Taxation is a key revenue collection method that the Federal government of the United States uses to run the economy (Osberg & Smeeding, 2006). Taxation is done with respect to ones earnings, with the high income earners required to pay more. However, Americans feel that this is not the case as low earners are taxed more heavily. Kocieniewski (2011) gave a good example of the row around General Electricals. Heavy earners contribute more but only a small percentage of their earnings are taken up for taxation (Roach, 2003). Nicholas Fergusson, a renowned Briton, criticized most economies for their lower taxation on multimillionaire capital ventures (Bawden, 2011). Warren Buffet, an American multimillionaire supported Fergusson’s claim by comparing his 17.7% tax that was charged on his $46 million in 2006, to his secretary’s 30% on her $60000 income. He challenged the government to reduce the gap and tax the Americans fairly proportionately.
Economically, the gap between the rich and the poor will soar as the poor increases in numbers. Past governments have coddled the rich by taxing them a small percentage of their earnings (Buffett, 2011). This is because the whole process is politically intertwined where the rich support their candidates in order to protect their riches. It is a favour that the elected leaders have to return to the rich class. Taxation inequality is an issue that the US administration should address (Osberg & Smeeding, 2006). In the paper, I will assert Buffet’s thoughts and support it with examples from other countries such as the Netherlands.
Evidence of Inequality in Taxation among the United States Citizens
Warren Buffet’s Contribution
Warren Buffet, a democrat, is a public figure in the United States and has been involved in many political events. He talked about the inequality during a fundraiser to support Hillary Clinton’s bid for presidency in 2007. During the fundraiser, he disclosed that 30% of his secretary’s $60000 earning was taxed. Surprisingly, only 17.7% of his $46 million 2006 income was taxed (Bawden, 2011). He termed it as a coddle to the rich by the government, which was cruel (Buffett, 2011). Such words coming from a highly ranked person, giving his personal experiences is evidence enough that there is an inequality in the tax system. Though he contributed a higher amount than the secretary, the proportionate contribution was all wrong.
The OECD Income Inequality (After Taxation) Report
Taxation system in a country is among the factors that affect the income status of citizens in a country. Inequality arises when one group is taxed more than the other. European countries have a relatively lower inequality than the US due to their better taxation system. One of the indicators is the Gini coefficient which puts the US in the 32nd position out of the 35 OECD countries. Only Turkey, Mexico and Chile rank behind the US (Osberg & Smeeding, 2006). Its Gini coefficient stands at 0.34 while countries such as the Netherlands and Denmark have 0.29 and 0.25 respectively. Netherlands’ system of taxation is very equal across all classes of people which average at about 40%. This gives them an economically better society (Roach, 2003).
In countries like Germany, Italy and France the gross income of the citizens shows very unequal trends but the after-tax income is very regular (Osberg & Smeeding, 2006). Though these economies and their respective populations are not as large as the US, it can be used to regulate the increasing rate of inequality between citizens in the United States.
Unprecedented Inequality Growth
In the recent past, there has been an unprecedented growth in the inequalities between different classes of citizens in the United States (Bartels, 2008). The government has however concealed this information by emphasizing on the positive economic issues. Since 1970, there has been a very unusual inequality trends between the rich and the poor (Bartels, 2008). Hacker and Pierson attributed the increasing gap to the wealth transfer between the people. Higher class cements its social status while a new class of very poor people is getting created (Bartels, 2008). In a Forbes report of September 2011, there was an increase in the worth of America’s richest 400 to $1.5 trillion. This was an incredibly quick increment of 12% within a year from 2010, leading to the shrinkage of the middle class while gap in income has widened. In a report by Stanford University that examined the growth of inequality on the US between 1970 and 2009, number of house holds has decreased significantly while the lowest earners have become further impoverished (Lendman, 2012). Areas that were possessed by the middle class have been transformed to low income earners areas while the differential between poor and rich children has increased to 40% with comparison to 1970 figures. The gap has also increased since 1990 and is now greater by 50% after only two decades. Comparison between low class and high class students show that the completion rate of the former is 10% less than that of the latter. A report by CBO indicated that there was a 275% increase in earnings by the richest 1% between 1979 and 2007. The 19% that follows have increased their income by 65% for the same period, while the next 60% have increased their earnings by less than 40%. The lowest 20% have only increased their earnings by less than 18% (Lendman, 2012). This is a clear indication of the difference in growth over the years. Between 1996 and 2006, the high income earner’s income doubled while middle level earners experienced a 10% increase. The poorest experienced a 6% fall in their income over the same period of time (Lendman, 2012).
Most of the 1% rich Americans have a high stake in the political orientation of the United States. They fund politicians during campaigns to ensure that their riches are well guarded and with no changes on the existing policies. A high population of the rich is involved in venture capital investments. In 2010, venture capitalists tirelessly fought to fail a bill that was introduced to the House of Representatives, which attempted to increase taxation of venture capital investments (Miller 2010). Among other things, the bill was meant to increase the tax paid by the managers to the investment fund on the carried interest. Investors criticized the bill that demanded to tax them 25% of their investments and 75% taken as ordinary income (Miller 2010). The venture capitalists have always been well represented and the senator has never agreed to the demands of increasing taxation (Bartels, 2008). It is therefore hard to fight for an increase in these taxes which means that the taxes would not be easily increased (Reich, 2011; Stain, 2006).
Warren Buffet is a reasonable man and can clearly foresee the dip that the United States is headed for if necessary measures are not put into consideration. His remarks were strong, timely and made on the correct political forum where potential policy makers were present.
Evidently, there is a large inequality deficit that can be partially attributed to the taxation system. In most countries where inequality is low such as Germany, taxation system is used to regulate the gap. Buffet feels that there is need to change the taxation system and allow the top 1% to be proportionately taxed as the low income earners. This could be the only way to salvage the falling America. It will reduce transfer of money from the poor earners to the rich earners and the low earners will enjoy the benefits of their citizenship in the world’s most influential and powerful economy.
Finally, the political influence that is possessed by the 1% does not help the situation. Most of them would do all it takes to keep their riches. They, therefore, ensure that they use influential politicians to shoot down motions that would increase taxation on their income. This has resulted to the deterioration of the situation to advanced levels where a new class of very poor people is being created. Unfortunately the rich control the process of policy making which makes the war hard to win by the poor and middle class.