This is probably for the first time in the history of mankind that a super rich person with a superstar status has beseeched the fiscal authorities of his country to tax him and persons belonging to his category of income more and justified such a stance with very convincing arguments.
Such a unique show was on display when billionaire investor, Warren Buffett, in a New York Times op-ed on 15th August, 2011 urged the US lawmakers to raise taxes on wealthier Americans to cut Washington's huge budget deficit. He proposed a tax increase on Americans who make at least $1 million per year and an additional increase on those making $10 million or more. In a sarcastic tone, Buffett, who is also the chief executive of Berkshire Hathaway, wrote that "our leaders have asked us for 'shared sacrifice'. But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. While the poor and middle-class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks."
Backing his statement with the relevant data, Buffett added that his federal tax rate was 17.4 percent last year, while some investment managers were taxed just 15 percent on income reaching into billions. On the other hand, the middle-class was taxed up to 25 percent, along with heavy payroll taxes. On the relationship between taxes, jobs and investment, Buffett recalled that the rich were taxed at "far higher" rates from 1980 to 2000, and yet 40 million jobs were added during this period. "You know what has happened since then: lower tax rates and far lower job creation. People invest to make money, and potential taxes have never scared them off." Reproving Congress, he said that Americans were losing faith in its ability to tackle the country's financial woes. "My friends and I have been coddled long enough by a billionaire-friendly Congress." According to him, it was time for the government to get serious about shared sacrifice.
We feel that Buffett's observations, particularly his critical remarks about the existing American tax regime, are highly significant, especially at a time when the country is facing a huge budget deficit and the world attention is focused on the fiscal behaviour of the US because of its likely impact on the global economy and international financial order. There is probably no need to say that what he has said was never said before and the remedy he has proposed makes ample sense. It is surprising to learn that, contrary to popular belief, richer sections of American society are subject to a lower rate of taxation than the middle-class or, in other words, the US tax system was regressive and the data that Buffett presented to prove his point seems to include tax breaks and other adjustments which appeared are justified.
It was a long held belief that higher tax rates would lower investment and reduce employment and vice versa. Buffett's figures belie this long-held view and support his assertion that entrepreneurs invest to make money and are not scared off by taxes because it is the net income that would be the focal point for investors. His dig at the Congress, in our view, was, however, most noteworthy. It appears that US politicians, like most of the political leaders in the rest of the world, are guided by selfish instincts and do not care about equity in taxation or the disproportionate tax burden on the middle-class. There also seems to be an overall tendency to befool the ordinary people and reward the mighty rich in the name of shared sacrifice.
On the face of it, Buffett remarks would hurt the Republicans because of their continued insistence not to raise taxes on the rich to alleviate the problem of a fiscal deficit. On the other hand, Democrats could now support their case more vigorously, with the necessary arguments from an unexpected quarter. Anyway, the article of Warren Buffett is bound to be debated in the policy circles in an animated way and is likely to make a positive impact (he later appeared at Charlie Rose Show where he further explained what he had proposed in his NYT article). At the minimum, the US fiscal authorities would now probably be forced to calculate the net rate of taxes rather than concentrate on the general rate of taxes on various categories of income for overall policy formulation. Also, members of the Congress would now be more careful while dealing with matters related to fiscal policy in general and equity in taxation in particular.
There could be many lessons for the affluent circles and policymakers in Pakistan from the above narrative. It is no secret that only a tiny percentage of population, most of it belonging to the salaried class, pays income tax while a large part of tax revenues is collected through indirect taxes, which are generally regressive in nature. Our tax system is so skewed and tax collecting machinery is so inefficient or corrupt that people belonging to the highest categories of income are either legally exempt from paying taxes or could easily evade the tax net through other means.
On the other hand, expenditures of the government are increasing, budget deficit is up, public debt is mounting and fiscal authorities are highly dependent on bilateral donors and other sources of finance to bridge the widening fiscal gap. Our parliament is not only billionaire-friendly but most of its members belong to this class and tend to reject tax proposals aimed at their sources of income. The irony is that we, as Muslims, believe in social justice more than anybody else, but find no Warren Buffett in Pakistan to plead the case for equity in taxation so openly and boldly. This is of course sad and pushing the country towards a position which is financially unsustainable and morally indefensible. Given the clout of the vested interests, it would be a hard struggle to act on a proper roadmap but the ultimate fiscal goals are too obvious in our situation to be ignored for long.