Tax the rich: Should millionaires really pay more?

Brennan McFarlane had never been to a protest before. On Sept. 17, the former Navy seaman from Mahwah, N.J., packed his rucksack with sheets and a blanket, unsure if he'd return home that night. Then he rode the train into Manhattan's financial district.

Activists from around the country were converging on Zuccotti Park for the first day of "Occupy Wall Street," a multiweek rally against greed. They brandished signs: "Democracy not plutocracy," "No war but the class war," and "I can't afford a lobbyist." Hundreds chanted, marched, and danced along Broadway. One woman in a birthday cake costume distributed anti-global warming fliers. A skateboarder in sunglasses and a pin-striped suit with a noose in place of a tie clattered along the park's southern edge.

Mr. McFarlane stood in the midst of it all with a neatly hand-lettered sign: "TAX THE RICH."

"I think taxing the rich and getting the rich out of politics is a central issue," explained McFarlane, who studies history at Montclair State University in Montclair, N.J. "If you fix that, you can fix other problems."

Many protesters felt the same.

"I'm here to get out the message: 'Shared sacrifice' is a polite way of saying 'Pay up!' " said Claudia Ford, an administrative assistant who works at a bank and lives on Manhattan's Upper West Side. "It's not about class warfare. It's about supporting our country."

Ms. Ford wore a pale blue T-shirt that said "Tax the rich: You realize they're not 'creating jobs' with their tax breaks, right?" She hawked buttons and bumper stickers that reiterated her theme for $3 apiece. ("I'm not here to profit," she added. "I'm selling these at cost.")

Passersby were bemused. "It seems like a friendly protest," Daniel Koppers, a businessman visiting from Munich, Germany, said with a shrug. "If this was happening in Germany, something would be burning."

Others, less tolerant and perhaps immune to irony, yelled insults like "Get a job!" Youth unemployment, it should be noted, hit 18 percent this summer.

Americans don't typically take to the streets to talk taxes, but these are strange times. A month before the demonstrations began, The New York Times published a now-famous editorial by billionaire investor Warren Buffett titled "Stop Coddling the Super-Rich," which favored raising taxes on the wealthy.

Not everyone liked it. Even some who agreed with Mr. Buffett thought that his championing the issue was symptomatic of the same inequality he sought to repair. "We don't need a rich person to tell us," McFarlane, the protester and former naval seaman, retorted. "I resent that just by being rich you can get your voice heard in ways other people can't."

As the economy continues to wilt, voices on all sides are getting louder and more aggressive. And concerns over taxation – a topic perennially debated among pundits, legislators, and economists, and simply griped about by everyone else each April – are spilling into mainstream America.

The issue provokes strong opinions that don't always fall along class lines.

Four blocks from the protest, Richard Golle, a homeless Vietnam War vet and former stone-mason, sat on a stack of overturned mail crates, his back against a Chase bank's granite facade. At his feet was a paper coffee cup. The few nickels inside weren't enough to cover the bottom.

"They don't really understand the system," Mr. Golle said of the protesters. "The rich people are not oppressing the poor people."

"I'm a poor person, and I don't knock anyone that's rich," he added. "If you want them to spend their money to improve the economy, you've got to give them a tax break. You've got to give them something back."

No one downtown knew it on the first day of Occupy Wall Street, but the tax battles were about to intensify. That night, as McFarlane and his fellow protesters bedded down in the park, using their cardboard signs as mattresses, more news broke: President Obama planned to propose a new millionaire's tax, which he had named – what else? – the Buffett Rule.

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With an estimated net worth of $39 billion, Buffett is the second-richest man in America. When the "Oracle of Omaha" speaks, the markets listen. Yet he's been repeating the same one-liner for more than a decade.

"I'm paying taxes at a lower rate than my secretary ... and frankly I think that's crazy," Buffett said during a speech in 2000 at Columbia University in New York, where he endorsed Hillary Rodham Clinton in her first Senate bid.

Eleven years later, Buffett's refrain – "Tax me more!" – reflects the same stance: that low tax rates on capital gains favor wealthy investors over middle-class wage earners.

For the first time, however, the folksy tale of his receptionist has caught fire, eliciting a strong endorsement from the Oval Office and cries of class warfare from congressional Republicans. Forget Joe the Plumber. Warren Buffett's secretary is the new working-class hero of the Great Recession.

(For the record, Buffett has not one but several assistants. And none are exactly jumping to answer the call of history. Two of them, Carrie Kizer and Debbie Bosanek, declined to be interviewed for this article.)

When Buffett spoke of his beleaguered secretary back in 2000, his words made shallow ripples in the media, then sank from view. Today they've sparked a fierce debate across the country – and even helped inflame one around the world.

In Germany and France, wealthy citizens are petitioning their governments to tax them more; some are positioning themselves as Buffett's ideological cousins. In Italy, Luca di Montezemolo, the chairman of Ferrari, recently said in essence that the rich – the same people who can afford to buy his cars – can afford higher taxes and should pay them.

In the United States, an argument that appears to be about money is actually something much deeper: a fight over the nation's character, waged between two archetypes at the core of the American dream. In one corner is the rugged, up-by-the-bootstraps individualist. In the other is the egalitarian, level-the-playing-field populist.

But these figures have been dueling in the national psyche ever since a band of rebellious Colonists dumped boxes of tea into Boston's harbor. So why is the notion of taxing the rich such a pervasive issue right now?

The answer is twofold. First is the matter of America's budget deficit: The federal government is awash in red ink. The national debt stands at a staggering $14.8 trillion. And the tools required to promote growth and create long-term solvency – raising taxes and cutting spending – are driving a wedge between Democrats and Republicans.

"The acute nature of the economic crisis is such that a fair number of people of goodwill and intelligence feel the deficit has to be tackled as a solution to the long-term economic problems," says Steven R. Weisman, editorial director at the Peter G. Peterson Institute for International Economics in Washington, D.C., and author of "The Great Tax Wars." "Everybody knows that it can't just be done with spending alone, so they're turning to taxes."

The decision to focus on the deficit, it's worth adding, marks a seismic shift in the nation's economic policy. "Since the time of Keynes, it's generally been viewed as destructive to raise taxes or to cut spending at a time of recession. That's what we thought was the lesson of the Great Depression," adds Mr. Weisman. "But there is a feeling that we have to close the deficit, even though that's viewed as completely irrational among the diehard Keynesians."

Twelve legislators on a bipartisan "super committee" have been tasked with creating a plan by Nov. 23 to reduce the deficit by more than $1 trillion over the next 10 years. Failure to reach a compromise will unleash a round of automatic spending cuts, ones that both Democrats and Republicans find odious.

Legislators are now locked in a game of chicken. Republicans have vowed to reject any tax increases. Mr. Obama pushed back, promising in a Rose Garden speech on Sept. 19 to veto any plan that cuts Medicare without raising taxes on the wealthy.

The deficit debacle is one impetus for cries of "tax the rich" on the left and subsequent howls of protest on the right. The other reason comes from life outside the halls of Congress. If you think the public ledger looks bad, consider the personal pocketbook.

More than 46 million Americans now live in poverty, according to census data released on Sept. 13. That number is the highest it's been since the US Census Bureau started keeping track 52 years ago.

Unemployment is hovering stubbornly around 9 percent, prompting Federal Reserve Chairman Ben Bernanke to declare a "national crisis" and Hallmark to release its first-ever line of layoff greeting cards. (One features an angry Persian cat offering to cough up a hairball on your ex-employer. Another depicts cartoon animals slouching toward the "unemployment office.")

The gulf between rich and poor is at its widest since the 1920s, and the wealthiest 1 percent of American households now take in more than 20 percent of total US income, a figure that's doubled in the past three decades. Over the same time period, marginal income tax rates on top earners dropped from 70 percent to 35 percent.

"It's become a moral issue rather than just an economic one," Robert Reich, the former Labor secretary and liberal political economist, says of taxation. "Most people in this country are flat on their backs economically. It's the worst economy since the Great Depression. We have a huge budget deficit that's getting worse."

"If the rich don't pay their fair share, then everyone else has to either pay more taxes or go without the public services they need," he adds.

Mr. Reich isn't alone in that belief. More than three-quarters of Americans support progressively increasing federal income taxes for households that earn at least $1 million annually, according to a Christian Science Monitor/TIPP poll taken last month. And 64 percent favor increases for households earning at least $250,000 a year.

Wealthy people, not surprisingly, are more divided over the idea. Only 23 percent of well-to-do Americans (those making more than $100,000) support tax increases for households making $250,000 a year, according to a September poll conducted by the Harrison Group and American Express Publishing Corp. But the support goes way up when the threshold rises: fully 65 percent of respondents said they would support tax increases on people making $1 million or more.

Don't count conservatives among them.

"Can a people tax themselves into prosperity? Can a man stand in a bucket and lift himself up by the handle?" Winston Churchill demanded in 1904, during his first term in the British Parliament. Never mind that the late British prime minister was talking about free trade, rather than income taxes; that quote has attracted a popular following in contemporary Republican circles, where an arsenal of antitax arguments are being honed for use in the current debate.

Conservative political economists cite how much of the federal tax burden is already shouldered by America's richest citizens. The wealthiest quintile of households paid 68.9 percent of federal taxes in 2007, according to data from the Congressional Budget Office. They also argue that not even a soak-the-rich strategy would make much of a dent in America's staggering debt. Robbing the Fortune 400 of everything they've got would yield about $1.53 trillion – nearly the gross domestic product of Canada but a fraction of the $14.8 trillion US debt.

On the other hand, advocates of taxing the rich counter that a trillion dollars would contribute a lot to solving the problem and, if you extended the increased levies to a larger segment of the rich – or even put a tax on wealth instead of just on personal income, as some economists advocate – the revenues would be even more substantial.

Still, conservatives believe that taxing the rich is tantamount to punishing – and thereby discouraging – the wealth-creating behavior of a nation's most industrious citizens. Many cite a tenet of supply-side economics: the enduring notion that prosperity in upper income brackets helps the less fortunate, too, through job creation and investments that bolster the economy. If the rich are taxed excessively, the theory goes, those benefits will stop flowing.

"There are clearly economic costs associated with taxing this group," adds Alan Viard, a former senior economist at the Federal Reserve Bank of Dallas and a resident scholar at the conservative-leaning American Enterprise Institute. "We will trigger more tax avoidance by them, and we do have the potential to undermine saving and investment."

Grover Norquist, the father of Republican tax policy, has rallied legislators behind these arguments and others. Of the 292 Republicans in Congress, all but 13 have signed a pledge committing to oppose "any and all tax increases." That pledge is circulated by Mr. Norquist's advocacy group, Americans for Tax Reform.

In a recent interview with The Christian Science Monitor, Norquist said, "Obama promised you recovery. He didn't get you recovery. He made things worse." Norquist next compared the president to Joseph Stalin, saying:

"So it's somebody else's fault. 'Get the Kulaks!' The Kulaks were wealthy peasants that Stalin had murdered by the hundreds of thousands. He ran a campaign saying 'Are you not doing well? Are you starving to death? Oh, it's those wealthy Kulaks. Get them!' It distracts people from who's responsible. He's responsible for the problem. Not the Kulaks. And dividing the country against each other to distract people from the failure of leaders is the kind of thing that we expect people to do in other countries that wear funny uniforms. We do not expect that from Americans. I mean, it's repulsive."

Even when such arguments are put in tamer terms, not everyone sees the wealthy as potential victims. "The explosion of the debt bubble and the excesses of Wall Street hurt most Americans terribly," suggests Reich. "Rarely before in American history has the public seen so blatantly how the predations of a very rich and powerful minority at the top can hurt so many."

Reich and others like to note that 23 million jobs were created under President Bill Clinton, who raised taxes and left a surplus, while only 3 million were created under President George W. Bush, who lowered taxes while leading the country into debt and two wars. They point out that, according to the Internal Revenue Service, the 400 wealthiest Americans paid on average only 18 percent in income taxes in 2008, the latest year for which data is available.

They argue that more tax brackets are needed at higher income levels and also that, in a country where the top 1 percent owns more than one-third of the wealth, a direct tax on that wealth may be in order. Finally, they argue that income inequality hurts the purchasing power of the middle class, which is bad for everyone.

"The rich could not possibly have earned as much without the advantages that come from living here in America," Reich says. "We're all in the same boat together."

Some observers, frustrated with both the left and the right, voice a growing concern that the tax code has become a partisan piñata, a hostage to politics. (Consider the definition of politics offered by satirist Ambrose Bierce: "A strife of interests masquerading as a contest of principles. The conduct of public affairs for private advantage.")

"Tax reform should be a nonpartisan activity," says Annette Nellen, a business school professor at San José State University in San José, Calif., who testified at a recent Senate Finance Committee hearing on taxation. Ms. Nellen believes that there are common-sense changes – for example, eliminating the mortgage interest deductions on second homes – that could be palatable to both parties, make the tax code "simple, neutral and equitable," and bring in some revenue, too. But she worries such reforms are unlikely to come about in a climate where politicians are being pulled in too many directions at once.

"They're trying to do tax reform, deficit reduction, and economic stimulus all in one package," she says, frustrated. "That's just too many things."

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As Republicans and Democrats battle, it's hard not to wonder: Have arguments over federal revenues always been this taxing? "The opponents of the income tax have been accusing its supporters of class warfare since at least the Civil War," says Weisman. "That's what they always say: 'You're pitting one class against another.' "

The first federal income tax was established in 1861 by President Abraham Lincoln. Aimed at the young nation's most affluent citizens, it was enacted to finance the Union's war effort and then repealed in 1872, returning America to a tariff-based tax system that protected captains of industry from foreign competition.

In 1894, at the end of the Gilded Age, populists won the passage of a 2 percent income tax on the wealthy. "In a republic like ours, where all men are equal, this attempt to array the rich against the poor or the poor against the rich is socialism, communism, devilism," declared Sen. John Sherman, known at the time as "the Ohio Icicle" for his chilly demeanor. The Supreme Court struck down the tax in 1895.

When the US adopted an income tax for the third time, it stuck. The 16th Amendment was passed by Congress in 1909 and ratified in 1913, establishing the system that is still in use.

While some early American tax battles mirror present-day struggles, Weisman notes, there are also big differences. Prior to the wars in Iraq and Afghanistan, for example, Washington typically raised taxes in wartime.

Today, with calls for austerity ringing out on both sides of the Atlantic, it's not clear that history will offer much of a road map for tax battles waged in the new and globalized economic crisis. Keynes is gone. In America and across the eurozone, governments are abandoning economic stimulus and trying instead to scrimp their way to prosperity. That includes calls for higher taxes on the rich, some of which are being adopted and some not.

In France, for instance, President Nicolas Sarkozy is backing a 3 percent tax on the country's wealthiest individuals. Yet the Italian government recently dropped its plans for a special levy on the rich. One of the main arguments of Greeks rioting in the streets of Athens is the government's failure to demand more of the wealthy. The British are still debating a boost in the top marginal tax rate, to 50 percent, adopted last year.

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During their weeks encamped in lower Manhattan, the Occupy Wall Street protesters described themselves as heirs of the Arab Spring. Historians are likely to tie their rally – thematically, at least – to the narrative of economic unrest playing out across Europe.

Though the violent clashes in places like Berlin and London made the goings-on in lower Manhattan look like one big group hug, at least one New Yorker was spooked by the potential for transcontinental resonance.

"You have a lot of kids graduating college, can't find jobs," New York Mayor Michael Bloomberg said during his weekly radio address the day before the Wall Street protests began. "That's what happened in Cairo. That's what happened in Madrid," he added. "You don't want those kinds of riots here."

Americans don't often riot, and that behavioral pattern seems unlikely to change anytime soon. But their frustration is palpable. Occupy Wall Street and spinoff protests from Los Angeles to Boston attracted thousands of young people who believe their financial prospects have been mortgaged to bail out the nation's elite. They want the future back.

On Sept. 26, the Wall Street protesters staged a march on the financial district's "Luxury Night Out," an event promoting high-end merchants, including a local BMW dealership, a chocolatier, and a steakhouse.

"Couples wore outfits that cost more than we will ever make in a month and looked at cars that cost more than we will ever make in a year," the protest's organizers later reflected on their website.

By the start of this month, rallies fueled by similar sentiments had spread to more than half a dozen American cities. Not surprisingly, the demonstrations have drawn fire from the other side of the tax debate, including from GOP presidential candidates. During an Oct. 5 campaign stop in Florida, retirees asked Republican hopeful Mitt Romney what he thought of the whole thing. "I think it's dangerous," he said, "this class warfare."