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September 25, 2011 8:36 pm
Barack Obama last week put forward a package of tax increases to pay for a proposed $447bn jobs programme. The most controversial proposal is that no one making more than $1m a year should pay a smaller share of his income in taxes than a middle class family pays. This is popularly called the Buffett Rule, after the billionaire Warren Buffett, who has long complained that he pays a lower tax rate than his secretary, and famously came out in public recently asking to pay more.
Republicans were quick to denounce the proposal as "class warfare", and to argue that low taxes on the wealthy are essential to boost the economy in these difficult times. This echoes the debate in Britain where 20 prominent economists from the left and right sparked a nationwide debate after writing to the Financial Times suggesting that the top 50 per cent rate of tax, introduced in the 2010 tax year, should be lowered to encourage investment and hiring.
But polls show wide public support. A Gallup poll found that two-thirds of Americans favour raising taxes on those making more than $250,000 a year. While I spent many years working for Republican administrations, one of whose core principles was low taxes, I believe Mr Obama is on solid ground asking the rich to pay more.
Mr Buffett said publicly that he had an effective federal income tax rate of 17.4 per cent in 2010. This low rate undoubtedly reflects the fact that the bulk of his income consists of dividends and capital gains, which have been taxed at a maximum rate of 15 per cent since 2003. His secretary, however, probably gets the bulk of her income in the form of wages, which are taxed at a higher income tax rate and also covered by taxes for the giant US entitlement programmes, Social Security and Medicare, the healthcare scheme for the elderly.
Calculations by the Tax Policy Center indicate that about a quarter of those with incomes as low as $30,000 to $40,000 pay a higher combined tax rate than Mr Buffett does. Assuming that his secretary is pretty well paid and falls into the $75,000 to $100,000 group, the median taxpayer in that income range pays about the same as Mr Buffett, with 40 per cent of them paying considerably more "“ between 18.3 per ent and 23.8 per cent of their income to the federal government.
Strikingly, the tax rate on the wealthy has fallen sharply over the past 25 years, according to the Internal Revenue Service. The top 1 per cent of taxpayers "“ those with incomes above $380,354 in 2008 "“ had an effective income tax rate of 33 per cent in 1985 and 29 per cent in the mid-1990s. During George W. Bush's administration, it fell to just 23 per cent.
The Republican party position argues that low tax rates on the wealthy are essential for economic growth. But growth was much more robust in the 1980s and 1990s, when both their average and marginal rates were higher. There is no evidence whatsoever that lower rates on the wealthy stimulated growth in the 2000s. Indeed when the Congressional Research Service examined the economic consequences of allowing all the Bush era tax cuts to expire at the end of 2010, it concluded that the impact was likely to be slight because their effect on growth was virtually non-existent.
Reducing the budget deficit by cutting spending alone, as Republicans insist, means that the burden of adjustment will fall almost entirely on those with low and middle incomes, since those with high incomes do not benefit much from federal programmes. Raising taxes is the only way of ensuring that the cost of deficit reduction is shared among all income groups.
Also, it is unrealistic to think that the deficit can be reduced significantly without higher revenues, which are at a historical low of 15.3 per cent of the gross domestic product, compared with a postwar average of 18.5 per cent. As a matter of practicality, the well-to-do will have to pay more because they have a greater capacity for doing so. And because of various deductions and credits, many enacted by Republicans, close to half of all tax filers pay no federal income taxes.
While it is unrealistic to think that very many rich people are going to follow Mr Buffett and call for higher taxes on themselves, there are a few. On September 19, Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team, wrote on his personal blog that people like himself ought to be paying more.
In France, where the tax burden is far higher than in the US, a group of wealthy people, including Christophe de Margerie and Maurice Lévy, have signed a petition calling on the nation's richest citizens to make an "exceptional contribution" to the public finances. Traditionally that would have been seen in the US as another sign of the ruinous socialist ethos of western Europe. But polls in the US say that Mr Obama is on solid ground, politically.
The September 20 Gallup poll found 2-to-1 support for higher taxes on those making more than $200,000 a year to pay for his proposed jobs bill. This might seem improbable in a country which has always prided itself on its commitment to low taxes and the purer form of free market capitalism. But these are exceptional times "“ and they require exceptional measures.
The writer served in the administrations of Ronald Reagan and George H. W. Bush. His latest book on tax reform, "The Benefit and the Burden', will be published in January
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