If Congress is willing, covid relief and infrastructure maintenance and improvement will cost $6 trillion over the next 8 to 10 years. Who should pay for it? Most proposals call for increased taxes on the rich. But rich people already pay a disproportionate share of federal income taxes. The richest 1% of households already pay 38.5% of federal income taxes and the total for the top 10% is about 70%, leaving 90% of households paying only about 30% of these taxes. Is this fair?
In addition, the desire of rich people to become richer is essential to economic growth. Imagine if Jeff Bezos, Bill Gates, Steve Jobs, and Elon Musk had each retired after making several million dollars because any additional income would be taxed away. High taxes on the super-rich could hinder economic growth and job creation.
Fortunately, the US tax system doesn’t actually soak the rich because, besides the income tax, we have payroll taxes, sales taxes, real estate taxes, corporate taxes, and a host of other taxes at all levels of government that results is a nearly flat tax overall. Taken together, these taxes constituted 28% of the US gross domestic product (GDP) in 2018, with almost everyone in the US paying between 24% and 30% of their income in taxes.
What’s wrong with a flat tax? Well, if the government needs to spend an extra $6 trillion over the next 8 years to remain competitive with the rest of the world, and we don’t want to increase the national debt, a flat tax would take money from the poorest 50% of American households whose income averages $18,500 per year, and from middle class households, who constitute the next higher 40% of earners, who make $75,000 on average. President Biden, by contrast, proposes progressive taxation, obtaining additional revenue only from households earning over $400,000 a year. Which strikes you as more realistic and fair?
As for realism, consider our history. Rich people largely paid for the infrastructure built in the 1950s and 1960s which put us ahead of the rest of the world. Grouping taxpayers according to wealth rather than income, in 1962 the top 10% paid on average 33% of their income in taxes of all kinds instead of the 29% paid in 2018. The wealthiest 1% paid 43% instead of 30%. The top 0.1% paid 51% instead of 31%; the top 0.01% paid 53% instead of 29%; and the top 400 households paid 54% instead of 23%. These were decades of enormous economic growth and low unemployment. High taxes on the wealthy didn’t harm the economy; it helped.
In 2017, the Trump administration lowered the corporate tax rate from 35% to 21% to stimulate the economy. But the last 35 months of the Obama administration (when the tax was 35%) saw more job growth than occurred in the first (pre-pandemic) 35 months of the Trump years. This suggests that increasing the corporate tax rate from the current 21% to 28%, as President Biden has proposed, would not realistically harm the economy or reduce job growth.
As for fairness, tax loopholes have reduced corporate taxes enormously. Over a 10-year period when Amazon earned $50 billion in profit, the company paid less than 5% in taxes (when the official rate was 35%). In the three tax years from 2018 through 2020, dozens of corporations, including Nike, FedEx, and Duke Energy, paid no federal taxes at all even though each earned billions in profits. In addition to this legal tax avoidance, tax cheating costs the government $700 billion per year. Most of this money would enter the Treasury if there were more IRS agents conducting audits on the rich. Should poor and middle-class families pay increased taxes (the flat tax model) so that rich families and corporations can continue to cheat?
Currently, rich couples can pass on over $23 million to the next generation without paying any tax. If the tax-free amount were lowered to $7 million, which would still extend the estate tax to only 0.5% of taxpayers, the government would gain billions of dollars each year and still leave inheritors $17 million of the first $23 million of the family legacy. Should we raise federal taxes on poorer people to avoid such harm to the wealthy?
Capital gains and dividends on investments, income common among the rich, are taxed at a lower rate than most other income. Should people pay less tax when they invest than when they work?
In sum, it seems realistic and fair to tax rich people disproportionally. History shows that it’s economically sound. Adding $6 trillion to the Treasury in this way will still allow rich people to get richer, so progressive taxation won’t harm the economy by reducing incentives among rich entrepreneurs to generate additional wealth and create jobs.
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