Bill Gates, Microsoft Corp. co-founder and co-chairman of The Bill and Melinda Gates Foundation, said in a recent interview with Bloomberg Television that the wealthy should pay more to help reduce the deficit. Gates added "there’s no doubt that as you look at balancing budgets to the degree you need more revenue" that lawmakers will need to look to the wealthy "to get a little bit more from them proportionately than you get from people as a whole."
According to America’s richest man, the sequester targets discretionary spending programs such as education, infrastructure and research and this is something to worry about as the U.S. is compromising its “values” in its approach to reducing federal spending.
Gates is not the only advocate of taxing the super-wealthy; he’s joined by the second richest man in America Warren Buffett who’s calling to “stop coddling the super-rich,” and by President Barack Obama who argues that “Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett.”
Buffet says that in 2010 he paid a federal tax bill of $6,938,744 — including the income tax as well as the payroll tax, which is only 17.4% of his taxable income and a lower percentage than was paid by the other people in his office whose tax burdens ranged from 33% to 41%.
Buffett also recognizes that some investment managers who earn billions from daily labour are getting “extraordinary” tax breaks because when they classify their income as “carried interest” they get a 15% tax rate bargain. Others of America’s richest earn most of their wealth from capital gains, which some billionaires don’t end up identifying as taxable income.
To understand the reason behind this discrepancy, one needs to look at the sources of government revenue. About 80% of these revenues originate from personal income taxes and payroll taxes. Some of the mega-rich pay income taxes at a rate of 15% on most of their earnings but very little in payroll taxes. However, the story is different for the middle class, which falls into the 15-25% income tax brackets, in addition to payroll taxes.
According to data from the Internal Revenue Service (IRS) in 2009, 1,400 American millionaires didn’t pay U.S. federal income tax, but this is less than 1% of the nearly 237,000 returns with incomes above $1 million. On the other hand, Americans donated around $347 billion to charity in 2011, a 7.5% increase over 2010. Total giving to U.S. non-profits increased by $24.2 billion over the 2010 total of $322.69 billion.
The idea of imposing higher taxes on the super-rich as a measure to control fiscal deficit is of much debate and controversy. Some argue that this approach is counter-productive, leads to volatile revenues, and isn’t an effective measure to raise revenues as it takes resources away from job creators in the private sector, which will deter investors from starting new enterprises. Robert P. Murphy argues that for those who believe in private-property rights, “soaking the rich is an immoral policy.”
However, Buffett argues that many of the mega-rich wouldn’t mind to pay more in taxes, particularly when so many fellow citizens are suffering. Buffett adds that in 60 years of experience, he didn’t see anyone shying away from investments because of the tax rate on the potential gain. Finally Buffett says “and to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”
In order to design a more comprehensive tax reform, there should be a clearer definition of “ultra-rich” and “taxable income.” For example, Connecticut’s income tax has three brackets: 3% on incomes below $10,000, 5% on incomes between $10,000 and $500,000 and 6.5% on incomes above $500,000. So if someone earns $550,000 he’s not on the verge of starvation, nor is identified as “mega-rich” either. In addition, only two states — California and Maryland, have a bracket for people making at least $1 million.