The Buffett question: how should we tax the rich?

You have to be very rich indeed to think you should pay more tax, especially in these straitened times. But Warren Buffett, the so-called Sage of Omaha who is often cited as the world's richest investor, thinks he should, and last week he ignited a debate which has been simmering on both sides of the Atlantic ever since the banking crisis broke over three years ago.

His personal tax rate last year, Buffett told the New York Times, was just 17 per cent, a level that was on average half that paid by his employees. Given the parlous state of America's public finances, he urged Congress to "stop molly-coddling the super-rich" and make him pay more.

Here in Britain, meanwhile, the Chancellor is said to be considering the future of the 50 per cent tax rate introduced by Gordon Brown in the dying days of the Labour government. But, unlike Buffett, George Osborne is worried that high taxes deter entrepreneurs and stifle badly needed growth. He thinks top earners should pay less not more, which raises the intriguing question, who is right - the Chancellor or the Sage?

While the apparent disagreement may seem surprising, it is readily explained by what has been happening to tax rates in both countries.

In America the percentage paid by top earners has been going down for the last 20 years. In this country, over the last two years it has gone up substantially. As well as the 50 per cent top rate on income above £150,000 a year, top earners here have also lost their personal tax allowance, while capital gains tax has gone up from 16 to 28 per cent.

The real question is not which is right in its attitude to taxing the rich, Britain or America, but has the former gone too far and the latter done too little?

As far as the US is concerned, tax rates for the very rich do seem extraordinarily low. It is hard to believe many would really up sticks if, at a time of national fiscal emergency, they were asked to pay a bit more.

In Britain the situation is more complicated. Unlike the US, we are making a serious attempt to reduce our deficit and taxes have gone up accordingly - not just for the rich but for everyone. In fact, in this country it is the middle classes who are being hit hardest of all, even more than the rich and particularly if they have children.

For them, not only have tax and national insurance both gone up, but next year they will be clobbered by the near trebling of university fees, and in 2013 those with younger offspring will also lose their child benefit. By contrast in the US, while middle class tax levels have not fallen in line with those for the rich, they have not gone up either.

Against this background, one has to wonder whether the Chancellor was politically wise to intimate that reducing the 50 per cent top rate is one of his priorities, even allowing for its impact on growth.

A Treasury study is underway to determine how much extra revenue the 50p band is actually producing and many Conservatives are hopeful that the answer will be none at all, thus paving the way for its abolition. But while the public may agree with lower tax for entrepreneurs, they are unlikely to feel so indulgent towards bankers and utility company executives.

If Osborne really is set on scrapping the 50 per cent rate, he is going to need answers to two, very ticklish, political questions.

First, if there is scope for tax reductions, who should come first, the middle classes whose support the Tories will need if they are to win the next election, or entrepreneurs on whom growth depends but who would probably vote Conservative anyway?

Second, how can he relieve the burden on the sort of job-creating businesses everyone wants to support, without at the same time doing a favour to the banks, utilities and oil companies whom the public suspect are ripping them off?

The answer to the second would be comparatively simple: continue hitting them with special levies and one-off windfall taxes, as both Labour and Conservatives have done in recent years.

Going easy on the middle classes will be more tricky, because that would require real money. Unless Osborne is also prepared to go easy on his deficit reduction targets, and so far there is no sign he is, that could be hard to find. Without something for the middle classes, however, it is difficult to see how he will be able to help top-earners – deserving or otherwise. ·