The answer is actually in the same article that I quote. Buffett makes much of his money from investments, and in this country investment income is taxed at a lower rate. Why? As an incentive for people to make investments. It's to get money out of the hands of the rich and into the hands of businesses where it can be put to utilitarian use, and make a profit. Only some of that profit returns to investors like Buffett, in the form of loan interest and dividends, and some of the return from the use of that money is kept by the business as their own profit and some is paid out as operating expenses, salaries, etc. In other words, that investment drives an economy that pays salaries. It doesn't just return to Warren Buffett and others like him, but is paid out at every level, from the janitor up. Even when that money isn't used directly to pay such expenses it is used to purchase equipment, etc. which in turn generates the revenue used to pay salaries.
Now, Warren Buffett himself knows all that. He's not really asking how it can be "right" (correct)... he's asking how it can be "Right" (fair). I'm going to be a little guarded in my response here because Buffett is a philanthropist; nevertheless, in just asking the question he's not being entirely honest. There are two areas here where Buffett is complaining about his own behavior... not that of "the system", but his own. First, there is the amount of the profit that's being made: the return on his investments. He's the one who makes his investments. He's not forced into making any particular investment over another. He could, for instance, choose to put it all into loans and accept a lower return, on the theory that more of that profit should stay with the people who earned it. It's 100% entirely within his power to do so. So there's that.
But he's talking about his taxes, not his profit. Some people (and this is where I have a problem with a number of the Occupy Wall Street crowd who've misquoted him severely) take this to mean that he paid less than his employees, like his maid. Unless his maid paid more than $48.1 million in taxes in 2006, that's completely wrong. No, he's complaining not about the amount of his income, but the percentage rate at which it's taxed. And it's not all of his income, but the aggregate amount. For some income he's taxed at a higher rate than for investment income, and he makes a lot of investments. His employees... not so much. But there's a fix for that, too -- if that really bothered him... and I mean if it really bothered him -- then he can simply write a bigger check on April 15th. Nobody would stop him. My taxes aren't Warren Buffett's, but I do them myself, and I know for a fact, as someone who generally overpays[*], that you can write that check for any amount you bloody well feel like, so long as it meets or exceeds the amount you're required to pay. And if he's not writing that check, it just doesn't bother him that badly.
[*] the reason I overpay is simple... I've been audited before. It's a lot of work, and it's not fun. But it's bearable when the government goes to all the trouble of making you dig out years of back tax returns only to have to cut you a check. The next time I get audited I will get paid for the effort I have to put into it, just like I did the last time. And if I never get audited again then the government is free to just use the money that I gave to them, even though I'll never so much as get thanked for it.I say that bit about "doesn't bother him that badly" with tongue in cheek. While it is factually true that he has control over the top percentage that he chooses to pay, and he chooses not to pay the amount he states would be fair, he does use that money for the public good in other ways. Like most of the filthy rich, he is a philanthropist. It is folks like Warren Buffett who fuel such charitable organizations as the Bill and Melinda Gates Foundation, the Buffett Foundation, even community arts like our theater group here in Union, SC.
The point here is that this money does get distributed back out in the form of charities. There's nothing wrong with that. Now, you might argue that there's nothing that makes the rich be philanthopists... that they can choose to just keep the money. You're right, they could; after all, it's their money. But they rarely ever do. This isn't ideological... if you look at the top philanthropists in the US for 2010 you'll find it populated by Republicans and Democrats alike. (In case you're wondering, Buffett didn't make the top 50, and neither did any of the Waltons. Larry Ellison did: go Iron Man!).
Buffett has announced that most of his money will be distributed that way when he dies, though you'll notice he's hanging on to a lot of it right now. I don't waste concern on that. Bill Gates heads a huge foundation now, but he did pretty much squat, getting and hanging onto that title of "World's Richest Man". Been there, done that, and now he's putting the money to use. It's pointless to whine and cry about how many more millions somebody else has than you when in point of fact you're better off than you were 20 years ago (or than you would have been 20 years ago if you'd been alive).
Twenty years ago, in 1991, if you had a pager on your person you were assumed to be a doctor or lawyer. (Having sold pagers at the time, I report that the next group to get them en masse were pushers and pimps). You wouldn't settle for a pager today, everybody has cell phones. Digital cable TV, once a luxury, is so ubiquitous that I actually had an exchange with somebody on Twitter in which he didn't believe that broadcast television even existed anymore! For the record, it does, and I use it. The worst car you can buy today is better than what you could get then. The worst computer you can buy would have been financially unattainable. In whole, the average low-income person today wouldn't settle for the luxuries of 1991.
The addage "the rich get richer while the poor get poorer" is only true if you ignore the fact that the poor get richer, too. And the "income gap" is a problem only if you so busy looking into somebody else's business that you failed to notice that you got richer, too. This is what Republicans mean when they talk about "the politics of envy" and "class warfare". Even though I had a kick-ass job in 1999 before the tech bubble burst, making more in raw dollars than I do today, I'm not so blind as to ignore the fact that, even with fewer dollars today and two years of being unemployed after the bubble burst, my standard of living has increased, and I'm better off in every regard than I was in 1991.
Actually, that's an interesting point. Someone actually brought up "trickle-down economics" into a conversation a few days ago, stating that it's a failure... that it doesn't work. The problem with this assertion is that it did and does work. Again, unlike the stagnation that persisted for the vast majority of all of history, you would simply not put up with the standard of living that was luxurious only 20 years ago. What someone really means when they say that is that it hasn't made rich people poor.
Nope, it's hasn't. Neither has it made the poor as rich as the richest of the rich, but that target keeps moving. It has, though, made the poor rich by earlier standards.
Now I would be very surprised if you disagree with me thus far and are still reading. What I am NOT suggesting here is that the Occupy Wall Street people do not have valid grievances. I am NOT suggesting that lower income people could not be still better off than they are today. I am NOT suggesting that there are not improvements to be made. What I am saying is that you have gotten a totally lop-sided view from those who have framed the debate from the liberal point of view, and this can push you to the wrong "solutions". The politics of envy is a weapon. It's a political weapon intended to make you focus on anything other than what matters, and that is your personal situation and those things that you can do to control it. You're shown all these "fat cats" that "pull the strings" and you're made to feel as though poverty is something that is thrust upon you rather than a situation you can do something about.
The politics of envy do not stop at class, but are generational as well. Even if you're one of the middle class, or even the rich; if you are just starting out in life, you are made to feel as though need or deserve everything that your parents have, though you're just marching out of the gate and they've been at this "life" thing for a very long time, building slowly up to what they have. This envy is part of our economic problem, and it's something that you totally have the power to control. Envy is what gets you into a credit crisis; it is what causes you to buy more than you can afford. People are encouraged to do these things, and here's the dirty secret... it's not by "greedy bankers".
I am privileged to have worked at a mortgage insurance subsidiary of AIG in the late '90s and early 2000s... I modified their lender evaluation system. I designed their business rules engine. I say "privileged" in the sense that this has put me in a position to understand a little of the housing market, and specifically, the issues that led up to the crisis involving AIG and other lenders. Though I'm far from an expert, I can tell you this with absolute certainty:
LENDERS DO NOT WANT YOUR HOUSE (OR CAR, OR WHATEVER).
LENDERS DO NOT WANT YOU TO DEFAULT.
LENDERS WILL NOT PUSH YOU INTO LOANS YOU CAN'T AFFORD
LENDERS HATE RISK.
THEY'D RATHER NOT LOAN YOU THE MONEY AT ALL.I'll repeat that last: THEY'D RATHER NOT LOAN YOU THE MONEY AT ALL. Here's why. If they make a risky loan to you and you don't repay them in full, they're out the money, and they're out the profit they'd have gotten from somebody who wasn't a risk. If they take your house from you, then yeah, they can put it back on the market, but they're in the loan business, not in the housing business. They're only interested in recouping their losses, they have no interest in properly maintaining and preparing houses for sale, so they get pennies on every dollar of that house's value, and that's why foreclosure sales are stupendously great deals for the buyers. I don't care how greedy you think they are, they make more money by not lending to bad risks. That's the whole idea behind a credit rating, for cryin' out loud... to prevent you from taking out risky loans... or more properly, to keep them from making risky loans.
Nevertheless, they were forced to do it. Was it driven by Wall Street? Not on your life. Was it out of greed? Well, not exactly... unless you count Congressmen wanting to bring home some bacon for the purpose of re-election, "greed", and using the politics of envy to sell the idea. This 2008 Op-Ed on Boston.com by Jeff Jacoby explains it clearly and it's 100% on-target. What it doesn't mention, though, is that the risk that was forced on companies by the government was the incentive for them to come up with programs like "credit default swaps", which is a way of spreading the risk (remember, lenders hate risk), as you would with insurance, but with less regulation. In the mortgage insurance business, risk was managed by bundling risky loans with less risky ones and re-insuring them.
That's right, the insurance companies bought insurance, and they did it through "captive reinsurance" companies. They're "captive" because they're owned by the parent insurance companies. It sounds like magic, but it's more like stage magic with smoke and mirrors. The idea is to get the risk off your books so you don't have to keep as much reserves on hand. If you remember my last post, reserves are the money that an insurance company keeps on hand to pay out if they "lose the bet". In this case, it's the money that gets paid out if you default on your loan. The more risk they have on the books, then the more money they have to have in reserve, and the less they can invest elsewhere. Money is valuable if it's in motion; not so valuable if it's just sitting there doing absolutely nothing. Reserves are the investment equivalent of money stuffed in a mattress. It earns nothing, and it helps nobody else either because they can't borrow it to use it. By forcing more risk, the Feds were forcing money out of circulation, and that's not what anybody in the financial industry wants. Again, from my last post, your bank makes a living by keeping your money in circulation, and that's how you earn interest on your account. Otherwise you'd have to pay them to keep it. At the same time that they're not making money on the increased reserves, they're paying out more on more defaulted loans. So they used captive reinsurance as a way to free up that capital. And it sort of works unless a bunch of folks default at once, and then you have something similar to a run on the bank. And that's what happened.
Sadly, when you took a look at all the regulations in total, it was pretty much pre-destined to happen. Publicly traded corporations have an obligation to their stockholders to maximize profits (remember these stockholders include investments for retirement accounts). They can be sued for not doing that. They can also be sued for not taking risks, as Jeff Jacoby explained. And our Congress made it all possible by relaxing standards, removing oversight, and eliminating checks and balances, using the politics of envy to make it seem "fair". Both parties had a huge hand in that.
So when discussing real solutions it's necessary to have a handle on the real causes, and simplistic "greed" isn't even the half of it.
Where the money comes from, why there's an income disparity, and why it won't go away no matter what they do.