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How to make the super rich pay more tax

Warren Buffett's revelation may embarrass Donald Trump.

Warren Buffett's revelation may embarrass Donald Trump. Photo: AAP

If the Australian government could commandeer Warren Buffett’s bank accounts and share portfolios, fixing the budget deficit would only be a matter of a few mouse-clicks.

As the world’s most successful investor in the last 30 years, Omaha-based Buffett has amassed a personal fortune estimated by Forbes magazine at $US 72.3 billion.

In local currency terms, that’s pretty much double what Joe Hockey expects to lose this year managing the Australian government’s revenues and expenses.

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While Buffett’s troves of cash are well beyond the reach of the Australian Treasurer, his ideas are not.

A local think tank, The Australia Institute, has just published a report that claims the government could save $2.5 billion if Buffett’s wisdom was applied to the tax system.

Closing tax loopholes for the rich

The report’s author, Matt Grudnoff, argues that the problem with budget finances is not excessive spending, but the recent failure of successive governments to grow revenue.

He observes that tax revenue as a percentage of Gross Domestic Product has declined from 25 per cent in 2000 to its current level of 22.8 per cent.

“Clearly, the drop in tax revenue is a much larger contributor to the budget deficit than the increase in spending,” Grudnoff states in the report.

He argues that tax revenue is eroding because high-income earners are today more able to exploit tax breaks to reduce their annual tax bills.

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According to Grudnoff, the government should be focussed on developing policies to protect and retrieve revenue rather than withdrawing welfare services that are needed by people on low or no incomes.

The Buffett Rule

Grudnoff’s observations stem from a research exercise undertaken by Buffett that compared the tax rates paid by him and his staff at the headquarters of his company, Berkshire Hathaway.

To his great surprise and dismay, Buffett discovered that he was paying a lower effective tax rate than many of his staff, including his secretary.

The discovery inspired Buffett to formulate a method that ensured millionaires and billionaires always paid a higher tax rate than middle and low-income earners.

Under the so-called “Buffett Rule”, the wealthy can still claim tax breaks on their investments or business activities, but only to the extent that they do not lower their effective tax rates below those of people in lower income brackets.

The effect of Buffett’s approach is to establish tax floor on people in the highest income bracket.

“The ‘Buffett Rule’ creates a tax rate floor, which allows legitimate deductions to be claimed, but also means deductions on earnings over a certain level can’t reduce high income earners’ average tax rate below a specified minimum,” Mr Grudnoff said.

For this reason, Grudnoff argues that implementing the Buffett Rule would be a relatively simple way of restoring the Australian income tax system to an equitable balance.

Importantly, it would immediately reduce the incentives for wealthy individuals to employ tax advisers to find and exploit loopholes in tax laws.

“The result is a more progressive tax system where less time, effort and money is spent in the endless game of cat and mouse as loopholes are discovered, exploited and sometimes removed,” Grudnoff said.

Potential impact of Buffett rule in Australia

The Australia Institute commissioned the National Centre for Social and Economic Modelling to measure the likely impact of Buffett’s Rule in Australia.

The centre found that the government would extract almost $2.5 billion in additional income tax revenue.

Buffett Rule Table

The $2.5 billion would be raised from only 31,524 high-income households who would pay, on average, extra taxes of $79,000.

Mr Grudnoff said the Buffett Rule did not create a new tax, but a way to close the loopholes and fix the system so it could work in the way it was intended.

“Many on extremely high incomes are not just reducing their tax bill, they’re managing to pay nothing at all,” he said.

“Luckily, a billionaire has proposed a simple and effective solution.”

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