Tax Day (in the US) is almost upon us. And in both the US and the UK there's been a lot of news about millionaires and their taxes—or lack of them.
Here in the UK, Chancellor George Osborne has recently discovered that lo, very rich people don't pay much in taxes! They hire accountants to find tax loopholes, sometimes disguised as charitable deductions, to avoid paying the rates that lesser mortals do. According to the BBC, "The Daily Telegraph reported that a study by HM Revenue and Customs showed the very rich had reduced their average income tax rate to just 10%."
While the Chancellor proposes to do something about that—i.e. close the loopholes, he also wants to lower the top tax rate on income over $150,000 to 45p from 50p.
(This is where I'm supposed to applaud the Chancellor, bravely waving a red flag at the enraged millionaires and their accountants while he tosses treats to them with the other hand.)
In the US, the situation is even more egregious. Many millionaires and billionaires, with incomes alone over a million a year, pay lower taxes than, well, secretaries. This is why one of the richest men in the world, Warren Buffett, has complained—yes, complained—that he pays a lower tax rate than his secretary (who, in fairness, is probably a well-paid administrative assistant).
The "loophole" in the US is no loophole at all; it's a lower rate for capital gains—money made from investments, such as stock, rather than income from labor. Capital gains are only taxed at 15%, and when combined with loopholes, the effective tax rate is often lower than 15% for people like Mitt Romney and Warren Buffett.
While Buffett thinks this is wrong, Mitt Romney and the GOP think it's just fine. They argue that rich people are the ones doing the hiring, and in times of low employment taxing rich people doesn't make sense. I heard one GOP pundit stating it thus: "When's the last time a poor person hired anyone?"
This is like looking at a plum tree, heavy with fruit, and not realizing there's a root system underneath. Rich people (and corporations, who in effect pay them) hire workers when they sell lots of goods and services. And who buys goods and services? Middle class and poor people, who spend a significant portion of their paycheck on goods and services, like, say, cars. And meals out. And rent. Things that increase dividends for rich people. Things that make rich entrepreneurs richer.
There's another facetious argument I've heard about the proposed "Buffett rule" that's making its way through Congress now (in vain, alas, since no Republican in the House will vote for it). If millionaires like Warren Buffett, and several others who've spoken in favor of the new tax proposal, wish to pay higher taxes there's nothing stopping them from voluntarily paying more to the IRS.
Call me a rabble raiser, but I don't like the idea that rich people get to voluntarily pay taxes but I must mandatorily pay them, and at a higher rate! The same argument goes in the UK, where millionaires are able to deduct millions given to charities on a voluntary basis. Suppose I decide to donate a million pounds to the Donkeys Trust. A worthy charity, to be sure, but is it more worthy than my taxes going to pay for roads, schools, benefits for the disabled, or police pensions? Or if I live in the US, and want to endow Toad Hall University with an amount that will cause them to name their new baseball diamond after me, should I be able to claim that as a deduction on my taxes?
Economist Jared Bernstein has put together some figures if you want more information on the Buffett Rule, including these startling facts:
–In 2009 (most recent data) 22,000 millionaire-and-up households paid less than 15% in federal income taxes, and about 1,500 paid nothing.
–The 400 richest Americans, with average incomes over $100 million, paid 18% in federal income tax.
–These average tax rates have fallen sharply over the years, due both to cuts in the basic income tax rates, and particularly to much larger cuts in taxes on asset-based incomes, like capital gains. According to the White House’s release on this: “the wealthiest 1-in-1,000 taxpayers pay barely a quarter of their income in Federal income and payroll taxes today—half of what they would have contributed in 1960.”
Fair? Certainly not. A boon to the economy? No, in fact the economy's been more sluggish than ever since the Bush tax cuts which ushered in the 15 capital gains tax rate.
And for even more information about the Paying A Fair Share Act (i.e., the Buffett Rule), Ezra Klein has the details. Turns out it doesn't even go into effect fully for incomes between 1 and 2 million; instead it's eased in. Wouldn't want to shock those millionaires into having heart attacks when their accountant gives them the full bill.
Unlike, say, a teacher, who finds out her rent is going up but her paycheck isn't.
The Buffett Rule, which, again, has no chance of being passed by this Congress, would raise revenue of around $160 billion. That's a fair chunk of change. (And even after that, millionaires' tax rates would still be lower than in the UK.)
Unless you've just won the MegaMillions* jackpot or EuroMillions, you're probably in favor of millionaires and billionaires paying higher taxes, on either continent, than the paltry amounts they're paying now.
*(Full disclosure: I myself was a winner in the recent MegaMillions. I won $2, which entitles me, I believe, to deduct the $10 I spent on tickets. But I'll have to ask my accountant to be sure.)