Last updated: Jan. 8, 2017
My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.
–Warren Buffett, one of the world’s richest men, closing his argument that the wealthiest Americans need to be taxed more.
Both the income gap and the wealth gap began to widen in the early 1980s, around the same time that supply side economic theory was put into practice. One of the key policies of this theory called for a dramatic cut in taxes for the wealthiest Americans. In 1981, the top tax rate was 70%; by 1988, it was 28%, the lowest it had been since the 1920s. At the same time, the share of US wealth owned by the top 0.1% had also returned to the same high level that it was in the 1920s.
The parallels between the 1920s and today are notable. Both periods of low taxes are associated with high levels of income inequality and bubbles of high economic growth followed by protracted periods of negative or low growth. While low tax rates were believed to stimulate investment and growth, the income inequality produced undermined the essence of a consumer economy by taking money out of the pockets of a majority of consumers.
High Tax Rates Limit Economic Growth; Low Tax Rates Stimulate Growth
One of the central tenets of supply side theory says that a high tax rate inhibits investment and so, limits economic growth. The history of the 1950s and 60s suggests otherwise: In this period of very high income tax rates of more than 90% on the wealthiest Americans, the country experienced its longest sustained period of high growth in more than a century. Income grew at comparable rates up and down the economic ladder during this same period.
Another tenet of supply side theory is that low tax rates will stimulate investment and economic growth. Yet, the periods that saw the lowest tax rates over the last 100 years, the 1920s and our own recent history, generated brief booms but were followed by the Great Depression and the Great Recession, respectively.
This history suggests only that circumstances beyond the income tax rates have a great deal to do with the success or failure of tax policy. Rather than look to absolute principles of taxation and market theories, policymakers should look to particular circumstances of the moment and adjust tax policies accordingly. Naturally, the lessons of history indicate that caution should be taken to avoid an over-adjustment that can undermine growth and destabilize the economy, creating upheaval for all.
Income Taxes are Un-American
Some people believe that progressive income taxes are not consistent with American values and may even constitute a form of socialism. Some argue that such a tax violates several principles of our Constitution, namely “that individuals are equal under the law, that consent is the basis of just laws, and that the powers of the federal government are strictly limited.” Constitutionally speaking, however, the progressive income tax is one of several policies that protect the most fundamental right guaranteed by the Constitution – that of equal representation in government.
In an unregulated market economy, money tends to accumulate among an industrious and fortunate few to the detriment of lower earning workers. Without curbs on extreme income inequality, political power shifts to those with the most cash, enabling moneyed interests to buy representation and access to elected officials while those without much personal wealth are muted. “Government for some of the people, by some of the people” are not the words that built a great nation. Policies that support extreme wealth inequality present a poor choice for those who seek to honor and protect the Constitution.
The progressive income tax values the American system of equal representation over the nation’s preference for unregulated markets. It may not be the perfect solution, but along with other policies for limiting the concentration of wealth in America, it has been an important mechanism for preserving this most basic American value.
Mechanisms for Getting Something Done
A number of mechanisms have been suggested for increasing taxes on the wealthy. Each is briefly summarized below. We invite you to review each one. Please feel free to suggest another mechanism that we have not yet covered. In time, we will offer an option for you to tell us which options make the most sense to you.
Raise the Income Tax Rate on the Wealthiest Americans
An increased tax on earned incomes at the upper end of the scale is generally recognized as only part of one possible solution to resolving the problem of income inequality. There are several reasons for this:
- Those individuals and families who are in the highest tax bracket tend to derive most of their income from sources that are taxed at lower rates than earned income. There are mechanisms that enable the wealthy to convert their earned income to these other forms of income, such as capital gains or dividends. As a Brookings Institution report points out, “A multi-billion dollar tax planning industry thrives on fees wealthy filers willingly pay for help to [shelter their more highly-taxed earned income].”
- Increasing the tax rate on the top earnings brackets will have the greatest effect on income inequality when the change is combined with policies that
- eliminate many tax breaks and credits available to the wealthy, and
- transfer the additional government revenue to taxpayers with the lowest income.
As a stand-alone solution to income inequality, an increase in the tax rate on the wealthiest Americans would only further encourage them to shelter more of their income in order to reduce their tax payment. Such a stand-alone policy would, therefore, have limited effect on income inequality and would be, in the words of Henry J. Aaron at Brookings, “bad tax policy”. Instead, a tax rate increase that is implemented as part of a broader tax policy package that includes elimination of tax shelters and money transfers to those with the lowest incomes (such as expansion of the Earned Income Tax Credit) will have much greater effect.
Eliminate tax loopholes
Tax deductions and credits are written into the tax code to make it legal for individuals and corporations to reduce the tax payments they owe under other parts of the code. While some tax breaks may seem like fair-minded tax deductions, others may be viewed more negatively when they allow those individuals in upper income brackets to substantially reduce the amount of taxes that they pay. Billionaire Warren Buffett has been an outspoken critic of the US tax code and the numerous loopholes that favor the wealthy. On several occasions, he has pointed out that it is because of these loopholes that he is able to pay a much lower tax rate than his secretary.
Implement a Progressive Consumption Tax
The progressive consumption tax is an alternative to the progressive income tax that has slowly gained support. Jointly proposed in the Senate in 1995 by Senator Sam Nunn (D-Georgia) and Pete V. Domenici (R-New Mexico), it has been endorsed in the decades since by the likes of Bill Gates and the Cato Institute, among a host of economists and others. Originally proposed as a means to simplify what is considered to be an overly complex and arcane tax system, the progressive consumption tax is considered by its proponents to be an elegant and simple solution to inequality. There are skeptics, however, who question whether this “silver bullet” will resolve our tax problems and reduce income inequality.
As its name suggests, the progressive consumption tax (PCT) taxes consumption rather than income. It is not to be confused with the “consumption tax”, which is a regressive tax that places a higher effective tax burden on lower income families. In its “progressive” form, it serves the dual purpose of offering families a strong incentive to save while heavily taxing the kinds of luxury spending that only the wealthy can afford.
By itself, most agree that the PCT will not reduce income and wealth inequality. On one hand, a long history of data suggests that the savings incentive of the PCT is unlikely to encourage lower income families to save and build their net worth. On the other hand, those with large savings will get a disproportionate amount of their income through investment interest and capital gains. Some mechanism, such as an estate tax, would be needed under a progressive consumption tax to limit capital accumulation in order to curtail further division between the rich and the poor. The need to append such mechanisms to the PCT raises the concern that this new tax code would be susceptible to the same layering on of complexities as the current system as attempts are made to properly balance all tax-related priorities.
The progressive consumption tax is a straightforward, though not perfect, mechanism for addressing inequality, according to Robert H. Frank, an economist at the Johnson School of Management at Cornell University and a NY Times economics columnist. He explained how the progressive consumption tax would work as follows :
Under such a tax, people would report not only their income but also their annual savings, as many already do under 401(k) plans and other retirement accounts. A family’s annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction — say, $30,000 for a family of four — would be the family’s taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000. It would pay only $1,500 in tax. Under the current system of federal income taxes, this family would pay about $3,000 a year.
Consider a family that spends $10 million a year and is deciding whether to add a $2 million wing to its mansion. If the top marginal tax rate on consumption were 100 percent, the project would cost $4 million. The additional tax payment would reduce the federal deficit by $2 million. Alternatively, the family could scale back, building only a $1 million addition. Then it would pay $1 million in additional tax and could deposit $2 million in savings. The federal deficit would fall by $1 million, and the additional savings would stimulate investment, promoting growth. Either way, the nation would come out ahead with no real sacrifice required of the wealthy family, because when all build larger houses, the result is merely to redefine what constitutes acceptable housing.
The resources below can help you become a more informed and engaged citizen, shareholder, business person, voter – and maybe even an American leader. Our list is not comprehensive, so if you know of another resource that belongs here, please let us know.
Track and support proposed legislation
Several proposals were made in the 114th Congress to close specific tax loopholes but none became law. There are, however, many additional loopholes that have been targeted by politicians, business people, and public interest organizations. The organization, Americans for Tax Fairness, posted a summary of recommendations in March 2015 that is still useful today.
In the table below, click the linked name of the proposed legislation to go to GovTrack, where you can learn more about each bill and contact your senators and representative to express your views.
We will update this page as new proposals are made in the current session of Congress.
|Efforts to increase the federal minimum wage
S. = “Senate Bill” | H.R. = “House of Representatives Bill”
|H.R. 5125:||In committee
GovTrack gave it a 2% chance of being enacted
|Rep. Lloyd Doggett||Would amend the tax code to discourage corporate inversions[i] and to impose tax on unrepatriated earnings and unrecognized gains in connection with corporate expatriations|
|H.R. 1790:||In committee
GovTrack gave it a 1% chance of being enacted
|Rep. Jan Schakowsky||Would eliminate tax credits, deductions used by domestic companies to shield foreign-derived income from taxation in the US|
|H.R. 3935:||In committee
GovTrack gave it a 0% chance of being enacted
|Rep. Mark Pocan||Would end tax deferrals on profits accumulated offshore and terminate the deferral of active income of controlled foreign corporations.|
[i] “Corporate inversions are a form of tax avoidance, whereby corporations and individuals arrange their affairs to legally reduce their tax obligations, usually by moving their legal entity to a country with a lower tax rate.” (adapted from Wikipedia, https://en.wikipedia.org/wiki/Tax_inversion)
Other Resources for Action
VoteSmart.org. Founded in 1988, Project VoteSmart provides free, factual, unbiased information on candidates and elected officials to all Americans. It aims to give you the information you need to … well … vote smart.
Elected officials on USA.gov. This website provides links so you can call or email your federal, state, and local elected leaders. Let them know what you think, and find out their position on increasing taxes so you can make a more informed vote.
Americans for Tax Fairness. Americans for Tax Fairness represents a coalition of more than 400 national, state, and local organizations that support ATF’s call for comprehensive, progressive tax reform that results in greater revenue to meet the nation’s growing needs. Learn more and decide if your company or organization should endorse their efforts.
Center on Budget and Policy Priorities, “Income Gains Widely Shared in Early Postwar Decades – But Not Since Then” (based on US CensusBureau data), http://www.cbpp.org/income-gains-widely-shared-in-early-postwar-decades-but-not-since-then-0. Accessed August 5, 2016.
Covert, Bryce, “Wealth Inequality Is Now As Bad As It Was During The 1920s”, Think Progress, March 31, 2014, http://thinkprogress.org/economy/2014/03/31/3420998/wealth-inequality/. Accessed August 5, 2016.
Buffett, Warren, “Stop Coddling the Super-Rich”, New York Times, August 14, 2011, http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html. Accessed August 24, 2016.
Blodget, Henry, “THE TRUTH ABOUT TAXES: Here’s How High Today’s Rates Really Are”, Business Insider, July 12, 2011, http://www.businessinsider.com/history-of-tax-rates#. Accessed August 5, 2016.
Dorn, James A., “Ending Tax Socialism”, The Cato Institute, September 13, 1996. http://www.cato.org/publications/commentary/ending-tax-socialism. Accessed April 28, 2016.
Aaron, Henry J., “Can taxing the rich reduce inequality? You bet it can!”, Brookings Institution, October 2015. https://www.brookings.edu/wp-content/uploads/2016/06/taxing-the-rich-you-bet-aaron.pdf. Accessed August 5, 2016.
Frank, Robert H., “Why Not Shift the Burden to Big Spenders?”, NY Times, October 7, 2007, http://www.nytimes.com/2007/10/07/business/07view.html. Accessed April 27, 2016.
Sanders’ campaign to be the Democratic Party presidential nominee in 2016 brought renewed focus to the issue of income and wealth inequality, and to the solutions he advocated, including several changes to the tax system aimed at closing corporate loopholes and creating new taxes that would affect only the wealthiest Americans. Learn more …