Here’s a short test of your value judgments. (There’s no right answer.) If free markets start dishing out increasingly unequal pretax incomes, should the government
- ignore it,
- mitigate it by making the tax system more progressive, or
- exacerbate it by making the tax system less progressive?
The question isn’t hypothetical. And you may be surprised to learn that the U.S. political system has given a clear answer: Exacerbate it.
In September, the U.S. Census Bureau released two important reports containing data on inequality. First came the annual report on poverty and income inequality, based on the Current Population Survey, which showed inequality in 2018 just a hair’s breadth below the all-time high set in 2017. This finding received little coverage.
But the media snapped to attention about two weeks later, when the bureau released different data, this time from the American Community Survey, showing that inequality in 2018 surpassed last year’s high. New records get attention.
Superficially, it sounds as if we have conflicting data: One measure of inequality points up while the other points down. But the differences between the two measures are tiny. By either measure, income inequality in America now stands at, or just a tad below, its all-time high. The essential fact is that inequality has been rising for almost 40 years. Whether the high-water mark came in 2017 or 2018 is immaterial.
What about tax progressivity? Two economists at the University of California, Berkeley, Emmanuel Saez and Gabriel Zucman, just published an important new book, “The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay.” Perhaps the most stunning finding: “For the first time in the past hundred years, the working class today pays higher tax rates than billionaires.”
Chew on that for a moment. You may remember Warren Buffett bemoaning that he paid a lower average tax rate than his secretary. Apparently, he wasn’t alone.
Reaching this conclusion took a lot of number-crunching. The federal personal income tax, which gets the most attention, is certainly progressive. But Messrs. Saez and Zucman went beyond that measure in their analysis. They took great pains to evaluate all federal, state and local taxes (including the highly regressive Trump tax cuts), and to attribute to shareholders tax payments by corporations. This last adjustment is crucial because most of the ultrarich earn their money from investments, not paychecks.
Messrs. Saez and Zucman also painstakingly traced tax records as far back as possible—in some cases, all the way to 1913, when the 16th Amendment allowed a federal income tax. These efforts found that the average tax rate (taxes as a percentage of income) on the top 0.1% of income earners rose from about 19% in 1913 to an average of 53% between 1930 and 1974. An “Age of Progressivity,” you might call it. After that, however, policy reversed, and the tax rate on the upper 0.1% has now fallen to about 31%.
For the 400 highest earners, whose taxes can be traced back only to 1960, the drop was a veritable implosion: from 56% in 1960 to 23% today. As a consequence, working-class Americans now pay the tax collector a slightly larger share of their incomes (about 25%) than do the richest 400, who earn more than $450 million a year on average. Does that strike you as fair?
How did this happen? Messrs. Saez and Zucman find that the biggest driver was the collapse of the corporate tax as a source of revenue, followed by the near-death of the estate tax. Both were policy choices.
When we juxtapose the data on inequality with the data on taxes, a sad story emerges. Since about 1980, the market has been handing out increasingly unequal rewards in the form of pretax incomes. This trend toward greater inequality isn’t uniquely American—within-country inequality has risen in most advanced market economies. But instead of mitigating that trend by making the tax system more progressive, America’s political system did precisely the opposite. The present Age of Inequality is also an Age of Regressivity.
One can perhaps excuse Ronald Reagan, who couldn’t have known at the time of the 1981 tax cuts that the market would produce more inequality for decades. But by the time of the 2001 and 2003 tax cuts, George W. Bush’s team certainly knew that. And by 2017, when Donald Trump hammered the latest tax regressivity nail into the inequality coffin, virtually every sentient American knew that inequality was at or near a historic high.
Since it’s football season, we should probably call those tax changes “unnecessary roughness.” On the field, the referee would blow the whistle and penalize the culprits 15 yards. But our political system seems to impose no penalty for piling on. That’s just sad.
Mr. Blinder is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve.
Presidential candidate Bernie Sanders proposed an annual wealth tax topping out at 8% for the richest Americans, offering the farthest-reaching Democratic plan to pay for expanded government programs and break up concentrated fortunes.
Mr. Sanders’ plan would hit more households and raise more money than the tax proposed by Sen. Elizabeth Warren of Massachusetts, his chief rival for progressive voters. According to an analysis by economists who consulted with both campaigns, Mr. Sanders’ plan would generate $4.35 trillion over a decade, compared with Ms. Warren’s $2.75 trillion.
Mr. Sanders’ plan would increase federal revenue by about 10%, all from around 180,000 households.
“Enough is enough,” Mr. Sanders, a senator from Vermont, said Tuesday. “We are going to take on the billionaire class, substantially reduce wealth inequality in America and stop our democracy from turning into a corrupt oligarchy.”
‘Enough is enough,’ Sen. Sanders said. ‘We are going to take on the billionaire class, substantially reduce wealth inequality in America and stop our democracy from turning into a corrupt oligarchy.’ PHOTO: GERARDO BELLO/ASSOCIATED PRESS
The tax would apply to married couples with net worth of at least $32 million and individuals with net worth of at least $16 million. The rate would start at 1% per year and rise to 8% for married couples with assets of least $10 billion. That 8% rate would mean that megabillionaires who don’t earn at least an 8% return would see their fortunes shrink, and Mr. Sanders said Tuesday that there should be no billionaires.
During this election cycle, Democrats have offered more expansive proposals to tax the super-rich than they did in years past. That is in part a reaction to income and wealth disparities, and it is also an attempt to fill what they see as gaps in the income-tax system.
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Under the current tax code, gains in wealth aren’t taxed as income unless people sell assets and realize gains. Unrealized gains also escape income taxation when a person dies, though the estate tax may still apply.
But implementing a wealth tax would face challenges. Such a change would require new rules and procedures for determining wealth and additional Internal Revenue Service resources to prevent tax avoidance and tax evasion. A wealth tax would also have unknown effects on economic growth and could be declared unconstitutional because courts could declare it a direct tax that would have to be apportioned among states according to their population.
Mr. Sanders calls for imposing an exit tax of up to 60% on wealthy people who renounce their U.S. citizenship. He would also expand the IRS to audit at least 30% of people in the lowest wealth-tax bracket and audit all billionaires every year.
Analysts have questioned whether wealth taxes would actually raise as much money as the campaigns estimate, both because of tax avoidance and because of disagreements over how much wealth is concentrated at the top of the distribution.
“These wealth taxes raise a lot of money, perhaps not as much as the advocates hope,” said Janet Holtzblatt, a senior fellow at the Tax Policy Center, a Washington group run by a former Obama administration official.
Robert Reich debunks 12 misconceptions about tax policy in America.