A fair way to soak the rich

It has been a little over a week since billionaire Warren Buffett called for higher taxes on the richest Americans, and now comes the reaction.

Harvey Golub, a former chairman and chief executive of American Express, writes in the Wall Street Journal that he "resents" Buffett's suggestion.

I already pay plenty of taxes, Golub asserts, adding: "Before you 'ask' for more tax money from me and others, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely."

Who's right?

Mr. Golub points out that almost half of the population pays no income tax, and that the very top earners - 250,000 Americans who make $1 million or more per year - already pay 20 percent of the total.

State income taxes are often quite high, especially in places where the rich cluster, such as New York, New Jersey and California - yet, notes Golub, Buffett doesn't factor that in.

The current code is "replete with favors to various interest groups and industries," as Golub puts it, from the mortgage-interest deduction to the exemption for employer-paid health benefits.

All true. But this doesn't really refute Buffett, whose main argument - that the burden of deficit-reduction should fall most heavily on the well-to-do - Golub doesn't dispute.

Buffett acknowledged that higher taxes on the very rich should be part of a deficit-cutting package that also tackles excessive entitlement spending.

Unlike Golub, he noted that lower-income people who don't pay income taxes do pay substantial payroll taxes, which are less progressive.

More to the point, there's no contradiction between Golub's attack on tax expenditures and Buffett's lament, in a New York Times column, about his 17.4 percent effective federal income tax rate.

Buffett - like other ultra-rich people who get much of their income from investments - achieves that low rate thanks in part to one of the tax code's most special favors: The 20-percentage-point gap between the top rate for ordinary income, which is 35 percent, and for capital gains, which is 15 percent.

Even President Obama favored a temporary zero capital-gains rate for small businesses, ostensibly as a job-creation measure.

In fact, taxing capital gains more lightly than income earned through other means - e.g., work - promotes wasteful tax shelters and breaks such as the $1.5 billion-a-year "carried interest" provision for investment managers.

The 1986 tax reform closed the gap between capital gains and ordinary income, taxing both at a top rate of 28 percent.

But subsequent legislation under both Republican and Democratic administrations, culminating in the tax cuts enacted under President George W. Bush, reopened it.

This is one reason that the effective tax rate on the top 400 earners in the United States fell from 29.2 percent in 1992 to 21.5 percent in 2008, even as their income more than quintupled.

Unless you equalize the ordinary income and capital-gains rates, there would still be myriad ways for the rich to avoid taxes.

Congress should follow the precedent set by the 1986 reform: Tax all income at the same top rate. Wiping out other special breaks would yield even greater gains in revenue and equity.

Indeed, expanding the tax base could yield more revenue at a relatively modest top rate. It might not have to be much more than the 29.2 percent top earners paid back in 1992.