Whether the government should tax rich people more to pay for spending priorities is a source of endless debate. Here’s another idea: Tax the rich because it’s the right thing to do.
Most recently, this debate has popped up around President Joe Biden’s aspirations to invest in infrastructure, jobs, child care, and other items. The White House and many Democrats in Congress are wondering how (and whether) to pay for it. Some are pushing to increase taxes on the wealthy and corporations, arguing that they at least need to raise some revenue if they want to send so much money out the door.
Others in the more progressive vein, however, question whether Democrats need to bother to come up with “pay-fors” at all. After all, Republicans didn’t worry much about the deficit when they passed a $1.5 trillion tax cut back in 2017. Plus, they note, concerns about the debt can be widely overblown; interest rates are low and may be for a while, so if there’s a moment to take on debt, it’s now. It’s a politically useful stance because some moderate Democrats are reportedly nervous about the idea of raising taxes.
Sometimes, the haggling and hemming and hawing over what to do about the debt overshadow a point that many Americans find obvious: It’s simply a good, fair idea to tax the wealthy. They have disproportionately reaped the benefits of economic growth and the stock market in recent years, contributing to increasing inequality in the United States. The divide has become even more obvious during the Covid-19 pandemic, during which billionaires have managed to add heaps of dollars to their wealth even as millions of people were knocked on their heels. Some ultra-rich people in the US keep getting richer no matter how much of their money they give away. They literally cannot stop adding to their coffers.
“The market has produced an increasingly unequal distribution of income, and tax policy — and spending as well — are the way that we use government policy to push back and restrain those market-driven increases in inequality,” said David Wessel, a senior fellow in economic studies at the Brookings Institution and the director of the Hutchins Center on Fiscal and Monetary Policy. “The fact is that the market forces producing more inequality seem to be growing, and the government’s willingness to use its power to push against that seems to be waning.”
The chips of the economy are stacked in rich people’s favor, and they’re getting handed more chips constantly. So why not take a few chips away?
The wealthy are grabbing a big share of prosperity. The government can grab it back.
Rich people have done very well in the economy in recent decades. According to the Congressional Budget Office, the share of before-tax income captured by the richest 20 percent of households increased from 46 percent in 1979 to 54 percent in 2016. For the top 1 percent, income share went from 9 percent to 16 percent — more than the entire income brought in by the bottom 40 percent of households. The 2017 tax cut bill disproportionately benefited rich people and corporations. During the pandemic, many high-income Americans say that their financial situation has improved over the past year. They saved money they would have ordinarily spent on vacations and going out to eat, and as the stock market soared, so did their net worth.
The wealthy are simply the group best able to afford to pay higher taxes. (Though to be sure, most people define the wealthy as “people who make more than me.”)
“We ought to start with the people who have benefited the most over the last couple of decades,” Wessel said.
The US tax code is already somewhat progressive, though several other rich countries have significantly higher top income tax rates, and the top income tax rate in the US used to be much higher, too. According to a recent report from the Joint Committee on Taxation, people making more than $1 million in 2018 paid an average tax rate of 31.5 percent, and those making upward of $500,000 paid an average rate of 28.9 percent, combining income, payroll, excise, and corporate taxes. Still, there are plenty of ways that the wealthy use the tax code to their advantage — an advantage the White House is seeking to cut off.
As it stands currently, long-term capital gains on investments such as stocks are taxed at a lower rate than income. In other words, if you make money off of the sale of a stock you’ve had for a while, it’s taxed at a lower rate than if you’d made the same amount of money through working. The Biden administration is eyeing overhauling the capital gains rate for people making $1 million or more, so that those gains would be taxed at the highest individual rate, which the president’s tax plan would put at 39.6 percent. (The 2017 tax bill lowered the highest rate to 37 percent). The White House is also pushing Congress to close the carried interest loophole that lets private equity and hedge fund managers have their gains taxed at a lower rate.
Democrats are also looking at changing how inherited wealth is taxed, including the “stepped-up basis” tax code provision. As it stands, if a rich person sees their wealth go up by $1 billion in, for example, stock, when they sell that investment, they’ll be taxed on their $1 billion gain. But if they never sell and the investment gets passed to their heirs when they die, their heirs are taxed at the baseline of what it’s worth when they get it. If and when they sell, they’re only taxed on new gains.
“We don’t collect as much as we ought to from rich guys because they could hold their stock until death, and then their heirs get a stepped-up basis, and all the gains, all the appreciation over their lifetimes, is simply income taxes avoided,” said Steve Rosenthal, a senior fellow at the Urban Institute’s Tax Policy Center.
Biden has also proposed trying to raise taxes on the wealthy without really touching the tax code and just trying to more fully collect what they already owe. He wants Congress to direct some $80 billion to the IRS over the next decade to try to beef up enforcement and close the “tax gap” — the difference between what the IRS gets in taxes versus what it is owed. IRS chief Charles Rettig has estimated that it could amount to $1 trillion every year.
A 2019 paper from Natasha Sarin, now deputy assistant secretary at the Treasury Department, and economist Larry Summers estimated that the tax gap would total $7.5 trillion from 2020 to 2029, with most benefits going to the wealthy. (Official IRS estimates from 2011 to 2013 put the tax gap at about $441 billion each year.)
In March this year, the Washington Center for Equitable Growth published a paper on tax evasion that estimated the top 1 percent of earners underreport about one-fifth of their income. The research suggested that collecting all unpaid federal income tax from the richest Americans would increase revenues by $175 billion each year. However, tax enforcement is difficult and takes a long time. (Remember Donald Trump’s taxes and endless audits?) IRS agents with the adequate experience and know-how to deal with complex audits can take years to train and replace. And even once the IRS is staffed up, it’s unlikely it will be able to capture all the money that’s owed.
Rosenthal has expressed concerns about the estimates from the Washington Center for Equitable Growth paper and says he believes the answer is to beef up the tax code with simpler laws that require additional reporting. It is true that the IRS could collect more in taxes, but rich people are pretty good at avoiding that. He prefers to raise taxes on corporations — Biden has proposed increasing the corporate tax rate from 21 percent to 28 percent — as a way to tax the rich. Wealthy people and foreigners disproportionately own stocks and benefit from slashes to the corporate tax rate.
“When we increase taxes on corporations, which falls on shareholders, it falls on those who have already benefited from Trump’s tax cuts and who have overwhelmingly benefited from the run-up in the stock market,” Rosenthal said.
Beyond what’s on the White House’s agenda, there is a plethora of proposals for taxing the wealthy. Sen. Elizabeth Warren (D-MA) ran on a wealth tax, which would tax the fortunes of the super-rich, though Biden has not embraced it. Senate Budget Committee Chair Bernie Sanders (I-VT) recently rolled out his own proposal to tax corporations and the rich as well.
One challenge to making any changes to the tax law is making sure they are robust enough that people don’t just find a way to avoid them. “If you spend a lot of political capital on taxing the rich and you spend a lot of time setting up something … and then you discover the people you want to tax are extremely good at finding ways not to pay the tax, then have you really accomplished anything?” Wessel said.
Some Republicans and business leaders fear that if the US taxes rich people and companies too much, it will make the country less competitive, or the wealthy will flee. Democrats pushing to get rid of the cap on the state and local tax deduction — which generally impacts well-off people in blue states — argue that the cap will encourage wealthy people to go to lower-tax states. But there’s not a lot of evidence of millionaire migration from blue states to red states over the tax code. And many rich people and corporations prefer to live and do business in the US, even if it means a slightly higher tax liability.
“The Republicans think every time you tax someone who’s rich ... somehow, they’ll work less hard, invest less, and we’ll all suffer. And Democrats say that’s simply not true,” Wessel said. “I think the evidence is on the Democrats’ side, as long as you don’t overdo it.”
Taxing the rich makes the economy feel fairer
Lots of people right now say the economy seems unfair. It feels like the system is rigged in favor of the people who need help the least. And that makes many people lose faith in the economy — it’s easier to believe in America when you feel like America isn’t stacked for winners.
That’s part of why taxing rich people and corporations is so popular. Like, really, really popular. Eight in 10 Americans say they are bothered by some corporations and the wealthy not paying their fair share in taxes, according to Pew Research Center. A recent Morning Consult/Politico poll found that paying for infrastructure by increasing taxes on those groups made Biden’s infrastructure plan more popular, not less.
Taxing rich people can’t pay for everything Democrats would perhaps like to, but for many progressives, that’s beside the point.
“We do not have to tax to have nice things, we tax for predistribution and redistribution. In order to have nice things, we print money and we invest in the things that we need,” said Solana Rice, co-founder and co-executive director of Liberation in a Generation, which pushes for economic policies that reduce racial disparities. “We almost couldn’t tax enough to really pay for all the things that we need, so it’s a ruse.”
With money comes power, and taxing those who can afford it more fairly could result in a more even distribution of that. “When you have such a massive concentration of wealth in the hands of so few, that ultimately leads to a greater concentration of power in the hands of so few,” said Dana Bye, campaign director of the Tax March, a progressive tax group. Overhauling the tax code won’t fix all of the country’s issues, but it might not hurt, either, and could address some egregious imbalances. Billionaire investor Warren Buffett claimed to pay a lower tax rate than his secretary for years; former President Donald Trump bragged about his low tax liability.
What happens to revenue from potential tax increases matters — if Democrats want to tax the wealthy in order to help people at the bottom of the income spectrum or pay for infrastructure, it is important that they’re deliberate about that. And raising taxes is never easy: There are plenty of constituents, from business groups to lobbyists to voters, who push back.
“That’s why Congress has been doing all of these deficit spending bills,” Rosenthal said. “It’s hard to get anyone to agree on taxes.”
But just because it is hard to tax rich people doesn’t mean Democrats shouldn’t do it. Biden has promised to go big and bold on the economy and push the country in a more progressive, broadly beneficial direction. This is a way to help him get there.