Sunday, October 30, 2011

A Buffet Tax: Does It Matter?

Warren Buffet started the discussion thread, and a lot of “rich” people argued against his idea, presenting unbelievably thoughtless arguments like “if you want to pay more, you do it alone.” Frankly, the rather fierce response from the conservative side of American society surprised me a little. Though different in the severity of the fervor, about the same sentiment prevails in South Korea all the time, as far as I can remember in its short history of democracy. One of the core promises by the current president during his election campaign period was reducing taxes for the rich, which has been carried out incredibly well, compared with other promises he made, for example, lowering the tuition fee for college students, for which nothing has been done.

For sure, taxing the rich has one very loud and clear impact: it shows that the government is at least thinking about economic inequality, and perhaps is trying to do something as well. But what about its actual impact on the fiscal balance for the government? Think about this: in China, 0.4% of people is said to have 70% of wealth. To do a back-of-an-envelope math, I will assume that all the wealth are taxable like income. (Oh, I hear some rich people throwing rotten tomatoes and stuffs.) If you levy one percent of tax from all (OK, let us simply think of a tax on net wealth) you end up with 1% of the nation’s wealth as tax revenue. On the other hand, if you levy two percent of tax only from the ultra-wealthy 0.4%, you get 1.4% of the whole nation’s wealth as the tax revenue. Let us suppose that the bottom 50% of Chinese population hold 5% of the nation’s wealth, which would not be even close to the truth, since even in Canada, the bottom half only has 3.2% of the total wealth of the nation. Anyway, suppose that for argument’s sake. If you impose 1% of tax on the wealth of the bottom half, you end up with 0.05% of the total wealth as tax revenue. But, if you impose the same rate of tax on the 0.4% of the population who literally pwns the economy, you end up with 0.7% of the total wealth, which is 14 times larger than the revenue you get from the bottom half.

In the recent Canadian Business Magazine, Armine Yalnizyan, senior economist with the Canadian Centre for Policy Alternatives, actually did the long math with the case of Canada. The result is surprising. Taxing the ultra-high-income earners ($250,000+) at 3% more than the current highest tax rate, effectively creating a new tax bracket at the upper end, ends up $2 billion for the government to spend, in such crucial sectors as dental care for the children. By contrast, taxing the majority (54%) of income-earning population who earns $30,000 or less gathers meager $154 million. The revenue from the rich is 13 times the size of the revenue from the poor. Even in Canada, the wealth gap is this horrendous. And bear in mind: this is only about income, not about the difference in accumulated wealth. Doing the same math for countries such as Mexico or Turkey gives me a chill. (These two countries are at the top of the OECD economic inequality ranking.)

In conclusion, taxing the rich at a slightly higher rate is not simply a rhetoric, but brings sizable tax revenue for the government, for all the people. And for you messrs rich in the states, Mr. Warren Buffet is not saying that he wants to pay more taxes. He is proposing a change in the strange tax system.

Lars Osberg, A Quarter Century of Economic Inequality in Canada: 1981-2006 (Canadian Centre for Policy Alternatives, April 2008)
Armine Yalnizyan, A “Buffet Tax” for Canada? (Canadian Business Magazine, Oct. 24, 2011)

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