A taxing subject

Saturday, 01 October 2011
Article on why Warren Buffett wants to pay more tax

Between the UK riots in August, the US debt debacle and the European economic muddle, it was good to see that the ‘silly season’ still found a place for American business magnate Warren Buffett to make headlines by saying that he did not think he had paid enough tax.

Few commentators picked up that Mr Buffett was talking about US tax. No one, that I saw, picked up on whether the tax Mr Buffett paid was his federal tax or included his state tax. No one asked whether and how his allowances and reliefs against tax were calculated (nor should they ask), but it only takes a moment to remember that the US and the UK have different rates of tax and entirely different allowances. If Mr Buffett’s tax bill was reduced because he had made major philanthropic gifts that reduced his tax exposure, can it be said there is a valid comparison between the rate of tax he pays and the rate that his employees or neighbours or friends pay?

At the same time, we have heard over the summer that the debate is hotting up as to whether the 50 per cent income tax rate should be abandoned as being ‘uncompetitive’. I notice that this is an interesting shift of adjective from the Chancellor saying that it is ‘unfair’ to saying it is ‘uncompetitive’.

No one can say anything sensible about what tax should be payable because direct tax is only one element in the equation. Add on your VAT payments when you go shopping, add on the rates you pay on your house, add on the National Insurance you pay, and add on the amounts paid for parking tickets, fees for road fund licences, and penalties for other breach of regulation, and then add on the cost of compliance. If we judge the tax system by the reference to the measure of charge for inheritance tax that is lost to the estate of the transferor then compliance costs cannot be overlooked.

At the end of all that, do you look at what rate Mr Buffett pays, or do you look at the actual number of dollars that Mr Buffett pays in tax? Either way round, you can see that he is paying a much larger sum as an individual compared with his employee who pays a higher rate. You could argue that he is paying way over the top for the services he gets.

Debate is hotting up as to whether the 50 per cent income tax rate should be abandoned

Have we not come back to the problem that ‘we try to make the measurable important, rather than the important measurable’? The tax system is not an end in itself but is part of the overall economy. Tax rates for companies are lower than for individuals because it is recognised that companies create jobs and create business that feed back into the economy. Not all companies do this, but many individuals who trade personally or in partnership do so as well, and the tax rates do not recognise that. Of course, tax is not, and can never be, played on a level field. I am glad that Mr Buffett is obviously playing downhill this half.

 

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Martyn Gowar

Martyn Gowar TEP is a Partner in McDermott, Will & Emery UK LLP.

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