Taxes on the super-rich

Escrito el 13 septiembre 2011 por Gayle Allard en Política fiscal

Rising deficits around the world have riveted public attention on who pays taxes, or more specifically, how much of the tax burden is being borne (or evaded) by the rich. The debate has taken some interesting twists and turns and poses critical questions for the future of developed economies.

Warren Buffett, chief of Berkshire Hathaway.
Warren E. Buffett will get back $3 billion that he invested in General Electric during the financial crisis, plus a $300 million bonus (Mario Anzuoni/Reuters)

In the United States, where the Bush-era tax cuts for the super-rich were extended last year despite widespread public opposition, billionaire Warren Buffet added fuel to the fire recently with an editorial where he proclaimed his willingness to pay higher taxes. Buffet said that a higher tax rate on capital gains or income would not discourage his investment activity and reminded Americans that taxes on the rich were much higher in the 1970s and the economy operated efficiently. He ridiculed the fact that his total Federal tax bill last year was only 17.4% of his gross income, a lower rate than that paid by any of the other 20 people working in the office of his hedge fund (their effective tax rates were 31-44%).

The data bear out Buffet´s claims. Figures from the IRS show that the super-wealthy in the United States pay an average effective tax rate of only 18.1%, compared to 30% in 1995 and 23% in 2001, on the eve of the Bush tax cuts. With so many Republicans having been voted into office on a pledge not to raise any taxes, plans to raise them even on the extremely wealthy to a more equitable level are likely to founder in Congress.

Rich taxpayers elsewhere in the world have now joined the debate. In France, a group of wealthy citizens sent an open letter to their government expressing their willingness to pay temporarily higher taxes –a “special contribution”– to help solve the country´s deficit problem. The French super-rich said that they, too, benefited from the system financed by French citizens and that “When the public finances deficit and the prospects of a worsening state debt threaten the future of France and Europe and when the government is asking everybody for solidarity, it seems necessary for us to contribute.” The signatories included LÓreal heiress Liliane Bettencourt, Christophe de Margerie from Total, Frederic Oudea of Societe Generale, and Jean-Cyril Spinetta of Air France.

It is not only in the United States where the super-rich have found themselves receiving better tax treatment in recent years. A look across the European Union points to a general trend toward lower tax rates for wealthy Europeans as well. According to Eurostat, personal income tax rates (on paper; not effective) for the very wealthy are in the 50-60% range only in Sweden, the Netherlands and Belgium; in most countries the rate is 40-50%. In only three countries (Sweden, Portugal and the UK) has the tax rate for the wealthy risen since 2000. In two other European countries it has remained unchanged, and in the rest it has been reduced. In some countries the per cent reduction has been substantial (in double digits), as in Lithuania, Slovakia, the Czech Republic, Hungary and France. In Spain it has been cut by 3% since 2000. These figures refer only to tax rates on personal income and not to taxation of other sources of income, such as capital gains, where the rate is typically much lower.

With this evidence and the opinions of many of the super-rich in hand, is there any reason to continue to “coddle”, in Warren Buffet´s words, the super-rich with lower taxes? At a time of historically high unemployment in many countries and strains on public services and government budgets, can the rich cling to their privileges when the social fabric around them might be in the process of unraveling? Is there any clear evidence that marginally higher taxes actually do reduce incentives to invest? What is the right way to ask the wealthy to pay their fair share of the deepest economic crisis in living memory?

And probably most importantly, if the wealthy do not shoulder their share of the crisis and the deficit problem, what backlash might await them?


Juan Garza 13 septiembre 2011 - 12:09

No es necesario entender el ingles para darse cuenta de los problemas que hay con el conversor de divisas en la Eurozona.

Brad 13 septiembre 2011 - 20:31

July 15, 2007
Fair Taxes? Depends What You Mean by ‘Fair’

DO the rich pay their fair share in taxes? This is likely to become a defining question during the presidential campaign.

At a recent fund-raiser for Hillary Clinton, the billionaire investor Warren E. Buffett said that rich guys like him weren’t paying enough. Mr. Buffett asserted that his taxes last year equaled only 17.7 percent of his taxable income, compared with about 30 percent for his receptionist.

Mr. Buffett was echoing a refrain that is popular in some circles. Last year, Robert B. Reich, labor secretary during the Clinton administration, wrote on his blog that “middle-income workers are now paying a larger share of their incomes than people at or near the top.”

“We have turned the principle of a graduated, progressive tax on its head,” Mr. Reich added.

These claims are enough to get populist juices flowing. The problem with them is that they don’t hold up under close examination.

The best source for objective data on the distribution of the tax burden is the Congressional Budget Office. The C.B.O. goes beyond anecdotes and bald assertions to provide hard data on who pays taxes. One can argue about the details of its methods, but there is no doubt that it is nonpartisan and that its tax analysts are some of the best in the business.

The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.

At the very top of the income distribution, the C.B.O. reports even higher tax rates. The richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government.

One might wonder how Mr. Buffett gets away with a tax rate of only 17.7 percent, while a typical millionaire is paying so much more. Most likely, part of the answer is that Mr. Buffett’s income is made up largely of dividends and capital gains, which are taxed at only 15 percent. By contrast, many other top earners pay the maximum ordinary income tax rate of 35 percent on their salaries, bonuses and business income.

The distinction is crucial for understanding how much the rich pay. Indeed, the share of top incomes coming from capital is much lower now than it has been historically. According to Emmanuel Saez, an economist at the University of California, Berkeley, for the richest Americans — those in the top 0.01 percent of the distribution — the percentage of income derived from capital fell to 25 percent in 2004 from 70 percent in 1929.

If your image of the typical rich person is someone who collects interest and dividend checks and spends long afternoons relaxing on his yacht, you are decades out of date. The leisure class has been replaced by the working rich.

Another piece of the puzzle is that Mr. Buffett’s tax burden is larger than it first appears, because he is a major shareholder in Berkshire Hathaway.

When the C.B.O. studies the tax burden, it includes all federal taxes, including individual income taxes, payroll taxes and corporate income taxes. In its analysis, payroll taxes are borne by workers, and corporate taxes by the owners of capital. For the richest 1 percent of the population, 9.3 percentage points of their 31.1 percent tax rate comes from the taxes that corporations have paid on their behalf. The corporate tax would undoubtedly loom large if the C.B.O. were to calculate Mr. Buffett’s effective tax rate.

None of these calculations, however, say whether the rich are paying their fair share. Fairness is not an economic concept. If you want to talk fairness, you have to leave the department of economics and head over to philosophy.

The quintessential political philosopher of modern liberalism is John Rawls, the author of the 1971 classic “A Theory of Justice.” Professor Rawls concluded that the primary goal of public policy should be to redistribute resources to help those at the very bottom of the economic ladder. If Professor Rawls were alive today, he would most likely want to raise the top income tax rate of 35 percent in order to finance a more generous safety net. And for much the same reason, he would probably raise taxes on the middle class as well.

Professor Rawls would get a vigorous debate from his Harvard colleague, the libertarian philosopher Robert Nozick. In his 1974 book, “Anarchy, State, and Utopia,” Professor Nozick wrote: “We are not in the position of children who have been given portions of pie by someone who now makes last-minute adjustments to rectify careless cutting. There is no central distribution, no person or group entitled to control all the resources, jointly deciding how they are to be doled out. What each person gets, he gets from others who give to him in exchange for something, or as a gift. In a free society, diverse persons control different resources, and new holdings arise out of the voluntary exchanges and actions of persons.”

To libertarians like Professor Nozick, requiring the rich to pay more just because they are rich is little more than officially sanctioned theft.

There is no easy way to bridge this philosophical divide, but the political process will, inevitably, try to forge a practical compromise among those with wildly divergent views. At the 2000 Republican National Convention, the candidate George W. Bush made clear where he stood: “On principle, no one in America should have to pay more than a third of their income to the federal government.” As judged by the C.B.O. data, he has accomplished his goal.

A question for any political candidate today is whether he or she agrees with the Bush tax ceiling. If not, how high above a third is he or she willing to go?


N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President Bush and is advising Mitt Romney, the former governor of Massachusetts, in the campaign for the Republican presidential nomination.

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