Are the super-rich paying enough tax?

Probably not.

Robin Hood wouldn’t have approved of the trend in tax policy over recent decades. Taking from the rich to give to everyone else has fallen out of favour, especially in Britain and the US. Since the early 1950s the top rate of income tax has tumbled in the US from above 90 per cent to 35 per cent. And a mix of different types of income means many of the super-rich pay an overall rate less than that. In Britain, too, the levy on the rich has halved since peaking in the 1970s at 83 per cent. And while HMRC reports that the share of total tax paid by the top 1 per cent in the UK has increased since 1999, tough fiscal times mean politicians on both sides of the Atlantic have been casting a covetous eye over the bulging wallets of the wealthy.

While the UK’s Conservative-Liberal coalition recently edged the top rate of income tax down, there have been other proposals to force the rich to contribute more – notably the idea of a higher charge on £1m homes, the so-called mansion tax.

In the US, Barack Obama is seeking re-election on a platform of raising top-rate income tax and imposing a minimum 30 per cent tax on those earning more than $1m a year, a policy originally suggested by billionaire investor Warren Buffett. "This debate is partly about fairness," says Len Burman, professor of practice in public administration and international affairs at Syracuse University and former Treasury official under Bill Clinton. "But there is no right or wrong answer to the question of how much of their money the rich deserve to keep." There are also myths about the dangers of taxing the rich that are often repeated with little evidence to back them up, he argues.

In reality, many economists believe governments can extract more money from their wealthiest citizens without chasing them out of the country or hobbling economic growth. Most clashes on high-end taxes begin with the tricky question of justice. The starting point for this debate is one of necessity. Most governments would like more cash. Government debt held by the public in the US is on track to climb from about two thirds of national income to as high as 100 per cent over the coming decade.

"Levels this high would make America vulnerable to a debt crisis that would make the fallout from the Greek debt crisis look like a picnic," says Bob Williams, an economist at the Tax Policy Center in Washington.

Meanwhile, despite far more active effort to control spending, Britain’s fiscal position still looks precarious. Thrift by the government has been hurting growth, further undermining tax revenues.

"The depressing fact is that cuts in spending won’t be enough to fix public finances," says Joel Slemrod, a tax specialist at the University of Michigan. "Painful as it is, we will need both spending cuts and tax increases."

Many right-leaning experts acknowledge that taxes will need to rise. But they also point out that high earners already pay more than their fair share. To back this up, friends of the rich observe that in recent years the top 1 per cent have paid about a third of all income taxes in the US – an impressive $318bn. (To make it into the 1 per cent club, you need to earn more than $344,000 per year.) On average they handed over roughly 25 per cent of their income to the taxman. By contrast the bottom half of American earners chipped in just 2.3 per cent of income taxes and were taxed at an average rate of just 1.8 per cent. Close to half of Americans pay no income tax at all.

Rich Brits aren’t far behind. The top 1 per cent shoulder a full quarter of Britain’s total income tax burden. Still, these figures tell only half of the story. As Occupy protestors never tire of saying, the rich have secured a bigger share of the national pie. As a result higher tax rates would merely be clawing back part of the outsized gains in income the wealthy have claimed over the past few decades. In 1970 the wealthiest 1 per cent of Americans took home just 9 per cent of the nation’s total income. Now that is closer to 24 per cent – the highest level since 1928.

Even if America doubled the effective tax rate on the top 1 per cent this golden group would still have an after-tax income twice as high as in 1970 in real terms, according to Professor Emmanuel Saez, an economist at the University of Berkeley. Income gaps have widened in the UK too.

Public anger is also roused by the fact that some of the super-rich pay an extremely low tax rate indeed. This may be a small minority but they attract a lot of attention. In an announcement to accompany his Buffett tax plan, President Obama disclosed that 22,000 households that made more than $1m per year paid less than 15 per cent of their income in tax – and 1,470 managed to pay no federal income tax at all, according to figures for 2009 from the Internal Revenue Service.

Mitt Romney, the Republican presidential nominee, paid 15 per cent tax on his $21m income partly because his money comes from investment dividends, in a form of payment known as "carried interest", which attracts a lower tax to reward risk taking. He also donates money to charity, which would further reduce his tax liability. America also offers a 15 per cent tax rate to hedge fund managers on fees they get for investing other people’s money. 

Squeeze the rich?

A similar case can be made in the UK. Research by the Treasury showed that about 550 people earning more than £1m a year were paying a lower average tax rate than those with an annual income of £20,000. Some 330 of these super-high-income Brits were managing to get away with a tax rate of less than 10 per cent.

So there is an argument in favour of both sides of the fairness debate. But assuming politicians will have to levy higher taxes on the rich, it is worth asking how this can best be done.

For decades, right-wing economic theorists have offered dire warnings about the consequence of trying to squeeze the rich. The first line of defence is that the rich will simply manage to avoid the tax. Second, in grabbing more from the rich, governments actively retard economic growth. That leaves everyone worse off. "These theories are intuitively appealing," says Williams at the Tax Policy Center. "But the evidence that this happens in practice is not terribly compelling." 

Take the idea that government revenues actually decline as tax rates rise. In 1974, economist Arthur Laffer impressed US President Gerald Ford and advisers Donald Rumsfeld and Dick Cheney by demonstrating how higher taxes could actually reduce tax revenue. The theory behind the famous Laffer curve – first drawn on a cocktail napkin for the president – is that tax hikes encourage the rich to work less, find more creative ways to evade taxes and postpone or scrap investments. As marginal tax rates move close to 100 per cent, government revenues would actually fall to zero.

Fans of Laffer claim that the celebrated curve was recently put to the test in the UK – and passed with flying colours. Eager for revenue, the Labour government raised the top rate of tax from 40 per cent to 50 per cent in 2010. While revenue didn’t actually fall, it didn’t rise much either. Affluent Brits found various ways to avoid the hike. Bankers asked for bonuses to be paid before the tax came into effect. After the tax came into force, others asked for income to be delayed in the hope that Labour would be replaced by the Conservative Party. Some even moved overseas.

Some would argue Britain was not an entirely fair test. Many tax avoidance strategies relied on delaying tactics. Had the tax remained in place for longer it would have been harder to avoid. There is also plenty of heavy-hitting economic research that shows higher tax rates can deliver more government revenue, especially if the tax code is simplified to reduce avoidance.

Professor Saez and Peter Diamond, the Nobel Prize-winning economist, published a paper in November 2011 concluding that even without closing tax loopholes, top tax rates in the US could be pushed as high as 48 per cent without falling foul of the Laffer curve of declining revenues. If the tax loopholes were removed, the rates could go up to 76 per cent.

Saez helpfully estimates that a tax of 67 per cent on the top 1 per cent would actually raise $4trn over the coming decade – far from enough to close the deficit but a very big step along the way. The common assumption that higher taxation – especially on the rich – slows the economy has even less foundation. Start with a geographical comparison. Many countries around the world tax at far higher levels than Britain or the US and achieve similar rates of growth. The Swedish government, for example, claims 53 per cent of GDP in tax – far higher than the 32 per cent collected by the government in the US, even including state and local authorities. And while it’s true other factors may have played a part, the nation’s economy has outpaced that of the US over the past decade. In fact Anglo-Saxon nations have not grown faster than countries that ignored Laffer’s advice, including Germany and Denmark. 

A time-based comparison goes against defenders of the rich too. There has been no noticeable acceleration of growth in the US or UK as their governments have gone about pruning the top rates of tax.

"In fact the US economy grew very swiftly in the 1950s and 1960s, when top rates of tax were draconian by current standards," observes Mark Weisbrot, the co-director of the Center for Economic and Policy Research in Washington. Professors Diamond and Saez contend that this is because a lot of what the rich do does little to promote economic growth – a claim that many on the right will dispute. So this leaves the question of how best to tax the rich. Buffett’s tax, which sets a 30 per cent floor under the tax rate of those earning more than $1m, makes for gratifying politics.

Sadly, this type of approach can cause policymakers real headaches (witness the charity tax in the UK) and would raise pocket change in budgetary terms, about $47bn over 10 years, compared with expected federal revenues of $41trn. 

Leak tragedy

There is a way of taxing the rich that will yield far more revenue and be much harder to avoid: plugging leaks in the tax code. "The US tax code is riddled with loopholes that the rich can exploit," says Professor Burman. "And many of these deductions are skewed to benefit the rich."

One example is the mortgage interest tax deduction, which allowed Americans to exclude from their income payments on home loans of up to $1m. This disproportionately benefits the rich. Those in a 35 per cent tax bracket will save $35 for every $100 of mortgage interest. Those in the humbler 15 per cent tax bracket save just $15 per $100 on what is likely a lower interest payment. Scrapping this deduction could raise $80bn a year – 20 times more than the Buffett tax over 10 years. Even capping deductions at a lower rate could garner impressive sums. And other policies benefit the wealthy, including a deduction on state income tax. A bolder move in the US would be to tax investment income at the same rate as income.

"Among the main reasons the rich pay less is the privileged treatment of investment over sweat and toil," says Dr Weisbrot. Equalising the two could yield enough to scrap corporate income tax, which is really a form of double taxation on profits. "The best way to ensure the rich pay more is to simplify the tax code," says Professor Burman. "You can even have lower rates and yet raise more money." 

Of course, soaking the rich won’t solve the fiscal problems of Britain or the US. One study by the Tax Policy Center showed that if policymakers tried to rely on top taxpayers alone to bring down the deficit to 3 per cent of GDP, the highest rate would need to rise over 90 per cent.

Few believe this is practical or desirable. Instead the pain will have to be more evenly spread throughout society. But on both sides of the Atlantic there is a compelling case for demanding a bigger contribution from the super rich.

This article originally appeared in Economia.

Photograph: Getty Images

Christopher Alkan

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The vitriol aimed at Hillary Clinton shows the fragility of women's half-won freedom

The more I understand about the way the world treats women, the more I feel the terror of it coming for me.

I’m worried about my age. I’m 36. There’s a line between my eyebrows that’s been making itself known for about the last six years. Every time I see a picture of myself, I automatically seek out the crease. One nick of Botox could probably get rid of it. Has my skin lost its smoothness and glow?

My bathroom shelf has gone from “busy” to “cluttered” lately with things designed to plump, purify and resurface. It’s all very pleasant, but there’s something desperate I know at the bottom of it: I don’t want to look my age.

You might think that being a feminist would help when it comes to doing battle with the beauty myth, but I don’t know if it has. The more I understand about the way the world treats women – and especially older women – the more I feel the terror of it coming for me. Look at the reaction to Hillary Clinton’s book. Too soon. Can’t she go quietly. Why won’t she own her mistakes.

Well Bernie Sanders put a book out the week after the presidential election – an election Clinton has said Sanders did not fully back her in –  and no one said “too soon” about that. (Side note: when it comes to not owning mistakes, Sanders’s Our Revolution deserves a category all to itself, being as how the entire thing was written under the erroneous impression that Clinton, not Trump, would be president.) Al Gore parlayed his loss into a ceaseless tour of activism with An Inconvenient Truth, and everyone seems fine with that. John McCain – Christ, everyone loves John McCain now.

But Hillary? Something about Hillary just makes people want to tell her to STFU. As Mrs Merton might have asked: “What is it that repulses you so much about the first female candidate for US president?” Too emotional, too robotic, too radical, too conservative, too feminist, too patriarchal – Hillary has been called all these things, and all it really means is she’s too female.

How many women can dance on the head of pin? None, that’s the point: give them a millimetre of space to stand in and shake your head sadly as one by one they fall off. Oh dear. Not this woman. Maybe the next one.

It’s in that last bit that that confidence racket being worked on women really tells: maybe the next one. And maybe the next one could be you! If you do everything right, condemn all the mistakes of the women before you (and condemn the women themselves too), then maybe you’ll be the one standing tippy-toe on the miniscule territory that women are permitted. I’m angry with the men who engage in Clinton-bashing. With the women, it’s something else. Sadness. Pity, maybe. You think they’ll let it be you. You think you’ve found the Right Kind of Feminism. But you haven’t and you never will, because it doesn’t exist.

Still, who wouldn’t want to be the Right Kind of Feminist when there are so many ready lessons on what happens to the Wrong Kind of Feminist. The wrong kind of feminist, now, is the kind of feminist who thinks men have no right to lease women by the fuck (the “sex worker exclusionary radical feminist”, or SWERF) or the kind of feminist who thinks gender is a repressive social construct (rechristened the “trans exclusionary radical feminist”, or TERF).

Hillary Clinton, who has said that prostitution is “demeaning to women” – because it absolutely is demeaning to treat sexual access to women as a tradeable commodity – got attacked from the left as a SWERF. Her pre-election promises suggest that she would probably have continued the Obama administration’s sloppy reinterpretation of sex discrimination protections as gender identity protections, so not a TERF. Even so, one of the charges against her from those who considered her not radical enough was that she was a “rich, white, cis lady.” Linger over that. Savour its absurdity. Because what it means is: I won’t be excited about a woman presidential candidate who was born female.

This year was the 50th anniversary of the partial decriminalisation of homosexuality, and of the Abortion Act. One of these was met with seasons of celebratory programming; one, barely mentioned at all. (I took part in a radio documentary about “men’s emotional experiences of abortion”, where I made the apparently radical point that abortion is actually something that principally affects women.) No surprise that the landmark benefiting women was the one that got ignored. Because women don’t get to have history.

That urge to shuffle women off the stage – troublesome women, complicated women, brilliant women – means that female achievements are wiped of all significance as soon as they’re made. The second wave was “problematic”, so better not to expose yourself to Dworkin, Raymond, Lorde, Millett, the Combahee River Collective, Firestone or de Beauvoir (except for that one line that everyone misquotes as if it means that sex is of no significance). Call them SWERFs and TERFs and leave the books unread. Hillary Clinton “wasn’t perfect”, so don’t listen to anything she has to say based on her vast and unique experience of government and politics: just deride, deride, deride.

Maybe, if you’re a woman, you’ll be able to deride her hard enough to show you deserve what she didn’t. But you’ll still have feminine obsolescence yawning in your future. Even if you can’t admit it – because, as Katrine Marçal has pointed out in Who Cooked Adam Smith’s Dinner?, our entire economy is predicated on discounting women’s work – you’ll need the politics of women who analysed and understood their situation as women. You’ll still be a woman, like the women who came before us, to whom we owe the impossible debt of our half-won freedom.

In the summer of 2016, a radio interviewer asked me whether women should be grateful to Clinton. At the time, I said no: we should be respectful, but what I wanted was a future where women could take their place in the world for granted. What nonsense. We should be laying down armfuls of flowers for our foremothers every day.

Sarah Ditum is a journalist who writes regularly for the Guardian, New Statesman and others. Her website is here.