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Tax system tilted toward the wealthy

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European Commissioner for Economy Paolo Gentiloni delivers his speech about the Pandoras Papers and the implications on the efforts to combat tax evasion and avoidance, among others, as part of a plenary session at the European Parliament in Strasbourg eastern France on October 6. AFP

Tax system tilted toward the wealthy

‘The taxation system has tilted toward the rich, and away from the middle class, in the last 10 years. It is dramatic, and I don’t think it’s appreciated. And I think it should be addressed,” so said billionaire investor Warren Buffett 18 years ago. He illustrated his claim by surveying his office staff: Although he was then the world’s second-richest person, he was paying a lower percentage of his income in taxes than his receptionist was.

Since then, economic inequality has only gotten worse, partly because of the rise of tech stocks that are immensely valuable but do not declare dividends. In 2020, six of the 10 wealthiest Americans – Jeff Bezos, Mark Zuckerberg, Warren Buffett, Larry Page, Sergei Brin and Elon Musk – were major shareholders of corporations that do not pay dividends. Together, they were worth $500 billion, or 0.5 per cent of total US wealth.

Last month, a paper from the White House, co-authored by economists from the Council of Economic Advisers and the Office of Management and Budget, estimated that America’s 400 wealthiest families, all of which had wealth exceeding $2 billion, paid federal income tax at an average rate of 8.2 per cent if gains in unsold stock are counted as income. The average American taxpayer paid 13.3 per cent of their income in federal tax.

The US budget deficit, as a percentage of gross domestic product, is now at its second-highest level since 1945. In poll after poll, Americans say they want the rich to pay higher taxes, which would reduce the deficit and improve equity as well. Yet Congress does not raise taxes on the rich.

Consider the egregious “carried interest” loophole in the US tax code, which permits investment fund managers to pay lower tax on the fees they receive from their clients, as if those fees were capital gains, rather than income. President Joe Biden has said he wants the loophole closed, but tax reform proposals must pass through the House Ways and Means Committee, chaired by Richard Neal. In 2007 Neal, a Democrat, supported an unsuccessful attempt to close the loophole. Then he started receiving big donations from the corporate sector, including $2.9 million for his 2020 campaign alone. Last month, the House Ways and Means Committee released its tax reform proposals. Closing the carried interest loophole was not among them.

The conclusion is inescapable: The US is no longer a democracy. It is a plutocracy. But countries in which money has less influence on legislation are also struggling to tax the rich. The Pandora Papers, released last month by the International Consortium of Investigative Journalists, shows how wealthy people in more than 200 countries and territories are keeping their assets offshore, many of them to avoid taxes.

Among them was Brazil’s finance minister Paulo Guedes, who has ultimate responsibility for raising the revenue his country needs, but who has moved nearly $10 million of his own and his family’s money to the British Virgin Islands. Andrej Babis, the Czech Republic’s prime minister when the papers were released, claimed that his decision to put assets into offshore accounts involved no wrongdoing. The electorate may have been skeptical: He subsequently lost a close election.

When leaders of the Group of 20 (G20), which comprises the world’s major advanced and emerging economies, met in Rome over the weekend, they endorsed an agreement to tax large corporations at a minimum rate of 15 per cent. The aim was to end a “race to the bottom” that has driven down corporate tax rates as countries compete to attract investment. But the agreement will be phased in over 10 years and has significant exemptions. Even for corporations that do not qualify for an exemption, the 15 per cent minimum rate is lower than most firms based in developed countries pay.

Is there anything else that the G20 could do about the tax inequity between the rich and most working people? Economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, have suggested a wealth tax of 0.2 per cent annually on the value of all publicly listed corporations’ stock. Such a tax, they note, is progressive, because the rich own a lot of corporate stock, and the poor own none. It is also difficult to evade, because the value of a corporation’s stock is public.

The opening of the global economy over the past 30 years lifted hundreds of millions of people out of extreme poverty, but it also enriched multinational corporations, which have been able to shift profits to wherever the corporate tax rate is lowest. The G20 has taken one step toward remedying that by accepting the proposed 15 per cent minimum rate, but that leaves untouched the wealth that comes from startups that are not making profits but still have soaring stock prices. The G20 countries can meet that problem by adopting a wealth tax along the lines Saez and Zucman recommend.

Peter Singer, professor of bioethics at Princeton University, is founder of the nonprofit organisation The Life You Can Save.

THE KOREA HERALD/ASIA NEWS NETWORK

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