Should governments tax the rich to get out of debt?

With governments in Europe and the United States running out of options to plug gaping deficits and calm jittery markets, some of the world’s wealthiest people have spoken out this week, seeking to breathe new life into the longstanding debate on taxes.

Billionaire investor Warren Buffett fired the first salvo on Monday with an op-ed published in the New York Times. “My friends and I have been coddled long enough by a billionaire-friendly Congress,” Buffett wrote. “It's time for our government to get serious about shared sacrifice."

After weeks of wrangling over eurobonds, short-selling and other mystifying financial terms, here was the third-richest man in the world talking up something everyone could grasp: taxing the rich.

In France, Buffett’s example was soon followed by Maurice Lévy, the head of the Publicis advertising group and of the French association of private enterprises. Writing in Wednesday’s edition of Le Monde newspaper, Lévy said it was time France’s wealthiest “participated in the nation’s effort”.

By Thursday, the debate had made it onto the front page of several French dailies, with the left-leaning Libération headlining on a “rich idea”.

A toxic debate

This is not the first time Buffett, known as the Oracle of Omaha, has spoken in favour of higher taxes. But the timing of his latest appeal, during an extended period of economic hardship and as US lawmakers debate how to slash the country’s deficit, has given it particular resonance.

"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks," he wrote, calling on Congress and the White House to raise taxes on America’s wealthiest.

His appeal was soon embraced by Democratic leaders, including US President Barack Obama. But Republicans and other opponents of higher taxation were incensed.

A number of critics suggested Buffett write a cheque to the Treasury, if he so wished, and leave the rest of wealthy America alone.

Some questioned the economics of Buffett’s proposal, arguing that the added revenue would be a mere drop in the ocean of debt.

Others cried foul at what they saw as a ploy by the octogenarian investor, whose estimated fortune of $47 billion is well beyond the tax man’s reach, to ensure nobody would ever catch up.

Overall, the passion stirred by the debate was reminiscent of the virulent partisanship that has become a hallmark of US politics.

Timid moves

In recent months, Republicans have fiercely resisted attempts, backed by Democrats, to see America’s wealthiest contribute a little bit more towards reducing the country’s debt.

Many Democrats would like Congress, which has its own fair share of millionaires, to let Bush-era tax cuts for the top income bracket expire. According to conservative estimates, the tax breaks cost the federal government close to $1.3 trillion.

Elsewhere, governments have made only timid attempts at collecting more from the rich. Just before it was ousted from power last year, Britain’s Labour Party rushed to raise the top rate of income tax to 50%.

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In Italy, the government of Prime Minister Silvio Berlusconi, the country’s richest man, has announced a special “solidarity tax” on incomes above €90,000.

As for the tax-shy French government, it is reportedly mulling an “exceptional” 1% to 2% levy on incomes that top €1 million, a move that would apply to a mere 30,000 households.

According to Libération, the levy would generate, at best, €300 million – far short of the €18.4 billion per year forfeited by the state as a result of tax breaks granted to the highest earners over the past decade. But French President Nicolas Sarkozy has made it clear he will not renege on pledges to leave the tax rate unchanged.

Restoring fiscal justice

“Taxing the rich is, in economic terms, a necessary move, and in political terms a fraught one,” said Moncef Cheikh-Rouhou, a professor of economics at the Paris-based business school HEC, in an interview with FRANCE 24.

Regarding France, Cheikh-Rouhou said “investors come here for the social cohesion we enjoy; they don’t want class warfare”.

But many argue that the social cohesion Cheikh-Rouhou describes is undermined by resentment over the widening gap between rich and poor, and the feeling of injustice it generates both in France and the US.

In one of the most widely quoted passages of his New York Times article, Buffett pointed out that the amount of tax he paid last year, though a whopping $7 million, was proportionally lower than that paid by any of his collaborators – a discrepancy attributed to the various tax breaks granted to America’s richest by former US President George W. Bush.

According to French economists Camille Landais, Thomas Piketty and Emmanuel Saez, the same is true of France. In their book Pour une revolution fiscale (For a Fiscal Revolution), published in January of this year, the three argued that, as a result of various tax breaks passed by conservative governments since 2002, income tax rates in France have become inversely proportional to household income, allowing France’s biggest earners to pay proportionally less in taxes than middle-income earners.

Today, the 50% of French taxpayers at the lowest income levels pay close to a 45% tax rate while the nation's 500,000 richest pay a rate of 35% on average.

Landais, Piketty and Saez say only a complete overhaul of France’s tax system, one that restores progressive rates of taxation based on household wealth, could help curb the deficit and restore a sense of fiscal justice.

As former hedge fund pioneer George Soros, another billionaire calling for more taxes, recently told Reuters, “Buffet has a point: if the rich don’t do something now, they will have the public on their backs for years to come.”