Last week, I shared a quote from Warren Buffett about how wealthy folks like himself should be taxed more. The article touched a nerve, drawing in more than 200 comments from you Fools, which was completely unexpected. So thank you to everyone who chimed in.
One of the most frequent comments, and the topic of several emails I received, went like this: If Buffett wants to pay more taxes, he's free to make a donation to the Treasury. Problem solved.
Clever. But anyone who thinks this is a logical fix or a rational argument is both underestimating the size of our tax hole and ignoring a theory called "the tragedy of the commons."
First, the size of this mess. In 2009, the federal government collected nearly half a trillion dollars less in tax receipts than it did in 2007. Between now and 2014, the projected budget deficit is a cumulative $4.6 trillion. Buffett donating his entire $50 billion slug of Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) stock to the Internal Revenue Service would not make one iota of a difference. One man -- even one very wealthy man -- won't make a dent in the hole.
Then there's the tragedy of the commons. This theory, first put forth by Garrett Hardin in 1968, is perhaps best explained by game theorist Ken Binmore:
Critics ask how can it possibly be rational for a society to engineer its own ruin. Can't we see that everybody would be better off if everybody were to grab less of the common resource? The error in such reasoning is elementary. A player in the human game of life isn't some abstract entity called "everybody." We are all separate individuals, each with our own aims and purposes. Even when our capacity for love moves us to make sacrifices for others, we each do so in our own way and for our own reasons. If we pretend otherwise, we have no hope of ever getting to grips with the Tragedy of the Commons.
Basically, we sometimes rationally look after our own interests even when doing so ruins society as a whole. This is why, during the oil crisis of 2008, throwing spit wads at ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) was our preferred response over what would have actually solved the problem: putting on a sweater and driving less. I want to solve the energy/global warming crisis as much as anyone else, but I'm going to keep driving, polluting, and draining finite resources because it makes my life convenient and I like the sound of pistons. That's the tragedy of the commons.
Here's another example. As far as I know, no one has voluntarily given up their Social Security or Medicare benefits in the name of fiscal discipline, even though these programs have our country's finances hurtling toward misery. Not that anyone should give them up. Cashing those checks as long as they're sent to you is the rational thing to do individually. Collectively, though, it's debilitating.
With Buffett's taxes, or anyone's taxes for that matter, the tragedy of the commons is relevant in the sense that you'd have to be certifiably irrational to voluntarily pay a higher tax bill than you're charged, even when you can, like Buffett, acknowledge how wacky and in need of repair the system is. Given a choice, the sensible thing to do individually is to pay in as little as possible while extracting as many benefits as possible. That's rational behavior, and actually explains a lot of why our deficits are so huge today. Frankly, I'm thankful we have people like Buffett who acknowledge the misfortune in this and push for the legal changes that the tragedy of the commons tends to prevent us -- even him -- from making individually.
Greece, most of whose tax code could be accurately described as "voluntary," probably wishes it would have come to the same conclusions a few years ago.
I'll go out on a limb and say some of you disagree. Sound off in the comments section below.
