The horns have sounded and the hounds are baying. Across the developed world the hunt for more taxes from the wealthy is on. Recent austerity budgets in France and Italy slapped 3% surcharges on those with incomes above 500, 000 ($680, 000) and 300, 000 respectively. Now Barack Obama has produced a new deficit-reduction plan that aims its tax increases squarely at the rich, including a "Buffett rule" to ensure that no household more than $1m a year pays a lower average tax rate than "middle-class" families do. Tapping the rich to close the deficit is "not class ware", argues Mr. Obama. "It’s math."
Actually, it’s not simply math. The question of whether to tax the wealthy more depends on political judgments about the right size of the state and the appropriate role for redistribution. The math says deficits could technically be tamed by spending cuts alone—as Mr. Obama’s Republican opponents advocate. Class ware may be a loaded term, but it captures a fundamental debate in Western societies: who should suffer for righting public finances
There are three good reasons why the wealthy should pay more tax—though not, by and large, in the ways that the rich world’s governments currently propose. First, the West’s deficits should not be closed by spending cuts alone. Public spending should certainly take the brunt. But experience also argues that higher taxes should be part of the mix. In America the tax take is historically low after years of rate reductions. There, and elsewhere, tax rises need to bear some of the burden.
Second, there is a political argument for raising this new revenue from the rich. Spending cuts fall disproportionately on the less well-off; and, even before the crunch, median incomes were stagnating. Meanwhile, globalization has been rewarding winners ever more generously. Voters’ support for ongoing austerity depends on a disproportionate share of any new revenue coming from the wealthy. Given the rich world’s need for faster growth, governments should be wary of sharp tax increases—especially since they are unnecessary. Indeed, the third argument for raising more money from the rich is that it can be done not by increasing marginal tax rates, but by the tax code more efficient.
The scope for doing so is most obvious in America, which relies far more than other countries on income taxes and has a mass of deductions on everything from interest payments on mortgages to employer-provided health care, so taxes are levied on a very narrow base. Since the main beneficiaries of the deductions are the wealthy, richer folk would pay most of that. And since marginal rates would be untouched (or reduced), such a reform would do less to discourage them from creating wealth.
The author’s attitude towards America’s higher taxes on the rich is one of