Should the rich pay more tax? Warren Buffett appears to think so. Last week he wrote a piece in The New York Times about how he and his super-rich friends pay far too little tax.
But it turns out that he isn’t the only turkey voting for Christmas. Now the French super-elite are at it too: 16 CEOs have just put out a call to be charged more. The idea that the rich don’t pay enough tax and should pay more has been gaining ground in the last few years – note our own new 50% top rate and the constant chatter in the press about a mansion tax.
But while the views of Buffett and the CEOs are being interpreted by some as a call for higher income tax, that’s not what they are. The CEOs are suggesting they pay a one off “special” tax to help France through tricky times. You could call that generous, or you could call it an effort to head off talk of something worse: a higher wealth tax. Buffett’s gripe is more about the way in which the rich can avoid paying income tax than the level it is levied at. He can take all his income as capital gains or carried interest and so incur a much lower tax rate than the mortals for whom income is income. We have a similar system here. If you’re smart you just arrange matters so that you pay your tax on gains and carried interest, not income.
On this, Buffett is talking sense. It is much better to close loopholes than to introduce new taxes. But as well as worrying about how the rich avoid the taxes that exist already, I suspect we should be doing something more difficult: looking at how to deal with the causes of inequality rather than bickering about how to tax the consequences.
Take the huge amounts of money made by Britain’s bankers. The banks only pay big bonuses because they are able to make the super high profits to pay them. How do they do so in a supposedly hyper-competitive economy? By being oligopolies (see our blog for more). So it seems to me that we’d be better off finding a way to force them to be more competitive (and hence less able to overcharge us and then pay silly bonuses) than focusing on taking the bonuses back later via the tax system.
The same goes for super-rich CEOs. They are overpaid because shareholders let them become overpaid. So instead of bumping up income taxes (and driving away genuine entrepreneurs along the way), why not force big shareholders (mainly fund managers) to take more responsibility and give more power to small shareholders?
Higher income taxes might make us all feel better, but we’d be doing more good if we focused on dealing with some of the regulatory and oligopolistic causes of inequality than on the symptoms. If we must have a go at the rich, how about a new VAT system whereby luxury goods incur a higher rate: so 17.5% on Ford Fiestas and 30% on Ferraris? That should do it.