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It’s time for the truth about taxing the rich

Leave pure envy out of the design of your tax code and you are faced with a couple of powerful, intractable principles


 
It’s time for the truth about taxing the rich

Jake Wright/CP

President Barack Obama’s endorsement of the “Buffett rule” for taxation has Republican legislators crying “class warfare” this week. Warren Buffett, the super-rich sage stock-picker of Omaha, Neb., has taken centre stage on the U.S. political scene by pointing out how outrageous it is that he pays a lower effective tax rate than his secretary. “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,” Buffett wrote in the New York Times in August.

“That sounds like a lot of money,” he added. (It certainly does to us.) “But what I paid was only 17.4 per cent of my taxable income—and that’s actually a lower percentage than was paid by any of the other 20 people in our office.” Like most Americans in his elite income category, Buffett pays little more than 15 per cent on what he makes because most of it takes the form of capital gains, which the U.S. taxes at that low rate.

Buffett takes glee in telling the American masses what they want to hear in a time of frighteningly high unemployment that looks increasingly invulnerable to the everyday tools of U.S. fiscal and monetary policy. Rich folks like me, Buffett says explicitly, really are avoiding sacrifice. “My friends and I have been coddled long enough by a billionaire-friendly Congress,” he wrote in the Times. He wants rates on income from all sources increased for individuals with million-dollar incomes, and still more for those raking in $10 million.

From Buffett’s standpoint this may be more like class self-preservation than class war: he takes care to reassure the middle-class reader that the “mega-rich” are “very decent people” who “love America.” Buffett never gets around to saying that his plan to soak the mega-rich will solve any of the U.S.’s fiscal problems. There are just not enough super-rich to be much help against the background of looming crises in Social Security and Medicare.

What a Buffett rule would achieve, according to its originator, is to restore the credibility of Congress as it fights the deficit. “Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems,” he says. “Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness.” In short, the Buffett rule appears to be primarily a matter of public relations; a sweetened tonic taken in advance of painful remedies that the poor and the middle class must swallow.

After all, Buffett is only proposing as a baseline ethical rule that his billionaire “friends” should pay at least as much proportionally as the middle class does. This amounts to a clumsy intervention in the old debate over how to treat various kinds of earned income. “Investment” is in principle the very last thing you want a tax code to build incentives against, but keeping rates competitive on “investment” income means that to gather the same government revenue, you have to take a larger bite out of income from ordinary work.

Buffett is the first to admit he doesn’t “work” much in the everyday sense of the term. His work is investing. And that’s pretty much why his taxes are so low—he takes only a nominal salary, and his Berkshire Hathaway fund doesn’t pay dividends.

Leave pure envy out of the design of your tax code and you are faced with a couple of powerful, intractable principles. One is that the rich are inherently better than the poor at abusing deductions, loopholes, wrinkles and definitions to their advantage. The other is that it is, as a strong general rule, much nicer to live in a place that allows people to get rich . . . assuming that they do it in a competitive marketplace, rather than by leveraging monopolies or government pull, Third World-style. It’s safe to say Buffett’s buddies wouldn’t stand around and let themselves be devoured; the industrialized democracies learned this in the ’60s and ’70s, when the jet-setting “tax exile” materialized in response to high marginal tax rates.

But while there is only so much that can be done to eat the rich, we can certainly nibble them, and for reasons that don’t boil down to mere envy. It’s a condition of liberal democracy that economic power must be curtailed at the point at which it threatens equality before the law and social mobility. Or, to put it another way, the rich must not be allowed to become a permanently closed, parasitic “class.”

It is thus a little bit curious that the Republicans are the ones hysterically invoking class. One expects them to defend the vision of a classless America, one in which the club of the mega-rich is socially harmless, even beneficial, and can be entered on “merit” in the way Warren Buffett did. Buffett’s appeal, which has become the President’s by adoption, may be a little disingenuous; it explicitly provides no real solution to America’s fiscal nightmare. But it is hardly a revolutionary-socialist war cry. If the Republicans treat it as one, it will encourage the natural suspicion that they are more interested in the protection of privilege than the defence of rational tax policy.


 

It’s time for the truth about taxing the rich

  1. Two points:

    1. My understanding of things is that the tax rate for top earners in the US is lower than it is in most, if not all, western democracies and that even if the tax cut that Bush passed was rescinded and the tax rate pushed back to what it was during the Clinton years it would *still* be among the lowest in the world.

    Sure, taxing the rich isn’t going to solve everything; the poor and middle class are going to still have to pay the vast majority of the price for whatever comes in balancing the US budget. But, that doesn’t mean that raising taxes on the rich isn’t appropriate or that it is some how driven by envy.

    2. Saying that this is somehow driven by envy implies that people who like the idea of everyone paying a fair share are driven by impure motives. The implication of this editorial is needlessly insulting to a lot of people who have absolutely no stake in what this purports to be about.

    • Considering that, % wise, the more you make in the US, the more you are taxed, I can’t see how taxing higher income earners even more is anything but class warfare and envy.

      Check out wikipedia and see who pays what:
      http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#Year_2011_income_brackets_and_tax_rates

      I love this ‘fair share’ argument. You make more, so you should pay a higher %. Fair would be the opposite, to be blunt. It should be: “You make more, so you should pay a lower % (which would still work out to be more in $ amount).”

    • They are most certainly driven by impure motives. This becomes quite clear that for two reasons, there is no such thing as a fair share, it is just a term used to justify theft, also rather than trim spending they would rather steal from their neighbours. Is this the type of behaviour that should be promoted?

  2. Intuitively, people believe that all taxes
    should be fair for everyone.

    There is no one in this country that got rich
    all on their own. No one!

    Individuals succeed because we have a society
    that allows for such success. Successful entrepreneurs and businesses
    move their goods to market on roads the rest of us paid for; their workforce
    was educated by a public school system that all society paid for. Health
    care, public safety, the list is endless; all of these public goods and services
    were provided to them by society.

    That some people became very successful and
    wealthy is great.

    But as a result, if you end up being rich,
    isn’t there an underlying the social contract with the rest of society. Isn’t
    there a responsibility to pay a fair and reasonable chunk of that wealth
    forward…… for the next generation? Everyone paying their fair share of
    taxes is the price we pay for living in a civilized society.   Taxes
    are an investment in the physical and social infrastructure of future. Our
    parents and grandparents did it for us; don’t we need to do it for future
    generations?

    • Why not? Because we’ve figured out that we can have more stuff now if we borrow lots of money, and leave the debt for future generations to pay off.

      Which sounds good to me, bring on the lower taxes and higher paying government jobs!!

    • what our parents and grandparents did for us was spend more than they made. Not something I want to do to my kids.

      The wealthy already pay more, % wise, then the poor. How much do you have to get out of them until it looks ‘fair’ to you?

      This is class envy, pure and simple.

      • In reply to “modster99, just here to spout my nonsenseCollapseExpand”
        your definitely true to your moniker!!

        This is NOT about class envy or class warfare
        or any name you wish to call it. This is plain and simple….. about fairness!

         Are
        you saying that rich people should not pay their fair share of taxes? Are you
        saying ….that they should be exempt from their fair share of taxes?

        • I am sorry, until you have a working, succinct, definition of fairness, this is just hot air. What is a fair share? What I do not get is this, a flat tax which demands the same proportion of earnings from people is a fair tax, the more you make the more you pay, it is that simple. To demand more of some and less of others is unfair, to treat people differently based on class or how much work they have done is unfair. You have no way of measuring your unfairness. I despise definitions that create authority, and your definition of fairness allows you the authority to arbitrarily demand more of people. You should be disgusted with yourself

          • Thanks Leon, you said this every well.

            Apparently ‘fair’ is in the eye of the beholder, and in @democracyseeker1:disqus ‘s case, (funny name for someone who wants to ‘fairly’ steal from people), it is fair as long as it gets him more, and others less.

        • This is purely about class warfare and envy.

          The more people make, the greater a % of their income they pay in taxes. What is ‘fair’ about that? As @twitter-189745524:disqus said, a flat tax for everyone would be the most fair (and the ‘rich’ would still pay more).
          You never asnswered the question: How much would ‘the rich’ have to pay in taxes, until it looked ‘fair’ to you?

          Speaking of nonsense, where did you ever get the idea that I don’t think ‘the rich’ shouldn’t pay their share of taxes. We are talking about what is fair. And who gives you the right to demand more of certain people, and call it ‘fair’?

          • Wouldn’t it be better overall, if we worked towards a system of
            tax fairness…… where we remove loopholes, incentives and cheating within the
            tax system?  As you know, there are no
            loopholes for the low to middle class segment of taxpayers.

            A
            flat tax system is designed to protect the incomes of the better off (or the “job creators,” as the rightwing wordsmiths prefer they
            be called)! The case for a progressive tax system, as argued by most
            enlightened economist, remains. The extra income earned by a rich person is
            simply worth less than that of a middle class or poor household. This is why a
            flat tax was, and is now, unfair. People who advocate for a flat tax – really want
            to cut social programs!

            Finally,
            why is it that individuals who have succeeded because we
            have a society that allows for such success, now want to end that opportunity
            for the generations that will come after them?

            As I stated before, everyone paying their
            fair share of taxes is the price we pay for living in a civilized society.

          • Cheating should always be punished.
            Incentives are just that, incentives. Nothing wrong with them.
            There are incentives for low and middle class taxpayers, if they have the money to use them. They also pay less tax, and benefit the most from social programs.

            Flat tax is the most fair. Anything other than that is social engineering, and class warfare, under the guise of ‘fair’.

            I have never heard that people who advocate a flat tax want to cut social programs.

            We have a society that allows for success, because it encourages and rewards risk-takers. Your system would do the opposite. In fact, you would end the opportunity for them.

            I agree that everyone should pay their fair share of taxes. Right now, the more someone makes, the greater a % of their income goes to taxes. That is totally unfair.

            You just have a really warped idea of what is fair. It is because you want to take from those who have more, for your benefit. Class warfare.

            If you want to argue that we should tax the rich more, so that we can give it to the poor, argue that. Don’t hide behind an idea that this is ‘fair’. It isn’t. In your mind it might be ‘just’, but it is not fair by any definition.

  3. Cameron in his speech to Parliament saw the solution to the Debt Crisis as increasing trade or as he put it baking a bigger cake. What he failed to identify is that while it may be possible to bake a bigger cake, he and his friends will rush in and the take the larger portion of that cake. To make matters worse, they will shirk paying the baking, fuel and flour cost leaving those to the people with the crumbs.

    The essence of Buffett’s argument is the recognition that if those costs (taxes) aren’t paid, the cakes wouldn’t be baked and the booty wouldn’t be available to Buffett et al. If you’re used to eating cake, lots of cake, you don’t want that to happen. Thus, giving up a few points on the tax side pays huge dividends on the supply side.

    • Buffett’s argument is full of holes, but I hope that the US follows his advice. Then lots of the rich and talented people will move to Canada. Can’t be anything but good for us, if they want to demonize their wealthy.

      • Modster, I think our capital gains treatment in Canada would have to be a helluva lot better than it is, or capital gains treament in the US would have to be a helluva lot worse than it is, before any rich Americans would be motivated to move up here.  Right now, as I understand it, we have 50% inclusion for capital gains in Canada (i.e., 50% of a given capital gain is taxed at your marginal rate).  In the US, it’s taxed at 15%.  So the US rate would have to increase very significantly before it even matched ours.

        There are other areas where we are quite comepetitive with the US on the tax side (e.g., corporate rates), but individual non-exempt capital gains ain’t one of them.  Not by a long shot.

        • I think that the US has a 15% CGT on the whole capital gain. (They are not taxed on 15% of the gain – they pay 15% tax on the whole gain). We have a tax on only 50% of CG, but we tax at a higher rate. If I am in a 40% tax bracket, and pay tax on 50% of my CG, I am effectively paying 20% on the whole gain. That is only 5% off of what they pay in the states.

          I think Maclean’s had an article a few months ago detailing that a lot of High Net Worth people are comming from the US to Canada. An increase on the CGT would only make it easier to decide.

    • Cameron, to his credit, raised taxes and cut spending to deal with his deficit. 

      Shockingly pragmatic approach no? I wish our Conservatives were as flexible and pragmatic as Cameron’s Tories.  

  4. “the natural suspicion that they are more interested in the protection of privilege than the defense of rational tax policy.” — They probably are — they’re doing what Mr. Mulroney famously called “dancing with the one that brung ya”.  With American political financing rules favoring the people with deep pockets it’s not surprising.

    What is really infuriating is the meek acceptance by media (American and to some extent Canadian) of the definition of the rich as “job creators”.  If they do create jobs it’s a by-product of their search for superior returns on investment wherever that return can be found (and that’s often NOT in North America).

    The next widely accepted myth is that if someone with talent and ambition is taxed they will cease to whatever it is that they do — in fact they will continue because doing something that you’re good at is one of life’s true pleasures.

    • It’s not that they cease to do what they do; they move jurisdictions and “do it” there, thus moving their tax revenue along with themselves (e.g., Rolling Stones, circa 1970-72).

      • If we degrade society in an effort to appease them with low taxes they’ll move to a happier environment.  Check with the Americans who’ve emigrated here to enjoy our way of life —

  5. I’m always amazed at how people such as “the editors” continue to ignore the entirety of Mr. Buffett’s points in favour of one line that they then “disprove”. He made it very clear that the loopholes have to be closed and that serious decisions of spending have to be made in order to correct US government spending.

    But his point is that no honest discussion can begin when the wealthiest people in the nation enjoy a tax boon over the lower classes.

    And suggesting that the wealthy will flee America is another fallacy. As Mr. Buffett pointed out, he’s lived through many tax structures and never has he ,nor the other super-rich people he knows, balked at the idea of paying more in tax.

    For an article based on the idea that it was time for the “truth”, it’s laughable that it contains more lies and distortions as to what Mr. Buffett was saying.

  6. The top 10% of income earners in the US pay about 70% of the federal income taxes collected. 
    The next 40% or so of earners pay the other 30% of what’s collected.
    Leaving very close to half of all American adults paying no federal income tax at all. (2009 stats)
    This is unfair to the poor?
    This is the rich getting away with not paying their fair share?
    I think not.

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