Warren Buffett’s 'tax the rich' idea has no legs

Few multi-billionaires have such universal appeal as Warren Buffett. The Sage of Omaha, famed for driving an old car, living in the same house he bought in the late 1950s and drinking cheery coke, is the acceptable face of a billionaire, if there has ever been one.

And true to form, Buffett, who has already pledged all his money to charitable causes when he dies, has come up with an idea that will further endear him to the public – it’s called taxing the rich more.

In an article written for The New York Times, Buffett says the rich don’t pay enough taxes. His argument is a forceful one. “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 says.

Buffett goes on to suggest various ways the rich should pay more, including raising rates on taxable income in excess of $1 million to include dividends and capital gains – and an even higher tax rate for those making $10 million or more.

Few, except of course the multi-millionaires who make this type of money - estimated by the Internal Revenue Service as being less than 250,000 individuals in the US - would disagree with Buffett’s proposal.

The trouble is that most governments seem to lack the will to tax the rich more than they are doing already. Some even argue that taxes are already too high for the rich – and they aren’t always right-wing libertarians. Look at President Obama’s comprise on estate tax last year as example of the lack of political will to tax the rich.

And even when governments attempt to tax the rich more, inevitably new taxes fall on the affluent, rather than the very rich. The 50% highest tax rate on incomes of £150,000 (€177,600) and above in the UK, introduced at a time when public fury was at it highest towards bankers, undoubtedly hits some highearners. But those earning this amount of money, or even £100,000 more, aren’t exactly the superyacht and private jet crowd that fit the popular perception of the rich.

Even so, the UK government is likely to drop the rate back to 40% next year given the fear that it is undermining enterprise and squeezing entrepreneurs. It might be cut just when the debate about an underclass in the UK is at its most fierce following the worst rioting in England for decades – so much for taxing the rich in the UK.

Granted, the US authorities might have more of a will to tax the rich than countries like the UK. On the whole, the rich in the US don’t threaten to leave the country when higher taxes are introduced. Even if they do, the IRS still taxes them on their worldwide income – as long as they hold American citizenship.

Not so in the UK, or for that matter many other countries in Europe, where tax arbitrage is made much easier by differing tax rates throughout much of the European Union and Switzerland. Also, the free movement allowed between countries if you’re a EU citizen makes moving around easier. European tax authorities also don’t follow their citizens around the world, or at least not for the rest of their lives like the IRS does.

Taxing the very rich also has another challenge. Increasingly, the ranks of the very rich are being fuelled by individuals and families from emerging markets, where often tax rates are very low, and/or easy to circumnavigate.

The mega rich from these countries have been buying residential property in places like London, Paris, the south of France and Switzerland for the past few decades, swelling property prices in the prime areas of these cities or countries.

They make sure they are only in these houses, villas or estates for a few months a year to ensure they avoid paying taxes in any of these jurisdictions. When you have so many houses spotted around the world and a super yacht there is little inconvenience to flip between countries so to avoid resident taxes.

These billionaires – and their numbers will swell as emerging markets get richer – have effectively become super rich nomads to tax authorities, impossible to get any of them to pay income, capital gains, or estate tax.

Then there is a question of the amount of revenue actually raised from taxing the very rich – some argue that it is negligible in making little difference to the lowering huge government deficits in much of Europe or the US.

And so the list of the difficulties in taxing the rich goes on…

Buffett might like to consider a few of these factors when he next says something on the subject of taxing the rich.