‘Kumbaya’ capitalism collides with self-interest
DAVOS, Switzerland–George Soros is a traitor to his class. Thatâ€™s not an insult or a tabloid exaggeration. It is, instead, a direct quote from my conversation with the billionaire investor and philanthropist at the World Economic Forum here.
â€˜â€˜I am a traitor to my class,â€™â€™ Soros said. â€˜â€˜I think that the income differentials are too wide and ought to be narrowed,â€™â€™ he added, which is why he favors a bigger hit on those, like himself, at the very top.
But among his plutocratic peers, he said, that is very much a minority opinion. In fact, Soros, who helped spearhead the muscular Wall Street support for Barack Obama in the 2008 presidential election, particularly among hedge fund and private equity investors, believes the presidentâ€™s call for higher taxes is the reason he has been ditched by the financiers: â€˜â€˜That has led my hedge fund community to abandon Obama in favor of any Republican, because they donâ€™t like to be taxed.â€™â€™
Henry Blodget, a former (and formerly disgraced) Wall Street analyst who has been resurrected as one of the smartest writers on business and politics, agrees that the financial class is strongly attached to its tax breaks. After his Wall Street friends have had a few drinks, he said, â€˜â€˜they are cackling that they have fooled everybody into thinking that thereâ€™s some justification for this.â€™â€™ â€˜â€˜Thisâ€™â€™ is the carried interest tax provision, which allows some private equity and hedge fund managers to pay tax at 15 percent.
But the cackling may be coming to an end â€” and the hostility toward the president mounting â€” following his State of the Union speech on Tuesday. A centerpiece of that address, and most likely a central theme on the campaign trail over the next nine months, was Obamaâ€™s insistence that the 1 percent must pay up.
â€˜â€˜Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households,â€™â€™ Obama said, in an oblique attack on the carried interest tax break and on Republican candidate Mitt Romney, who paid an effective tax rate of 13.9 percent on income of $21.6 million in 2010.
â€˜â€˜Tax reform should follow the Buffett Rule,â€™â€™ the president said. â€˜â€˜If you make more than a million a year, you should not pay less than 30 percent in taxes.â€™â€™ And, like Soros, the president has decided not to duck charges of class war: â€˜â€˜Now you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.â€™â€™
And not just Americans. Davos is all about identifying the common challenges the global business community faces. One of the big ones this year is governments reining in their plutocrats in the most painful possible place â€” their bank accounts. In Britain, for example, the week began with proposals from Vince Cable, the business secretary, on how to bring down salaries for top executives.
â€˜â€˜We cannot continue to see chief executivesâ€™ pay rising at 13 percent a year while the performance of companies on the stock exchange languishes well behind,â€™â€™ Cable told Parliament on Monday. â€˜â€˜And we canâ€™t accept top pay rising at five times the rate of average workersâ€™ pay as it did last year.â€™â€™ Chilling words for the City, especially since Cable serves in the cabinet of a Conservative prime minister.
Another one of the annual tropes at Davos is an emphasis on the softer side of business. This is a time of year for chief executives to wax poetic about their companiesâ€™ initiatives to educate the rural poor in India or provide clean water in Africa. But alongside these carefully crafted tales of corporate social responsibility, there is plenty of grumbling about government overreach. Three and a half years after the 2008 financial crisis, a particularly popular notion is the idea that the pendulum of financial regulation has swung too far, endangering not just the banking sector, but the sluggish economic recovery more generally.
There is also a powerful sense that businesspeople are being blamed for structural issues that arenâ€™t their fault. One British executive told me it was wrong to criticize executives for their high salaries. Those were the fault of their boards and compensation committees: â€˜â€˜The CEO,â€™â€™ the executive said, â€˜â€˜really has no say.â€™â€™
In a similar vein, the private equity chief David M. Rubenstein, who served in the administration of President Jimmy Carter, said during a panel discussion that businesspeople like Mitt Romney shouldnâ€™t be blamed for paying low taxes â€” thatâ€™s the governmentâ€™s fault. â€˜â€˜You change the law, and theyâ€™ll pay the taxes,â€™â€™ said Rubenstein, a co-founder and managing director of the Carlyle Group. â€˜â€˜Romney said â€” and Iâ€™m not his defender â€” heâ€™s paying whatever the law required. If you change the law, change the law. But donâ€™t criticize him for paying the taxes that the law requires him to pay.â€™â€™
Thereâ€™s some truth to that argument. After all, even Warren Buffett, the inspiration for Obamaâ€™s Buffett Rule, and the class traitor Soros today pay only those taxes required of them. Their point, as Soros told me, is that the tax rate should be higher. But of himself and Buffett, he added, â€˜â€˜the Republicans are trying to save us from taxation â€” against our will.â€™â€™
Yet the Rubenstein defense goes only so far. The low tax rates for millionaires are neither a natural law nor an act of God. They are the result of a political process that, since the late 1970s, has pushed rates, particularly at the top, hugely downward. Business has been instrumental in that shift, both as a matter of general ideology and in fighting doggedly and skillfully for sector-specific tax breaks, like the carried interest provision.
It is pleasant to spend a few days in snowy Davos eating fondue, skiing and talking up creative examples of social entrepreneurship. It can even be fun to muse on one of the big questions the World Economic Forum has designated for collective cogitation: how to â€˜â€˜redesignâ€™â€™ capitalism.
But the hard part is embracing higher taxes or a lower salary. â€˜â€˜I personally believe that when it comes to policy, you shouldnâ€™t be pursuing self-interest but the public interest,â€™â€™ Soros said. But Davos Man prefers to believe in a world of â€˜â€˜kumbayaâ€™â€™ capitalism, where self-interest and the public interest would coincide. Openly insisting that this is not always the case is how Soros really has betrayed his class.