The authors say that Democrats’ plans to make the wealthy pay a little more will barely dent America’s long slide from progressive taxation.
U.S. Rep. Alexandria Ocasio-Cortez making a fashion statement. (Ray Tamarra/GC Images via Getty Images)
By Gabriel Zucman and Emmanuel Saez
The Conversation
Demanding tax increases on the rich is back in fashion – both in the corridors of the House of Representatives and on the red carpet of the Met Gala.
The House Ways and Means Committee outlined plans on Sept. 13, 2021, to move the top marginal income rate up a couple of notches to 39.6 percent and to introduce a 3 percent surtax on incomes above $5 million. That proposal would fall short of calls to really “tax the rich,” as Rep. Alexandria Ocasio-Cortez’s dress demanded at a glitzy New York bash just hours later.
Tax policy is deemed progressive if the chunk of income taken increases with the income of the individual – so wealthy Americans would pay a larger proportion of their income than poorer ones. With a regressive tax policy, lower earners pay a larger percentage of their earnings in tax than wealthier ones. The committee’s plan would roughly put tax progressivity back to where it was just before President Donald Trump signed off on Republican tax cuts in 2017.
That would still be far below the level of progressivity the United States embraced in the middle of the 20th century – when wealthier individuals paid a much higher share of their income in taxes than the poor.
In 1950, when looking at all federal, state and local taxes, the top 0.01 percent of earners paid almost 70 percent of their income in taxes. In the postwar decades, corporate profits — the main source of income for the rich — were subject to an effective corporate tax rate of 50 percent. Meanwhile, the rich were subject to high tax rates on wages, dividends, interest and income from partnerships.
The progressivity of the U.S. tax system has dramatically declined over the past seven decades. The upshot is that for most income levels the U.S. tax system now resembles a flat tax that becomes regressive at the very top end, meaning the super-rich pay proportionately less. Today, virtually all income groups pay roughly 28 percent of their income in taxes – except for the 400 richest Americans, who each own more than $2 billion in wealth today and pay around 25 percent in taxes.
Working-class and middle-class Americans pay a substantial amount of taxes because of payroll taxes, which are high and barely affect the rich, and state and local sales taxes, which are regressive – they take a bigger chunk out of a smaller wage than out of a large income. Even households that pay no federal income tax because of low earnings hand over a percentage similar to that of wealthier households, because of these other taxes.
The super-rich’s low tax rates of today are in part aided by the collapse of federal corporate taxation. In the 1950s, 5 percent to 7 percent of national income came from corporate taxes. By 2018, that figure had fallen to just 1.5 percent.
The effective tax rate collapses for billionaires further because they can avoid reporting individual income by instructing their companies not to pay dividends and holding on to their shares without realizing their gains.
The proposal unveiled by House Democrats would increase taxes on millionaires significantly. But it would largely leave billionaires off the hook, despite the explosion of their wealth during the pandemic. More ambitious proposals in the Senate would tax their unrealized capital gains. In our view, this would be a bold addition that would help the United States reconnect with its tradition of tax justice.
Gabriel Zucman is associate professor of economics at theUniversity of California, Berkeley and Emmanuel Saez is professor of economics at the University of California, Berkeley.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
The views expressed are solely those of the author and may or may not reflect those of Consortium News.
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There would be no starving children, no homeless, no poverty, less violence, greater equity and less greed if the wealthy would just pay their fair share…
But surely we need to praise AOC for her brave decision to courageously attend the Met Gala and parade her expensive clothes in front of adoring wealthy people and the media. Don’t we? After all, she’s a socialist, so she says.
As the elites in the United States continue to accelerate the transfer of wealth from the working class to the very rich, the latest mechanism they are proposing is the elimination of the estate tax. That tax is levied on the estate of a deceased person whose assets exceed several million dollars. At the same time, these elite overlords suggest cutting Social Security and Medicare benefits because the nation is seeing an ever-larger deficit.
We need to head in the opposite direction. One solution is to institute a graduated annual asset tax when a person’s assets exceed, say, $5 million. Start out at an annual 5 percent tax on assets exceeding that amount. As one’s wealth increases, so does the tax rate, topping out at, say, 75 percent per year. We could think of this approach as a “pre-death estate tax,” simply moving the estate tax forward in time.
This approach avoids many of the current tax loopholes built into the income tax system, and acknowledges the important distinction between “income” and “wealth.” We would prohibit the export of capital by tax dodgers who no doubt would attempt to avoid paying their fair share by moving assets out of the country. This approach would bring the deficit down quickly and, within a few years, greatly reduce the size of the estates of the very rich.
Tax the rich. Shut down the constant wars, esp. the up-coming one with China. Spend the difference on countering global climate change.
Ah! One of my favorite topics. First, remove the ceiling on FICA taxes, but leave the ceiling on the max Social Security will pay per individual in place. Second, pass a minimum living wage of at least $22.74 per hour so that working people can feed, clothe, educate, and medicate themselves and their families and pay their taxes without great pain. These two things will help level the playing field in this country.
Hear, hear! I have never understood the FICA ceiling and those years when I was still working and exceeded it, I would have gladly kept paying in. I felt then (as I do now) that I made as much as anyone on the planet needs to make, and thus “giving back” in that small way to strengthen social security seemed more than reasonable. To the second point, I really wish there was a business movement that had a nice big logo to hang on any business premises (or post to their web site) when that business is paying a living wage, providing paid health care (until the day comes someday, when I hope when we have true universal care), and a minimum of three weeks annual leave.
Taxation will never ever do the job : hXXps://gerlagerweij.com/the-neo-feudal-subjugation-revisited/