Adam Smith on the Buffett Rule

From The Wealth of Nations:

The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

7 comments to Adam Smith on the Buffett Rule

  • Phil, the rich already pay “something more” as we have a higher tax rate for those making more money. Investment income is taxed differently. What should the tax rate be on income for the highest earners? How about investment income?

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  • Thanks Phil for your answer. I will admit that the link you provided was over my head. Can you dumb it down for me? Did you understand it all or did you just like the conclusion of an optimal 60 to 65% tax? I ask the question not to be snarky. It just strikes me as unlikely that a 65% tax rate on income would result in maximal GDP in so far as I suspect people might ratchet down their productivity in favor of free time when 2/3rds of their income is taken from them. Regarding taxing investment income at 65%, I wonder if you have considered the potential impact on risk taking (ie investing) at that rate. On the down side, you risk 100% of your investment but if you succeed in investing in something profitable you lose 2/3rds of the profits. I can tell you I wouldn’t invest in anything other than shoeboxes under such a rate.

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    • Have a look at a piece I wrote a year ago on this question.

      Basically, higher top-marginal rates force investment (which is not taxed) and that helps grow the economy.

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    • Memory Man

      Denis, what you’re saying in essence is that there should be a nationalized “safety net” for people who choose of their own free will to gamble their money in the markets. Apparently the irony of your proposition has eluded you.

      If you earn a million dollars a year in gross pay doing manual labor that I can see and measure, that would be one thing. The problem is that you are laying on the weasel words mighty thick, mixing apples, oranges and stones as if it didn’t matter. But it does matter! Wages earned from producing something tangible are completely different from the schemes that wealthy people concoct to use their money to make more money, only for themselves and at someone else’s expense.

      If you’re worried that you’re not very good at playing the markets, go buy some day trader’s insurance insurance then. At least that might help stimulate the economy.

      BTW, the last time I checked, when people lose their money, they get a tax deduction (even money back) for their net loss, so you’d better fix your creative mathematics there.

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  • Still confused Phil. In your first response you suggest that investment income should be taxed at 60 to 65% and in your second you say that investment is not taxed and that helps grow the economy. True, investment itself is not taxed, but profits on investment are and you want it taxed at 60 to 65%. Imagine someone earns a salary that, after taxes, other expenses and so on, leaves him with $10,000. If he invests it, he could lose everything. If he succeeds and gets a 10% return -not bad by most investment standards, he would gain $1,000, of which he could keep only $350 to $400. Are you suggesting that the tax rate on investment income will spur more investment if it is taxed at 65% than it would if taxed a, say, 20%?

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  • PJ

    Denis,
    Perhaps it would be instructive to reread the quote Phil has posted here, and remember that Adam Smith was not an economist. He was a moral philosopher, fully committed to the Scottish Enlightenment, and Scottish humanists such as Smith were concerned with societal betterment. The Wealth of Nations was not intended as an economic treatise unveiling his own theories on how to structure a political economy, rather It represents his own observations of what was already going on, what was playing out before him, primarily with the Glasgow merchant class. Many of his observations recorded the devastating impact the Glasgow merchants had upon the city, his concerns with the conditions that developed there. And those conditions were pretty stark indeed – the juxtaposition of an obscenely affluent merchant class and everyone else mired in poverty. What Adam illustrates in the above quote is a moral position, not a solely economic one.

    That being said, there is no historical precedent for the economic argument that increasing tax rates on the wealthiest among us discourages investment, nor that lower tax rates encourage investment. Nor can investment be considered synonymous with or positively correlated to job creation. Phil is on the mark in his post from last year that identifies rising GDP with progressive taxation. Progressive taxation is precisely what Adam Smith had argued for in The Wealth of Nations. Phil has outlined that sentiment in bold. Perhaps reread it and consider it from Smith’s perspective – as a moral, societal concern in which individuals ethically play a role.

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