How Do You Get the Rich to Pay More?

The most interesting read I had on Labor Day was an article by Warren Buffet for Business Insider. Mr. Buffet who is one of the world’s richest men with an estimated fortune estimated at around USD 73 billion argued that while the billionaire class was not conspiring the screw the world, it was time for taxes to be raised on the very wealthy and that they pay their fair share. The interview with Mr. Buffet can be found at:

 https://www.businessinsider.com.au/warren-buffett-wealth-gap-inequality-solutions-2020-4?fbclid=IwAR33IHdTvozw87jNJ3e7gZMNbUpcI5CTCYanWFUZ0cwriqwoBh_rCSYOnU8

What makes this interview significant is the fact that Mr. Buffet this is the second time that Mr. Buffet is calling for the extremely rich to pay their fair share and he’s challenging the notion that the rich require special protections because they are the ones who create wealth for the rest of us. Back in the Obama Administration (which was an administration that raised taxes), Mr. Buffet wrote a very public letter pointing out that while he paid more in absolute taxes than his secretary, she paid a higher percentage of her income. His made the point that people like him didn’t need the government to give him any special privileges.

What makes Mr. Buffet so unusual is the fact that he’s probably the only known billionaire to call for higher taxes on the rich. If you look at tax systems in advanced economies, you’ll note that most are progressive (the more you earn the higher the percentage) and you’ll note that advanced economies always have loopholes, which the well to do always use. There is the example of Hong Kong where billionaires like Li Ka Shing and Lee Shau Kee paid themselves yearly salaries of US$600 per year because that was taxed. On the other hand, dividends were not taxed and so they received most of their income in the shape of dividends (in the 90s, Lee Shau Kee of Henderson Land apparently earned US$400 million from dividends).

So, the question is what exactly constitutes a “fair” share and how can governments get the rich to pay more. There is a validity to the argument that high taxes scare away the people who get the economy going and punishing the rich policies don’t work and are counterproductive. The UK provided an example. In the 1970s, the Labour Governments raised taxes and the UK had a top income tax rate of 83 percent. The rich fled and the UK economy stagnated. It was only revived in the 1980s when Mrs. Thatcher slashed tax rates down to 60 and latter onto 40 percent.

This example has made governments around the world very weary of “punishing” the rich through higher taxes. In Singapore, our government gets very panicky whenever anyone drops a hint that we should raise direct income tax. The argument that is always used is that this will scare away foreign investors who create jobs and everyone will suffer as a result. One of Singapore’s favourite hobbies is bragging about the number of billionaires who have chosen to settle in Singapore. Think of Dr. BK Modi of Spice Group and Eduardo Saverin, the co-founder of Facebook.

However, the idea that high taxes are detrimental to the economy is also not true. The Nordic Countries are a prominent example. All of them (Norway, Denmark, Sweden, Finland and Iceland) have tax rates that are around 50 percent of your income. Yet, despite all of that, the Nordic Countries with their small populations have very high levels of development, very low levels of corruption (According to Transparency International, theNordics rank in the top ten of least corrupt nations) and have strong and diversified economies driven by advanced technologies. A rough guide to the economies of the Nordic Region can be seen at:

https://en.wikipedia.org/wiki/Comparison_of_the_Nordic_countries#Economy

While the Nordic Countries do have their flaws, one has to ask how they managed to get rich without low taxes or getting the rich to pay more.

The easiest point to make is that taxes, while high are not punitive and there are sufficient loopholes which allow the rich to offset the tax bill but at the same time to do so in a way that benefits the rest of society (start businesses that create jobs etc)

The more important point is that there is a high level of social cohesion in the Nordic countries and for an aspiring entrepreneur understands what he or she is paying for. Taxes are high, but so is the investment in social infrastructure like healthcare and education. The Nordics rank are amongst the best educated and healthiest people in the world. This in turn has helped them to become exceedingly productive. Taxes become not so much a cost but a social investment. My Nordic friends don’t think of their education as free but as paid for through their taxes. For a businessperson, its easier to stomach the idea of paying so much in tax if you know what you’re getting it back through a healthy and productive workforce that in turn is also a well to do customer base.

Social cohesion is the essential ingredient here. Nobody will pay half their income to a government that enriches its top ministers yet leaves its population sick and ignorant. The rich, particularly the industrious rich, did not get that way through stupidity. Rich people are particularly good at looking for value.

Hence, if you want the rich, particularly the type that benefits the rest of society through things like job creation and so on, you need to reexamine social contracts between the governed and the governing classes. The Nordic model has worked thus far because the people paying the taxes trust that the people receiving the taxes will use them in a way that benefits society at large. Nordic model will not work in a corrupt country where the only faith is that you’ll be enriching the man on top. If you want the rich to pay more – look at the social contracts.