Although this may seem like an obvious statement, I think it requires repeating. Buffett was on Charlie Rose on Monday night to speak about an article he wrote in the New York Times. Typically, I address economic fallacies in the popular press. However, for a change, I want to highlight the accurate statements made by Mr. Buffett. Two points I would like to address are:
1. Changes in tax rates do not empirically change the amount of labor significantly.
2. Subsidizing home purchases with tax credits delays the recovery.
First, Mr. Buffett said that "I have yet to hear one person say to me that no matter what the tax rate, I am not interested in an investment idea." The argument that Mr. Rose posed was that increasing tax rates might reduce the incentive for people to work. Mr. Buffett demonstrated that in all of his years investing, with tax rates from 39% to 15%, he has never seen people fail to invest because taxes were too high. A number of empirical studies prove Mr. Buffett's point, one from the CBO can be found here. The economics behind changes in tax rates are as follows:
-Increasing tax rates has a substitution effect in which people work less since it is cheaper to take more leisure.
-Also, there is an income effect in which people work more in order to stay as well off as they were before.
First, the increase in tax rates will shift the labor supply curve to the left due to the substitution effect and will shift the labor supply curve back to the right due to the income effect. Empirically, these changes almost balance out, inducing a limited change in hours worked. You can make the argument that the government is inefficient so they shouldn't take in more taxes, but empirically there is about a 1% change in hours worked for a 10% increase in tax rates. Mr. Buffett understands the argument perfectly.
Secondly, Mr. Buffett mentioned that he disagreed with the homebuyer $8,000 tax credit since it delayed the start of the recovery. Most of the jobs lost in the US were related to the construction sector. Growth in the US will resume when new homes are purchased. However, subsidizing home purchases creates an inefficiency and false demand - a deadweight loss - which prevents the true market demand from surfacing. Economically speaking, this subsidy shifts the demand curve to the right, increasing prices and increasing quantities sold. Eventually when the subsidy ends, prices and quantities will have to readjust back to their true levels - reducing demand and slowing recovery. Enabling the true market prices and quantities to surface will allow the recovery to begin to take place. Mr. Buffett simply understands what needs to be done and a lot more people should listen to his sound judgement.
1. Changes in tax rates do not empirically change the amount of labor significantly.
2. Subsidizing home purchases with tax credits delays the recovery.
First, Mr. Buffett said that "I have yet to hear one person say to me that no matter what the tax rate, I am not interested in an investment idea." The argument that Mr. Rose posed was that increasing tax rates might reduce the incentive for people to work. Mr. Buffett demonstrated that in all of his years investing, with tax rates from 39% to 15%, he has never seen people fail to invest because taxes were too high. A number of empirical studies prove Mr. Buffett's point, one from the CBO can be found here. The economics behind changes in tax rates are as follows:
-Increasing tax rates has a substitution effect in which people work less since it is cheaper to take more leisure.
-Also, there is an income effect in which people work more in order to stay as well off as they were before.
First, the increase in tax rates will shift the labor supply curve to the left due to the substitution effect and will shift the labor supply curve back to the right due to the income effect. Empirically, these changes almost balance out, inducing a limited change in hours worked. You can make the argument that the government is inefficient so they shouldn't take in more taxes, but empirically there is about a 1% change in hours worked for a 10% increase in tax rates. Mr. Buffett understands the argument perfectly.
Secondly, Mr. Buffett mentioned that he disagreed with the homebuyer $8,000 tax credit since it delayed the start of the recovery. Most of the jobs lost in the US were related to the construction sector. Growth in the US will resume when new homes are purchased. However, subsidizing home purchases creates an inefficiency and false demand - a deadweight loss - which prevents the true market demand from surfacing. Economically speaking, this subsidy shifts the demand curve to the right, increasing prices and increasing quantities sold. Eventually when the subsidy ends, prices and quantities will have to readjust back to their true levels - reducing demand and slowing recovery. Enabling the true market prices and quantities to surface will allow the recovery to begin to take place. Mr. Buffett simply understands what needs to be done and a lot more people should listen to his sound judgement.
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