Middle-income entrepreneurs in the UK can end up handing over more than half their hard-won earnings in taxes of one sort or another. So it is indeed shocking, but not really surprising, that US Presidential Candidate Mitt Romney, who is worth an estimated $250 million, paid taxes of “only 13.9%” on the $43 million he made over the last two years.

As usual, however, the media headlines do not tell the whole truth. A more accurate figure may be 14.5% rather than the 13.9% which was widely reported because it made a better story. Most reports also ignore the fact that this figure refers only to federal taxes: Americans pay state and local taxes on top of this. Finally it should be stressed more than it has been that this effective tax rate is an average over the whole income and should not be confused with the headline marginal rates that are payable on only part of the income of higher earners – the notorious 50% in the UK.

All that said, it does still shock how the effective rate paid by Mr Romney is much lower than that paid by many who are a lot poorer. There is no serious suggestion that Mr Romney has done anything illegal or dishonest. On the contrary, it is surely to his credit that he gave about $7 million to charity, which is tax deductible in the US and therefore a major factor in the relatively low marginal rate. He should not be condemned for generosity.

Nor should he be criticised, as a man in his 60s, for being retired from active business and living off his investments. Income from investments is taxed at a lower rate, as capital gains. At first glance, it does seem absurd that the tax rate on “unearned income” is lower than that on “earned income”. Yet most “unearned income” actually comes from the investment of income previously earned, so it seems unfair to tax it twice at the full rate.

In any case, Mr Romney has only done what we all do: arrange our finances to minimise our tax liability under the existing system. It is the system that is wrong.

Governments with high marginal tax rates know that they are economic nonsense but keep them for purely political reasons: they give the impression that they are “soaking the rich”, which usually goes down well with the vast majority of the voters who do not consider themselves rich. In order to prevent the rich disappearing, and most of their countries’ economies with them, these governments have almost invariably undermined the high headline rates of tax by a complex, but discreet, system of write-offs and loopholes. These tend to be more accessible for the super-rich than for middle-earners. This is why a flat rate tax would be both fairer and more efficient.

The most significant thing about Mr Romney’s tax returns is that they run to more than 500 pages.

It is with great reluctance that we must disagree with Warren Buffett, a man we admire and whose opinions we respect. But, one of the things we like about him is that he admits that he is not infallible.

He recently said that wealthy people like him should pay higher taxes. A group of the European “super-rich” said the same thing.

The obvious response is to say that, if they feel they are not paying enough, no one is stopping them making a voluntary contribution to the state. There is a precedent: the British Conservative MP, and later Prime Minister, Stanley Baldwin once donated a considerable portion of his own wealth to reduce the national debt in the hope that others would follow his example. Few did. There is no record of a similar gesture in the nine decades since then.

A more considered response is to acknowledge that Buffett made at least one good point: it is indeed absurd that our complex tax systems allow the “super-rich” to pay lower marginal rates than middle- or lower-earners. The solution, however, is not higher taxes on the rich but a flat rate tax system, ideally one integrated with the benefits system.

It must also be acknowledged that, although many “champagne socialists” are hypocritical in calling for higher taxes while paying as little as they can, no one can accuse Mr Buffett of such hypocrisy, because he is a great philanthropist.

Indeed, the correct response to Buffett is to appeal to his patriotism: “Mr Buffett, who is more likely to invest your money efficiently, you, with your track record of sensible investment over decades which earned that money in the first place, or the spendthrift US government, which is so incompetent with money that it just lost its credit rating?”

If America is to recover, it must invest in viable businesses. Private sector investment is almost invariably more efficient than public. The pool of surplus wealth held by the “super-rich” is therefore a more effective engine of recovery than the government. Some of this wealth may be wasted through personal extravagance, but very few wealthy individuals waste as much of their own money as our governments waste of ours.

For this reason – as well as for the incentive to generate more wealth – a group of British economists are right to suggest that a cut in higher rate tax would benefit the economy. That said, an even more efficient way of boosting productivity would be to cut taxes that increase the costs of doing business, such as payroll taxes and business property taxes, rather than taxes on the profits of business. President Obama is therefore right to emphasise cutting payroll taxes as the best short cut to new jobs – subject, of course, to the reminder that the debt crisis is still with us.

Eire, the Republic of Ireland, is a classic example of how low business taxes can generate prosperity even in the most unpromising of places. Although Irish people around the world are very entrepreneurial, the Republic itself was an economic backwater for most of its history. That changed when tax cuts attracted massive inward investment and turned Ireland into the “Celtic Tiger”.

The fact that Ireland is now in financial trouble does not alter that fact that it proves the effectiveness of a low tax regime. The current crisis arose in spite of Ireland’s success as a venue for inward investment, not because of it.

The low business taxes remain Ireland’s greatest competitive advantage – so it is sad that the Republic is almost certainly going to have to give them up.

The Republic’s mistake was not its low taxes but its failure to exploit their success in attracting inward investment. Instead of using the opportunity to develop its own indigenous enterprise culture, the Republic enlarged its already bloated public sector. Instead of investing in the capacity to generate even greater prosperity, Ireland’s politicians became addicted to higher spending.

So the global banking crisis only exposed that the Tiger was more of a kitten than it appeared. Bailing out Ireland’s banks increased state spending even more, and the government made the problem worse by adopting a strategy of hoping it would go away if they ignored it.

The European Union has now stepped in to bail out the Republic itself – but at a price. It is hardly surprising that the national governments who are providing the actual cash – Ireland’s competitors in Europe as well as “partners” – demand that taxes go up in return. They have long been jealous of the competitive advantage Ireland has enjoyed as a result of low taxes, and so they can hardly be expected to underwrite it.

That is why the Irish have been reluctant to accept the bail out. Without those low taxes, the economic future of Ireland looks grim. A virtuous circle may be replaced by a vicious circle – higher tax rates reduce the tax base and so increase demand for even higher tax rates. Ironically, this may mean that the very people who are insisting that the Republic raise taxes may end up paying even more than they intended to underpin the Irish economy.    

In the Hitchhiker’s Guide to the Galaxy, the rock star Hotblack Desiato is advised to spend a year dead “for tax reasons”.

The story is that Douglas Adams got the idea from Pink Floyd, who had to spend exactly a year abroad in order to avoid the astronomical levels of tax paid by British residents in the late 70s. Given that the tax system has got even more complicated since then, it may not be long before death is the only way to escape the tax man.

Death may already be good for business in other senses.

It is generally forgotten now how unpopular the singer Michael Jackson had become by mid 2009. Yet in the year since then he earned $275,000,000. What he did to turn things around was die.

He tops a distinguished list of dead celebrities who are earning more now than they did when they were here – and, in some cases, more than even the biggest earners who are still with us. Their earnings usually take the form of residuals from intellectual property rights.

So the question arises for those of us with intellectual property rights, but who are neither dead nor celebrities, whether it is a good idea to sell those rights while we can or hold on to them for our heirs?

Certainly there are some famous examples of people selling their rights for a pittance. Yet sometimes a pittance is what they really needed at that moment. There is something horribly sad about a great artist or inventor living and dying in relative poverty only to see his less deserving relatives living off millions.

It is also worth noting that selling an intellectual property may be the best way to maximise its value. If you have written a successful epic novel, you are more likely to make millions by selling an option to a big Hollywood studio than you are by trying to film it yourself. Even if you manage to raise the tens of millions necessary to finance the production, you will probably lack the expertise necessary to arrange the shoot and the marketing connections necessary to get the finished product into the cinemas. Something similar is true of most – but not all – new inventions: selling the patent to someone with an established distribution network is usually more profitable than trying to develop everything from scratch.

Of course, it is the ability to identify the exceptions to this rule, and know when it is best to go it alone, that is the mark of the truly great entrepreneur.