Howard Marks Memo: It’s All Very Taxing


The latest from Howard Marks, the CEO of Oaktree, and guru distressed debt investor.

Memo to: Oaktree Clients

From: Howard Marks

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Re: It’s All Very Taxing

The issue is simple: the U.S. government generally spends more than it brings in . . . and recently, a lot more. For years Congress was willing to serially raise the federal debt ceiling and monetize the deficit. But this past summer, some legislators balked. When the early August deadline for an increase in the ceiling arrived, our elected officials kicked the can down the road, but less far than usual. They created a Congressional supercommittee with unprecedented power to propose solutions, and they designed automatic spending cuts in case no proposal won approval.

With the committee working under a November 23 deadline to find ways to reduce the federal deficit by $1 trillion-plus over the next decade, and with a presidential election less than a year away, the subject of taxes is all over the headlines and likely to remain there. Thus I’ve decided to provide a background piece on the issues.

What form will the deficit-cutting action take? In fact, the possibilities fall into only four categories:

• cut discretionary spending,

• reduce expenditures on entitlements,

• cut waste and fraud, or

• increase tax revenues.

Given the magnitude of the problem, the limited number of potential solutions, and the differences between the parties on the subject, there’s already debate regarding the fourth of those listed above. Democrats generally feel tax increases should be part of any solution, and Republicans often insist that while they’re open to overhauling the tax code, total taxes must not rise.

What’s Fair is Fair

This memo got its start as an excuse for me to write about one of my greatest pet peeves: the so-called “fair share.”

Ask your typical Democrat or liberal about the idea of increasing taxes on upper-bracket earners, and what will they say? In my experience, the answer’s always the same: “We’re not out to soak the rich. We just want them to pay their fair share.” We’ve seen it over and over for years. For example:

Were [the politicians levying taxes on Americans] seeking to redistribute wealth, to recast society along more egalitarian lines? Or were they simply trying to ensure that rich people paid their “fair share”? The answer, predictably, is both. . . .

If poor and middle class Americans were going to be asked [by President Roosevelt], of necessity, to shoulder much of the fiscal burden, then they needed assurance the rich were paying their share. . . .

No one made the case more succinctly than Rep. Cordell Hull, legislative father of the 1913 income tax. “I have no disposition to tax wealth unnecessarily or unjustly,” he explained in his memoirs. “But I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty.”

(“Soaking the Wealthy: An American Tradition” The Wall Street Journal, January 29-30, 2011)

The rhetoric remained unchanged in the late twentieth century:

“We will lower the tax burden on middle class Americans,” [Bill Clinton] pledged in 1992, “by asking the very wealthy to pay their fair share.” (“The Middle-Class Tax Trap” The New York Times, April 17, 2011)

More recently, President Obama carried on the tradition.

I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share. (The New York Times, September 20, 2011)

And here’s another reference from just a month ago:

In proposing a 5 percent surtax on incomes of more than $1 million a year to pay for job-creation measures sought by President Obama, Senate Democratic leaders on Wednesday escalated efforts to strike a more populist tone and to draw Republicans into a confrontation over how much affluent Americans should pay to help others cope with a struggling economy. . . .

“It’s interesting to note that independents, Democrats and Republicans and even the Tea Party agree it’s time for millionaires and billionaires to pay their fair share of taxes,” [Senate Majority Leader] Reid said Wednesday.

(The New York Times, October 6, 2011)

But what is the fair share? How is it to be determined, and by whom? When Senator Reid says, “it’s time for millionaires and billionaires to pay their fair share,” he implies they haven’t been doing so thus far. How does he know? What’s the standard? If there’s an objective standard for one’s fair share, why does it only seem to be those from the left side of the political spectrum who say it’s not being paid? And if there isn’t an objective standard, how can the fair share be determined? The truth is, fairness is almost entirely in the eye of the beholder, and “get them to pay their fair share” seems like just another way to say “raise their taxes.”

There’s probably only one element of fairness that’s beyond discussion: those with higher incomes should pay more in taxes. After that, everything is up for grabs.

• For example, we have a progressive system of taxation, meaning earners don’t merely pay more in terms of dollars; they generally percentage of their incomes in taxes. Most people agree Why those marginal What’s should who fair? tax earn success rate more be double be should penalized that be higher, applicable through how greater to much lower-income taxation?

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