The real Buffett Rule

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Bill Gates and Warren Buffett are sitting at a diner drinking malted milkshakes. This is not the first line of a joke. In 2010, someone snapped a picture of this scene in Omaha, Nebraska. The image appeared with a Forbes article about a plan the two were hatching. Two of the world’s richest men were discussing an idea that came to be known as the $600 Billion Philanthropy Challenge.

“Gates and Buffett started what can be called the biggest fundraising drive in history,” writes Carol Loomis of the moguls.

They’d welcome donors of any kind. But their direct target is billionaires, whom the two men wish to see greatly raise the amounts they give to charities, of any and all kinds. That wish was not mathematically framed at the time of the New York meeting. But as two other U.S. dinners were held (though not leaked), Buffett and Gates and his wife, Melinda, set the goal: They are driving to get the super-rich, starting with the Forbes list of the 400 wealthiest Americans, to pledge — literally pledge — at least 50% of their net worth to charity during their lifetimes or at death.

The pledge is an ambitious and noble undertaking. It means persuading others to give a lot of their money to good causes. And interestingly, it had come on the heels of Buffett’s 2006 commitment of more than $1 billion a year to the Bill and Melinda Gates Foundation, the world’s largest charity.

Economists have a concept they refer to as “revealed preference.” This is a fancy way of saying you can get a good idea about what people want by observing what they do. People’s actual choices reveal their preferences. It doesn’t always work. People are complicated creatures and can be motivated by multiple, often conflicting desires. You might not want to visit your in-laws, but you want to keep your spouse happy. In this case, you have demonstrated a preference, not so much for spending time with in-laws, but for maintaining domestic tranquility. Still, most of the time, we can figure out someone’s preferences through her actions. If somebody spends an hour at the movies rather than at the park, we can make an educated guess that she preferred the movies to the park. It could be that a park hijacker told her to “Go to the movies — or else.” But chances are she ranked the movie higher than the park among the available alternatives of things to do that day. Then she acted.

Similarly, if Warren Buffett gave large sums to the Bill and Melinda Gates Foundation rather than giving those same sums to the Thiel Foundation, we can make a pretty good guess that Buffett prefers giving to the Gates Foundation. Again, revealed preference — which is rooted in people’s real choices — can tell us a lot about what people prefer.

Only about a year after Gates and Buffett decided to convince other billionaires to give half of their net worth to charity, Warren Buffett said: “My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.” Specifically, Buffett wants the federal government to tax the rich at a higher rate — even if that means double taxation.

All of this prompts the question: Is Warren Buffett serious about shared sacrifice? It depends on what one means by the term. If shared sacrifice means helping the world become a better place, Buffett is, indeed, serious about both entrepreneurship and sacrifice. As we pointed out above, the Oracle of Omaha is giving boatloads to charity each year. But I’m not so sure he’s serious about billionaires paying more in taxes. Buffett’s is an example of Machiavelli’s cynical twist of an old line from Cicero: Videri Quam Esse — “to seem rather than to be.” How do we know? Revealed preference.

In the very same famous New York Times op-ed, Warren Buffett admits, “Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office.”

After his Times piece came out, a lot of people wanted to know why Buffett didn’t just pay more in taxes. Nothing prevents one from writing a check to the U.S. Treasury for any amount he likes. And yet it appears he did not. If he did, it was not an amount that would have caused the percentage he paid in taxes to equal that percentage paid by any of the other 20 people in his office.

So what can we conclude about people like Warren Buffett? We can, at least, say he’s inconsistent. I suspect others in the tax-me-more coalition are too. He wants to give. But what his actions reveal is that, deep down, Buffett really wants a fine organization like the Gates Foundation to be the steward of his philanthropy. Through his actions toward the $600 billion pledge, Buffett also demonstrates he wants others to be charitable. So far, so good.

Finally, we can reasonably surmise that Buffett’s actions speak louder than his words on the subject of taxes, too. For if he truly believed that the cluster of causes championed (and debts incurred) by the federal government were causes requiring shared sacrifice, he would have tried to convince his friends to give half their net worth to the Internal Revenue Service and not to charity. He did not. And if he thought the federal government was a worthy cause, he would himself have diverted all those billions per annum away from the Bill and Melinda Gates Foundation to the IRS. He did not.

So why didn’t he?

Perhaps because, when it comes to taxes, Warren Buffett prefers to seem rather than to be. Or perhaps the ghosts of grade-school justice are whispering to Buffett: If they don’t have to, you shouldn’t have to either.

Writing an op-ed for The New York Times is a relatively low-cost way to signal rectitude. Similarly, dangling a chad in the voting booth is a relatively low-cost way for any given voter to signal the same thing. Both actions let you get all puffed up on righteous indignation for less than it costs to write a check to the IRS, much less buy a meal for a homeless person.

Buffett could respond that, far from being sanctimonious, he just wants to be sure that rich people share the same tax burden as the middle-class people like those in his office. If that means raising taxes on the rich, then that’s fair. But if proportionality were the issue, he could easily have used his Times column to suggest lowering tax rates for the brackets occupied by those other 20 people in his office. Perhaps they should pay no more than 17.4% — what Buffett ended up paying. That’s still more than the very top earners pay in countries like Hong Kong and Switzerland. (He did not.)

We have gone a long way towards exposing Warren Buffett’s contradictions, but they are really beside a much larger point. Because when it comes to his actions, Buffett has some good things to say. What his actions tell us is that resources do more good in the hands of individuals and organizations other than the government. Philanthropies do a better job of seeing to people’s genuine needs than the federal government. On those two points, it would be hard to disagree.

Max Borders is a 2011-12 Robert Novak Fellow. He is writing a book called Superwealth.

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