Monday, June 10, 2019
Alexandra Thornton & Galen Hendricks (Center for American Progress), Ending Special Tax Treatment for the Very Wealthy:
Over the past several decades, as concentrations of income and wealth have approached historic levels, taxes on the very wealthy have not kept up. In fact, taxes on the ultrarich have gone in the opposite direction. Tax changes enacted since the 1980s, including the recent Tax Cuts and Jobs Act (TCJA) passed in December 2017, have eroded taxes on the people who have benefited the most from the economy, thereby aiding and abetting the widely acknowledged and troubling increase in wealth inequality. These changes have worsened a structural defect in the U.S. tax code—specifically, its failure to tax massive accumulations of wealth.
The result is that America’s tax code no longer adheres to the core principle of ability to pay—the idea that taxes should be based on a person’s capacity to pay taxes. Instead, today’s tax code turns that principle on its head by letting the wealthiest of the wealthy pay virtually nothing on their gains. Not only are top tax rates on ordinary income low by historical standards, the uber-wealthy also stockpile increasing amounts of capital income while paying little or no tax on those accretions of wealth. The resulting negative feedback loop—whereby the rich use their wealth to influence the U.S. political system to skew policy in their favor, including giving themselves even more tax cuts—undermines democracy. In many cases, this allows economic elites to get what they want, even if a majority of citizens disagree. The TCJA is a prime example of this problem. The bill passed into law despite overwhelming public opposition to tax cuts for the wealthy, and some lawmakers admitted that the motivation behind the bill was to satisfy political donors.
Reversing this troubling trend will require a higher top tax rate for those with extremely high incomes as well as a better way of incorporating wealth and the income it generates into the determination of how much tax a person owes. Accurately accounting for wealth is key to establishing a fair tax system. Policymakers have many options when it comes to taxing wealth or taking wealth into account, including implementing innovative approaches to the tax system and revamping existing provisions of the tax code. Well-designed adjustments to account for the current composition of income and wealth at the top could slow the ballooning imbalance in the structure of the U.S. tax system. Moreover, making these adjustments could lead to a more inclusive economy in the long run, especially if the revenues are invested in areas such as education, infrastructure, and scientific research.
Finally, as policymakers consider ways to better account for income and wealth inequality in the U.S. tax code, they should beware of myths surrounding taxation of the wealthy that may be used to push back against new proposals. This report challenges these misleading and commonly cited claims made by opponents of rebalancing the tax code and putting the economy on a better track.