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.

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