Monday, January 12, 2009

Why Bill Gates Laughs at the IRS

The tax situation today resembles that in France before the French revolution. Commoners had little enough to call their own, but what little they had was taken in taxes. The nobility had nearly all the wealth but were exempt from taxes. So today, the top 20% who own 80% of the wealth in this country pay almost no taxes on it. They pay income taxes, but this only exposes their income, not the wealth itself.

Take a single example. Warren Buffet is worth about $58 billion, yet his salary is only $100,000 per year. The federal income tax on his salary is about $38,000. In 1956, Buffett was worth less than $1 million. So his average increase in wealth over his lifetime has been $58 billion divided by 52 (2008 - 1956), or approximately $1 billion per year. If the increase of wealth were counted as income, his income tax rate is $38,000 divided by $ 1 billion, or about .0001%. Why should a man of great wealth, like Mr. Buffett be paying only .0001% of his annual increase in wealth when the average person in the lowest quintile, the poorest 20% of the population, pays 11% of income in taxes (state, local, sales, property, etc.)?

It is fun to fantasize about the wealth these people possess, but why should they pay no taxes at all when the rest of us pay so much? The reason is that the wealthy are able to control both tax policy and public opinion much more effectively than the French nobility of the ancien regime. The idea of taxing wealth itself is seldom heard in the public forum. People are convinced, not only that capitalism is a great good, but that concentration of capital in a few hands is also beneficial. The two ideas are not inseparable.

Conservatives protest that they shouldn't have to give up what they have attained and have it given to someone else. This is the basis of all taxation, so the argument could also be used to abolish all taxes. But modern states have become larger for a reason. They are like fish swimming in a tank with other fish. Bigger fish thrive. Smaller fish get eaten. So the government supported by taxes provides protection to the wealthy, by monetary policy, military defense, treaties on trade, the list goes on and on. In fact, the wealthy receive services from the government in proportion to the size of their fortunes. The more they have, the more they have to lose. They should be taxed accordingly.

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