial intelligence from the U.S. company Rethink Robotics, or “Universal 5” from the Danish company Universal Robots, priced at just $22,000 and $34,000 respectively.
Better, faster, and cheaper are the bases of increased productivity.
2.Robots will be interacting more directly with the general public. The fast-food industry is a good example. People may be accustomed to ATMs, but a robotic kiosk that asks, “Do you want fries with that?” will occasion widespread public comment, albeit temporarily.
Comment from displaced fast-food restaurant workers may not be so transient. NBC News recently described a strike by workers in an estimated 150 cities. The workers’ main demand was a $15 minimum wage, but they also called for better working conditions. The protesters, ironically, are speeding up their own unemployment by making themselves expensive and difficult to manage.
Compared to humans, robots are cheaper to employ—partly for natural reasons and partly because of government intervention.
Among the natural costs are training, safety needs, overtime, and personnel problems such as hiring, firing and on-the-job theft.
Now, according to Singularity Hub, robots can also be more productive in certain roles. They “can make a burger in 10 seconds (360/hr). Fast yes, but also superior quality. Because the restaurant is free to spend its savings on better ingredients, it can make gourmet burgers at fast food prices.”
Government-imposed costs include minimum-wage laws and mandated benefits, as well as discrimination, liability, and other employment lawsuits. The employment advisory Workforce explained, “Defending a case through discovery and a ruling on a motion for summary judgment can cost an employer between $75,000 and $125,000. If an employer loses summary judgment—which, much more often than not, is the case—the employer can expect to spend a total of $175,000 to $250,000 to take a case to a jury verdict at trial.”
At some point, human labor will make sense only to restaurants that wish to preserve the “personal touch” or to fill a niche.
The tech site Motherboard aptly commented, “The coming age of robot workers chiefly reflects a tension that’s been around since the first common lands were enclosed by landowners who declared them private property: that between labour and the owners of capital. The future of labour in the robot age has everything to do with capitalism.”
Ironically, Motherboard points to one critic of capitalism who defended technological advances in production: none other than Karl Marx. He called machines “fixed capital.” The defense occurs in a segment called “The Fragment on Machines” in the unfinished but published manuscript Grundrisse der Kritik der Politischen Ökonomie (Outlines of the Critique of Political Economy).
Marx believed the “variable capital” (workers) dislocated by machines would be freed from the exploitation of their “surplus labor,” the difference between their wages and the selling price of a product, which the capitalist pockets as profit. Machines would benefit “emancipated labour” because capitalists would “employ people upon something not directly and immediately productive, e.g. in the erection of machinery.” The relationship change would revolutionize society and hasten the end of capitalism itself.
Never mind that the idea of “surplus labor” is intellectually bankrupt, technology ended up strengthening capitalism. But Marx was right about one thing: many workers have been emancipated from soul-deadening, repetitive labor. Many who feared technology did so because they viewed society as static. The free market is the opposite. It is a dynamic, quick-response ecosystem of value. Internet pioneer Vint Cerf argues, “Historically, technology has created more jobs than it destroys and there is no reason to think otherwise in this case.”
Forbes pointed out that U.S. unemployment rates have changed little over the past 120 years (1890 to 2014) despite massive advances in workplace technology:
There have been three major spikes
in unemployment, all caused by financiers, not by engineers: the railroad and bank failures of the Panic of 1893, the bank failures of the Great Depression, and finally the Great Recession of our era, also stemming from bank failures. And each time, once the bankers and policymakers got their houses in order, businesses, engineers, and entrepreneurs restored growth and employment.
The drive to make society static is a powerful obstacle to that restored employment. How does society become static? A key word in the answer is “monopoly.” But we should not equivocate on two forms of monopoly.
A monopoly established by aggressive innovation and excellence will dominate only as long as it produces better or less expensive goods than others can. Monopolies created by crony capitalism are entrenched expressions of privilege that serve elite interests. Crony capitalism is the economic arrangement by which business success depends upon having a close relationship with government, including legal privileges.
Restrictive patents are a basic building block of crony capitalism because they grant a business the “right” to exclude competition. Many libertarians deny the legitimacy of any patents. The nineteenth century classical liberal Eugen von Böhm-Bawerk rejected patents. He called them “legally compulsive relationships of patronage which are based on a vendor’s exclusive right of sale”: in short, a government-granted privilege that violated every man’s right to compete freely. Modern critics of patents include the Austrian economist Murray Rothbard and intellectual property attorney Stephan Kinsella.
Pharmaceuticals and technology are particularly patent-hungry. The extent of the hunger can be gauged by how much money companies spend to protect their intellectual property rights. In 2011, Apple and Google reportedly spent more on patent lawsuits and purchases than on research and development. A New York Times article addressed the costs imposed on tech companies by “patent trolls”—people who do not produce or supply services based on patents they own but use them only to collect licensing fees and legal settlements. “Litigation costs in the United States related to patent assertion entities [trolls],” the article claimed, “totaled nearly $30 billion in 2011, more than four times the costs in 2005.” These costs and associated ones, like patent infringement insurance, harm a society’s productivity by creating stasis and preventing competition.
Excuse Me, Professor: Challenging the Myths of Progressivism Page 20