3 Better Ways to Reduce Income and Wealth Disparity Than a Wealth Tax
“In 2017, an Oxfam study found that eight rich people, six of them Americans, own as much combined wealth as half the human race. . .
From 1989 to 2018 the top 1 percent increased its total net worth by $21 trillion. The bottom 50 percent saw its net worth decrease by $900 billion over the same period. . .
A 2011 study found that US citizens across the political spectrum dramatically underestimate the current US wealth inequality and would prefer a far more egalitarian distribution of wealth.”
https://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States
Elizabeth Warren and her team have proposed an annual 2% tax on every dollar of net worth above $50 million and a 6% tax on every dollar of net worth above $1 billion. Because wealth is so concentrated, this small tax would affect roughly 75,000 households
https://elizabethwarren.com/plans/ultra-millionaire-tax
We have some wealth taxes now. We pay real estate taxes, every year, based on the assessed value of the property. Automobile registration, in many states, is essentially a yearly tax based on the value of the vehicle.
Elizabeth Warren and her team are very smart people, but her wealth tax has come under some criticism, such as:
“a likely constitutional challenge, and implementation problems — especially the consistent valuation of assets ranging from land to rare art — similar to those that have caused most European nations that tried a wealth tax to abandon it. Indeed, it’s all too likely that a wealth tax would bring in less revenue than advocates anticipate, in part because millionaires can afford the best accountants and lawyers. What’s more, a wealth tax of the kind Ms. Warren proposes would not distinguish between wealth accumulated through enterprise and innovation, which is socially productive, and wealth gained through inheritance or rent-seeking, which is not.”
Besides, Americans are aspirational. Even if they are extremely unlikely to ever be rich, they hope to be, and may find any significant “taking” of someone else’s property, offensive.
So, are there better ways to address income and wealth disparity? Several come to mind.
1) All Financial Trades Should Be Taxed 0.5%.
I’ll let 3 brief articles describe this one:
“It’s a simple tweak that would reign in an out-of-control financial sector, stimulate jobs, generate billions of revenue, and possibly prevent another heart-wrenching crisis. Nobel Prize-winning economists like Joseph Stiglitz and Paul Krugman want it. Billionaires like Warren Buffett and Bill Gates want it. Polls show the majority of Americans want it. Even the Pope wants it.
We’re talking about a financial transaction tax (FTT) — a tiny tax of, say, less than half a percent: maybe 3 cents per $100 — on Wall Street trading. It’s simple, more than fair, widely supported by the public, and long overdue. Wall Street has been raking in billions of dollars in profits from financial transactions. And they pay not a penny in taxes on most of them.
Instead of talking about nickel-and-diming seniors by cutting their Social Security and Medicare, letting our infrastructure crumble, and forcing our children to go without proper education or medicine, we could be returning sanity and balance to our financial system. The FTT would put the breaks on the sort of reckless, breakneck-speed computer gambling that helped tank the American economy five years ago. It could raise hundreds of billions annually. Did you hear that, deficit hawks? We’d have enough to close the funding gaps in states that had their budgets destroyed by Wall Street’s risky behavior and predation. We’d even have enough to invest in new jobs. ” http://www.salon.com/2013/10/18/the_tax_that_could_save_america_from_wall_street_partner/
“This small tax of less than ½ of 1% on Wall Street transactions can generate hundreds of billions of dollars each year in the US alone.
Enough to protect American schools, housing, local governments and hospitals. Enough to pay for lifesaving AIDS medicines. Enough to support people and communities around the world — and deal with the climate challenges we’re facing.
It won’t affect ordinary Americans, their personal savings, or every day consumer activity, such as ATMs or debit cards. It’s easy to enforce and tough to evade.
This is a tax on Wall Street, which created the greatest economic crisis in our nation, and globally, since the Great Depression. The same people who have returned to record profits and bonuses while ordinary Americans, the 99%, continue to pay the price of their crisis.
So it’s time for justice for ordinary families and businesses. For American families faced with a choice between buying food or paying the heating bill.
The Robin Hood Tax is just. The banks can afford it. The systems are in place to collect it. It won’t affect ordinary members of the public, their bank accounts or their savings. It’s fair, it’s timely, and it’s possible.
It’s not a tax on the people, but a tax for the people.”
http://www.robinhoodtax.org/how-it-works
A financial transaction tax would also help eliminate the scam of being able to trade stocks a few milliseconds faster, which does nothing productive, but does suck billions of dollars out of the economy and into their companies and bank accounts. Now many of our best and brightest young people go into financial fields for great wealth with no benefit to society, rather than helping solve the many large problems we face.
2) Income is income. Tax it the Same. Eliminate the lower tax rates on Capital Gains
If you buy things like stocks or real estate, and more than a year later sell them for more than you paid to buy them, it is considered a “long-term capital gain” and the maximum you need to pay on that income is 20%. The highest tax rate on regular income is 37%
“In 2016, according to estimates by the nonpartisan Tax Policy Center, nearly 76 percent of all capital gains went to households earning more than $1,000,000 a year. . . in 2016 alone, the capital gains tax preference cost over $130 billion in foregone federal tax revenue, according to the Joint Committee on Taxation.”
Many people work hard for their money. But if you had the good fortune to have $1 million in a US stock market index fund in 2013, you made about $250,000 without doing anything. If you had $1 billion in such a fund, you made $250 million. Without doing anything.
Of course, some years stocks or real estate prices go down. The reason given for taxing investments much less than actual work, is that we want to incentivize investors to risk their money. But how much risk do they really endure, and how much do taxpayers need to subsidize wealthy investors to get them to invest? Sure, the stock and real estate markets can go down huge amounts in a day (or year,) but over time, investors have done fine. After the huge recession in 2009, the stock market recovered by 2013. It is sometimes said that it took 25 years for the stock market to recover from the Great Depression. However, some argue that is “faulty analysis, and that an investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low” and only 7 years from the initial crash. And even if it took wealthy investors 25 years to recover their money after the Great Depression, is that a risk ordinary taxpayers need to cover to get the wealthy to invest? https://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html
It is not surprising that people like to get money that they don’t have to work for, and rich people have extra money they would like to increase. If their choice or timing of an investment is bad, they may lose money. But why should taxpayers cover that risk for wealthy investors? For years we’ve heard that the rich need special treatment of investment income so they will create jobs and prosperity will “trickle down” to the rest of us. But that was never true. Nearly all new wealth in recent years has gone to the wealthiest 1% or .1%, and wealth disparity has grown to the highest levels since the Robber Barons. Again, from 1989 to 2018 the top 1 percent increased its total net worth by $21 trillion. The bottom 50 percent saw its net worth decrease by $900 billion over the same period. . .
And often, instead of investments which increase productivity and prosperity for all, the rich are saving their money, investing it in stocks, bonds, and real estate, which threatens to create bubbles in all those markets. And during times of recession and very low interest rates, if too much money is tied up in savings rather than being used by consumers, it can also create a “liquidity trap”, which can lead to deflation and devastating economic depression.
Famed economist Milton Friedman and Federal Reserve chief Ben Bernanke have joked about dropping $1000 bills from a helicopter so ordinary people would spend them and cure this liquidity trap. Just giving ordinary consumers more money to spend by taxing the very wealthy more fairly would be far better than that helicopter.
https://www.federalreserve.gov/boarddocs/speeches/2002/20021121/
One could argue that capital gains should be taxed at HIGHER levels than regular income. Even the famed tax cutter, extremely wealthy Andrew Mellon ( a conservative Republican Treasury Secretary who reduced taxes on Corporations and the wealthy. The little cartoon banker with a moustache in Monopoly is based on him.) said that “unearned income,” that is, income from capital, should be MORE heavily taxed than “earned income” from labor . (my emphasis)
http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=5205&context=flr
But probably treating all income the same is fairest, with higher tax rates for the wealthy, elimination of loopholes, and/or stronger alternative minimum taxes.
Certainly, taxing Capital gains at LOWER rates than income obtained by real work by real people is crazy, and the fact that has been the case since 1921 largely reflects how well the government does what rich people want.
http://contractforamericans.org/contract-for-americans/
3) Remove the income limit on the Social Security tax.
Employers and employees each need to pay 7.35% of their income to social security and Medicare. 6.2% to Social Security, and 1.45% to Medicare. Self employed people pay 15.35%.
But they only need to pay the Social Security part for income up to $137,700 in 2020. So a person making millions, or even billions of dollars a year pays the same amount into social security as someone making $138 thousand. And that is a problem, because according to the Committee for a Responsible Federal Budget Social Security will be “Insolvent in only 16 Years.. The Trustees project that the trust funds will run out by 2035. . . when today’s 51-year-olds reach the retirement age and today’s youngest retirees turn 78. At that point, all beneficiaries will face a 20 percent across-the-board benefit cut, which will grow to 25 percent over time. The problem Is similar to last year, but It has deteriorated this decade.”
http://www.crfb.org/papers/analysis-2019-social-security-trustees-report
The good news is that simply making all wages subject to Social Security taxes is estimated to eliminate 72% of the projected Social Security shortfall. This assumes a cap on benefits for the wealthy when they retire, but if you consider Social Security a safety net as its name implies, rather than a personal retirement plan, that is fine. If Capital Gains were considered regular income subject to payroll taxes, the shortfall might be eliminated entirely.
Our current way funding of Social Security is a regressive tax — the poor pay relatively more than the rich and far more than the ultra-rich. Social Security is a critical part of our social safety net for the elderly, widowed, and disabled and just having everyone pay the same percentage of their income into the trust fund, could save it.
Summary
One political problem with all efforts to increase taxes on the wealthy is that they are the ones best able to spend money to lobby against those taxes.
Also, voters with incomes of $138,000 to $500,000 per year may seem rich to people in many places. However, I know quite a few such people near Silicon Valley, and most don’t feel wealthy at all. A very modest house there costs millions of dollars. Often both parents have difficult jobs, so child care is very expensive, and expectations are very high. Some offset in income tax for these “surprisingly poor for such large incomes” people, might be needed to get their buy in.
My goal would be to not increase overall taxes on anyone making less than $500,000 or even $600,000 a year. But Elizabeth Warren is correct that the ultra-wealthy need to pay more.
