Make Like Obama and Tax The Rich


On Monday this week, US President Obama gave a speech from the White House’s Rose Garden in which laid out a new plan to cut America’s vast deficit.

The plan would cut the deficit by $US4 trillion and get the US federal budget back to surplus by 2017, mainly by raising taxes, cutting defence expenditure, trimming social security obligations and saving interest on bond repayments.

There’s no doubt the US faces huge fiscal challenges. After a decade in which the US government fought two wars and still cut taxes, and which ended in a crippling economic downturn that some are now calling the "lesser Depression", US finances are in a mess. America’s tax code is riddled with carve-outs and loopholes, most notably in areas such as capital gains tax and corporate tax perks. Tax receipts are also way down on their pre-recession levels. As a result, the US doesn’t collect nearly enough taxes to pay for its expenditures. Massive deficits and a growing debt have ensued.

Obama’s plan would move to address this issue by letting the huge tax cuts enacted under George W. Bush expire on wealthy taxpayers, saving $US866 billion. Other loopholes will be closed and deductions will be limited for those earning above $US250,000 a year. This will save a further $US710 billion.

The Bush tax cuts gave huge discounts to high income earners. But the laws enacting them also had a 10-year expiration clause, meaning that if no amendments or new laws are passed to continue them, tax rates will return to their Clinton-era levels. Obama is proposing that this is what should happen, particularly for those earning over US$1 million a year, echoing the sentiments recently expressed by billionaire investor Warren Buffett, who urged US lawmakers to "stop coddling the rich" in a recent op-ed for The New York Times.

"This is not class warfare," the President told the assembled media. "It’s math."

Republicans and conservatives are predictably furious. But the anti-tax antipathy in America is strong across the spectrum, with many media organisations also taking aim at the proposal. Even former President Bill Clinton has told conservative news organisation Newsmax that Obama’s plan was "a little confusing"— while spruiking his wife’s chances in 2016.

Taxing the rich as never been very popular with the rich, Warren Buffett aside. And given the sheer number of high income earners in America, and their tendency to own media assets, it’s not surprising that the tone of the US debate this week has been critical of the President (See here, here and here, for example).

But for everyone except the very wealthy, Obama’s plan makes a lot of sense. This week’s debate about the "Buffet rule" has thrown up some amazing statistics that highlight the scope of tax avoidance amongst Americans. According to figures from the nonpartisan Tax Policy Centre, there are 7000 millionaires who will pay no income tax in 2011. Official US government figures (pdf) show that the top 400 individual income tax returns saw an average tax rate of just 18.1 per cent in 2008 and 16.6 per cent in 2007. Another thinktank, the Centre for Budget and Policy Priorities, estimates that "a significant group of very wealthy people pay a smaller share of their incomes in federal income and payroll taxes than large swaths of the middle class."

One key reason for this imbalance is quite straight-forward: income from capital gains is taxed at much lower rates in the US than income from wages. For the very wealthy, who derive a significant proportion of their income from investments, this amounts to a huge tax break. As Paul Krugman observes, "in a typical year between 30 and 40 per cent of those super-high-income players paid an average tax rate of less than 15 per cent; most of them paid less than 20 per cent."

The US debate comes at an interesting time in Australia. Although it’s been largely ignored by the mainstream media and little reported on outside the business press, Australia is about to have a two-day tax summit, convened by Treasurer Wayne Swan, to talk over possible improvements and reforms to our tax system. The meeting could be very interesting. Some of our best economists have already penned significant contributions by way of discussion papers, such as this effort by the Grattan Institute’s Saul Eslake.

The tax summit is the perfect opportunity for the government to grasp the nettle and raise taxes on the wealthy. Why?

Firstly, because they can afford it. Does anyone believe that Gina Rinehart or Andrew Forrest or Gail Kelly can’t afford to pay more tax? No, I didn’t think so.

Secondly, taxing the wealthy will raise revenues that the government can direct towards pressing national needs. There is no shortage of these: infrastructure and public transport in our cities, affordable housing, investment in research and development, education, health, Indigenous inequality, the challenges of our aging population … the list goes on. Even those philosophically committed to small government still tend to support items of government expenditure such as law and order and national defence, neither of which come cheap.

Thirdly, raising taxes on the very rich helps to reduce inequality. The gulf between the rich and poor in Australian society has been widening. According to the ABS, between 1997-98 and 2007-08, the gap between the top 10 per cent of income earners and the bottom 90 per cent grew by 14 per cent, while the so-called Gini coefficient (a more general measure of income inequality) increased by 9.2 per cent. But the ABS data doesn’t capture the really important trend.

The issue is not so much the difference between the top 10 per cent of the population and the poorest 10 per cent, but rather the gap between the super-rich (the top tenth of a per cent) and everyone else. The data here, compiled by former economists and current Member for Fraser Andrew Leigh, shows that the top 0.1 per cent (those earning more than $693,000 in 2007) are now earning their highest share of national income since the 1920s. These truly wealthy households have seen their share of total household income triple since 1980.

The reason is simple: more and more of the wealth of our society is being captured by those at the top. It’s not just investment properties and stock market portfolios: wages for top executives, bureaucrats and professionals are also rising much more quickly than the rest of the workforce. Leigh points out that "in 1993, the average earnings of CEOs in the top 100 Australian firms was about $1 million. By 2009 this had risen to around $3 million."

A tax of the super wealthy could help address some of these windfall gains. The top marginal tax rate in this country is 45 per cent for incomes over $180,000. The Greens have long had a proposal to raise this to 50 per cent for those earning over $1 million, which they estimated would reap an extra $250 million in revenue in 2005-06.

I don’t see why we should stop there. Why not a 60 per cent tax rate for those earning over $5 million, and a 70 per cent tax rate for those, like BHP’s Marius Kloppers, earning over $10 million? Sure, these very high tax brackets wouldn’t catch many taxpayers. But they would raise extra money for the Treasury, and they would tax away some of the windfall gains of top executives that enjoy their vast wealth due to their privileged position at the top of the corporate pyramid. While we’re at it, let’s remove the absurd capital gains tax rules that reward income from investment at the expense of income earned from labour.

It’s not as though Australia currently has high taxes, by the way. As ACOSS point out in their submission (pdf) to the tax summit, one problem Australia doesn’t have is high taxes. Australia ranks 27th out of the 33 OECD nations for our overall tax levels. Most of the rich world pays more tax than we do.

So, yes: let’s tax the rich. As US bank robber Willie Sutton famous quipped, "that’s where the money is."

Ben Eltham is New Matilda's National Affairs Correspondent.