Treat the Tax-Me-More Crowd to a Voluntary Additional Tax

Leave rates and rules where they are, but add a line to tax returns for a VAT-a voluntary additional tax.

As the clock ticks toward a tax increase scheduled to take effect at year end, expect to hear a lot from the "tax me more" crowd.

These are wealthy individuals who profess to favor increases in their own tax bills. A series of recent articles help define the genre, which was pioneered by Warren Buffett last year in his New York Times op-ed piece that ran under the headline "Stop Coddling The Super-Rich."

The first article, published at Bloomberg View on November 22, comes from two money managers, Whitney Tilson and Anthony Scaramucci. 

The second article, published by The New York Times on Novermber 25, is by Steven Rattner, who reportedly works managing about $5 billion of Mayor Bloomberg's money notwithstanding an order by the Securities and Exchange Commission in November of 2010 that barred him for two years from associating with any investment adviser of broker-dealer.

There's a certain amount of overlap between these articles, almost enough to suggest a coordinated campaign. Tilson and Scaramucci write, "we believe the tax rate for capital gains and dividends, currently 15 percent, should be raised to 20-25 percent. Finally, while some of our friends might not speak to us again for writing this, carried interest, which is the primary source of income for private fund managers such as Governor Romney and ourselves, should be taxed as the regular income that it is. This is one of the most egregious loopholes in the entire tax code."

Rattner calls the current tax rate for capital gains and dividends "absurdly low" and declares, "Personally, I would go further and raise the capital gains rate to 28 percent." Like Tilson and Scaramucci, Rattner also calls for inceasing what Rattner calls "the indefensibly low 15 percent tax rate on the famous 'carried interest,' the fee received by private equity and certain hedge fund investors."

Rattner ridicules the possibility that such tax increases would drive Americans offshore, damage small businesses, or adversely affect the incentive to invest. But consider that such tax increases would come, as Rattner concedes, in conjunction with a new 3.8 percent Medicare tax. And consider, too, that many states also tax capital gains, at rates that in 2013 will top out at 13.3 percent in California and at 12.696 percent in New York City.

Under the Rattner plan, the top federal tax rates on long-term capital gains would more than double, to 31.8 percent (28 percent + 3.8 percent). New York or California taxes could bring the total up to the neighborhood of 45 percent. In Hong Kong, Singapore, and Switzerland, by contrast, which compete against America in the global economy, the capital gains tax is zero.

Mr. Buffett himself weighed in again on November 26 with another New York Times piece that also targeted "carried interest" (which is how his competitors get paid) and dismissed concerns that tax increases would deter investment.

Alas, the "tax me more" crowd wins this debate even if taxes don't go up. That's because every minute spent debating higher taxes on capital gains and carried interest (which is just a variety of capital gains) is a minute not spent talking about how the deficit problem is really a spending problem, the result not of revenue shortfalls but rather the fact that an extra trillion dollars or so of annual spending—TARP, the stimulus, the Iraq and Afghanistan wars—has now become part of the budget baseline. It becomes an argument about "Why don't the rich pay more?" instead of a discussion about "Why don't the politicians spend less?" or "How can we increase economic growth?"

How then, to respond? One way for advocates of lower taxation to reply to the "tax me more" argument is with a variation on what House Republicans call the "Put Your Money Where Your Mouth Is Act of 2011." Leave the tax rates and rules where they are, but add a line to the tax return for a VAT—not a value added tax, but a voluntary additional tax.

Call it the Rattner-Tilson-Scaramucci Tax, or the Buffett Tax. The instruction lines could read something like, "If you think carried interest is an egregious and indefensible loophole, please enter the additional tax you would owe on your own carried interest if it were taxed as ordinary income here. And if you think the capital gains rate should more than double, please enter the additional tax you would owe here, too. Remember, this means you think the politicians and their lobbyist friends can spend this money better than you can invest it, spend it, or give it away yourself, or that you think for some reason that the politicians are not going to spend this money but are really going to use it for debt reduction."

The state of Massachusetts tried a similar approach in 2001 when it lowered its state income tax rate. It added a line to the state tax return that allowed taxpayers to voluntarily pay the old higher rate. The Wall Street Journal's Stephen Moore reports that each year about 1,000 Bay State taxpayers choose the higher rate; Senator-elect Elizabeth Warren was not among them. If a voluntary additional tax at the federal level, like the Massachusetts one, doesn't raise much at all in the way of revenues, at least it would have the advantage of clarifying that the "tax me more" clamor isn't really so much about voluntarism as about trying to force others to pay.