Terra Incognita: Disingenuous taxation

The social protesters that took to the streets in Israel this summer often spoke about increasing taxation on the wealthy, particularly the mega-wealthy who control large parts of Israel’s economy. With the economic crisis that has swept the world this has become a common theme in many countries. Either out of self interest, to deflect criticism, or due to sincere belief that they are under-taxed, some wealthy tycoons have come forward in France and the US, demanding to be taxed more. It is worth examining a few cases of the “tax me more” crowd in order to understand why their claims are partly disingenuous.

American billionaire Warren Buffet in particular has gotten a lot of attention for his call for a new tax on the wealthy. It is his latest ploy to keep himself a media darling and add to his fame as the “Oracle of Omaha.” In a New York Times op-ed entitled “Stop Coddling the Super Rich,” he claimed that he and his “mega-rich” friends were left “untouched” by the latest pain being felt by the American taxpayer. He explained that last year “what I paid was only 17.4 percent of my taxable income – and that’s actually a lower percentage than was paid by any of the other 20 people in our office.

Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent” (New York Times, August 14) Buffet went on to detail how those earning salaries on a payroll tended to pay much a much higher percentage of their income in taxes than the super-rich.

He noted that 88 of the top 400 income earners in the US reported no wages at all and thus paid no payroll taxes. The Oracle suggested raising taxes on the 236,000 Americans who earn more than $1 million a year in income.

THE BUFFET analysis of the tax system’s inequality has an allure. It doesn’t make sense that someone who earns a good salary, such as $100,000 a year, pays a higher percentage of their income than someone whose income was $1 million from their investments.

But there Buffet’s claim that he pays less tax is extremely disingenuousness. He pays less tax primarily because he has always structured his income to pay less tax. If he wanted to pay his fair share of taxes, like his employees, he could simply pay himself his income as a salary, and thus contribute upwards of 25% of it in taxes. He has always chosen, like most of the mega-wealthy, to retain his income in investment vehicles, such as his own holding company, Berkshire Hathaway.

John Edwards, the 2004 vice presidential candidate, was another disingenuous tax promoter. He spoke often of the “two Americas... with two sets of books: one for those at the top who get all the breaks, and one for the rest who do all the work.”

He argued that “First, we must write a firm principle into the tax code: the wealth of the wealthiest can never be taxed less than the work of the rest of America. Today, wealthy Americans can shelter unlimited amounts of unearned (investment) income from being taxed at the rate working Americans pay...That’s wrong.” But it turns out Edwards was the king of the tax shelters. In one year he took a salary of only $360,000 from his law practice, but received $26 million in income from special distributions.

Now several wealthy Frenchman have stepped forward to argue for a Buffet tax of their own. Maurice Levy, chairman of the advertising firm Publicis, declared that it is “only fair that the most privileged members of our society take up a heavier share of this national burden... I do not love taxes, but right now this is important and just.”

The billionaire heiress of L’Oreal also chimed in, encouraging the government to tax her more.

It all sounds very nice, but the reality is that it will always be hard for the government to tax the very wealthy. Most wealthy people either inherited their money or they are owners of major businesses. Their wealth is therefore either in a bank account earning interest, or in assets and investments. Enacting a “wealth tax” is difficult. This is always the irony of wealthy people like Mr. Buffet encouraging higher taxes, they want higher taxes and they know that those taxes will never reach them, because the government can’t simply order Mr. Buffet to turn over 10% of his shares in Berkshire Hathaway every year.

The higher taxes debate will always falter on this problem. The government wants to tax people that it can find; going after vague investment accounts, structured partnerships, trusts and overseas numbered accounts is not something tax authorities excel at.

Since, in the case of each mega-wealthy person the way their wealth is structured is unique, it is hard to levy a flat tax on them. However, raising the taxes levied on salaried employees, say people making over NIS 10,000 a month or NIS 80,000 a month, is easy because the taxes are generally collected or withheld at their source, before the wage earner even receives the income. The Warren Buffet Tax and the French wealthy calling on the government to tax them is primarily a ploy to make them look like better people and to encourage the public to continue believing in the empty slogan; “tax the fat cats.”

The writer has a Ph.D from Hebrew University and is a fellow at the Jerusalem Institute for Market Studies