Chrystia Freeland

DAVOS, Switzerland–George Soros is a traitor to his class. That’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.

‘‘I am a traitor to my class,’’ Soros said. ‘‘I think that the income differentials are too wide and ought to be narrowed,’’ 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 president’s call for higher taxes is the reason he has been ditched by the financiers: ‘‘That has led my hedge fund community to abandon Obama in favor of any Republican, because they don’t like to be taxed.’’

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, ‘‘they are cackling that they have fooled everybody into thinking that there’s some justification for this.’’ ‘‘This’’ 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 — and the hostility toward the president mounting — 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 Obama’s insistence that the 1 percent must pay up.

‘‘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,’’ 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.

‘‘Tax reform should follow the Buffett Rule,’’ the president said. ‘‘If you make more than a million a year, you should not pay less than 30 percent in taxes.’’ And, like Soros, the president has decided not to duck charges of class war: ‘‘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.’’

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 — 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.

‘‘We cannot continue to see chief executives’ pay rising at 13 percent a year while the performance of companies on the stock exchange languishes well behind,’’ Cable told Parliament on Monday. ‘‘And we can’t accept top pay rising at five times the rate of average workers’ pay as it did last year.’’ 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 companies’ 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 aren’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: ‘‘The CEO,’’ the executive said, ‘‘really has no say.’’

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 shouldn’t be blamed for paying low taxes — that’s the government’s fault. ‘‘You change the law, and they’ll pay the taxes,’’ said Rubenstein, a co-founder and managing director of the Carlyle Group. ‘‘Romney said — and I’m not his defender — he’s paying whatever the law required. If you change the law, change the law. But don’t criticize him for paying the taxes that the law requires him to pay.’’

There’s some truth to that argument. After all, even Warren Buffett, the inspiration for Obama’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, ‘‘the Republicans are trying to save us from taxation — against our will.’’

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 ‘‘redesign’’ capitalism.

But the hard part is embracing higher taxes or a lower salary. ‘‘I personally believe that when it comes to policy, you shouldn’t be pursuing self-interest but the public interest,’’ Soros said. But Davos Man prefers to believe in a world of ‘‘kumbaya’’ 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.

Watch Carlyle Group co-founder David Rubenstein explain to Chrystia why there’s greater political risk in the United States than in the emerging markets; how he gets a better reception from Chinese Communist Party cadres in Beijing than his own members of Congress in Washington; how private-equity firms can help remedy the impending entitlement crisis; and how the procedure that enacts Congressional salary increases can be adopted to cut the deficit.

Posted by Peter Rudegeair.

The American blogosphere lit up this week with discussion of a report from the International Monetary Fund that, by some measures, the Chinese economy will be bigger than the U.S. economy by 2016.

It makes a great headline, but that story was, of course, old news: Given China’s size, and the speed with which it is growing, simple arithmetic tells you that its economy will one day be bigger than that of the United States. The only question is when.

The bigger surprise is the huge affection U.S. capitalists have for Communist China.

“When I go to China, I find more people in government who are interested in learning about the things that private equity can do to help an economy and help companies than you often do in Washington,” David Rubenstein, co-founder and managing director of Carlyle Group, one of the world’s largest private equity firms, said in an interview this week.

“Washington, for a number of reasons, is not as focused on the joys of private equity,” Rubenstein explained. “So very often, you have to defend yourself when you’re talking to a member of Congress.”

In contrast, he said, he gets a warm reception in the People’s Republic: “What they really think is that private equity firms have shown in the West that they know how to make companies more efficient, that they know how to make workers more efficient and managers more efficient and how to make companies more productive. And that’s something they want.”

The content of his remarks is conventional wisdom among U.S. business people today: it is a truth universally acknowledged that China – with its censorship, central plan and one-party state – is a better place to do business than the United States.

This has become such a familiar refrain that it is easy to lose sight of what a radical assertion it is. We used to think that capitalism and democracy went together; that was the premise behind much of the U.S.-led global nation-building effort of the past two decades. But it has become commonplace to hear the most successful American business people assert that the world’s great power that most explicitly rejects democracy – China – is also the most business-friendly.

This embrace of Chinese Communism shouldn’t be entirely surprising. The best business people are pragmatists. Deng Xiaoping famously said it didn’t matter whether a cat was black or white so long as it caught mice. Smart business people are likewise pretty indifferent to a regime’s ideology (and indeed its treatment of dissidents, journalists and other such niceties) as long as their deals can get done and their tax rates are lenient.

So long as you have a skill or a technology that the comrades have decided China needs, its authoritarian system can be welcoming indeed, and free of many of the delays and frustrations that getting things done in a democracy can entail.

It is easy to equate that effectiveness of execution with good government. But fans of authoritarian regimes, including well-run ones such as China, should never forget the agency problem that is their big structural flaw: For their systems to work, dictators need not only be smart; they must also act in the interests of the state, not of themselves. It doesn’t always work out that way.

Legendary fund manager George Soros recently made the provocative argument that one of China’s most contentious policies – its undervalued currency – is a fraught issue because it is wrapped up in the self-interest of its mandarins. He argued that the undervalued currency is “a form of transferring purchasing power – wealth – from the citizens to the government without imposing taxation.” This made the central government powerful and attracted the best talents to government because it was a way to become wealthy.

The problem now, Soros said, is that the national interest would be served by allowing the currency to appreciate, but the officials whose job it is to make that call are loath to give up the personal benefits of an undervalued exchange rate.

As we prepare for a world in which China is the largest economy, we should be on the lookout for moments like this, when the interests of the state and of its mandarins don’t coincide. And it might be worth remembering that democracy, for all its quarrelsome inefficiencies, has the great virtue of making the conflicts of interest between the state’s servants and the state itself transparent, and making it easy to kick the bums out when those conflicts become acute.