OP-ED: Policies to reduce economic inequality
Wealth and income inequality have been growing in the United States since the late seventies. While some inequality is acceptable, present inequalities are great enough that the rich and the poor often live in two separate worlds.
If the political system does not allow those left behind to improve their lives, while a wealthy elite continue to prosper, the disaffected may take their grievances outside the political system. Additionally, neither free market capitalism nor democracy work if many people are left outside the system; the primary advantage of these systems is that they harness the skills and ambition of a greater portion of the population than do other systems.
There are a few public policies that can create the more even playing field that market economies need to function effectively. Progressive income taxes, where the wealthy pay a higher rate, are effective and widely accepted. The concept of marginal utility is the foundation for this tax; the first dollars people earn are used for necessities so should be taxed as a lower rate than the dollars earned later. For example, dollars earned over $640,600 (the current top bracket for single filers) are less valuable to the taxpayer and are therefore taxed at a higher rate. Economists believe that the top rate to maximize government revenue would be 75% (the current rate is 37%), so that could be higher.
Unfortunately, the U.S. has some major exemptions that undermine progressivity; one is that income from capital gains is given preferential treatment (a maximum rate of 23.8% instead of the previously mentioned 37% rate). Why are investments taxed at a lower rate than wages? Certainly dollars earned through wages are harder to part with than dollars earned through investments. President Reagan corrected this in the 1986 Tax Reform Act, but the political influence of the wealthy led to its gradual reinstatement. The unrealized profits on stocks and bonds are already largely exempted from annual taxation, because their increase in value is only taxed when they are sold.
The second major exemption is that people who inherit securities are allowed to use a “stepped up basis” of their value as their acquisition cost, so all the capital gains that occurred before the transfer avoid being taxed at all. Unrealized capital gains account for 55% of estates worth more than $100 million. There is no good reason that those profits should be tax- free.
Another contributor to inequity is the “carried interest loophole” for financial managers. This allows income earned managing assets (customary fees of 2% of assets and 20% of the profits) to be taxed at significantly lower capital gains tax rates. This benefits the wealthiest profession on the planet and doesn’t even have the fig leaf of encouraging investment (the rationale for taxing capital gains at lower rates), because the manager’s capital is never at risk. The earnings are clearly wages and should be taxed as such.
The estate tax could be used to reduce generational wealth. Unfortunately, Republicans demonized this as a “death tax” and claimed that it would destroy family farms, though they could not produce an example of that ever happening. In 2020, there were 31K principal farm operators who died. Only 50 of those owed any federal estate taxes, so the death of the family farm is more likely due to agribusiness expansion, not the estate tax.
The estate tax only affects 1 in 1,000 estates (couples worth more than $30 million). In 2001 it was applied to estates worth more than $1.35 million, so there is a lot of room to restore some progressivity by reducing the exemption. The estate tax is almost the perfect tax, since people subject to it have the resources to pay and it does not alter economic behavior.
There are a few other potential policies that I don’t have space to go into detail about that could also be helpful. The most obvious is a wealth tax; this has been tried in Europe with mixed success; California will vote in November on implementing a one-time 5% wealth tax on fortunes over $1 billion. Another is raising the corporate tax rate; under President Eisenhower, the corporate tax rate was 52% (Reagan reduced it to 34% and it was reduced to 21% in Trump’s first term). While a high corporate tax rate (compared to other countries) encourages creative bookkeeping to book profits in lower tax jurisdictions, about 40% of corporate stock is owned by foreigners, so much of that tax reduction did not benefit Americans. When Trump reduced the rate substantially, corporations used most of the proceeds to buy back stock (boosting share prices and exacerbating inequality because most shares are owned by the wealthy).
Some on the left want to demonize the wealthy and use the phrase “tax the rich” as a rallying cry. When Jeff Bezos spends tens of millions on his second wedding in Venice, or Mark Zuckerberg spends $300 million on a yacht, that does make them rich targets. While such behavior does suggest that the rich are not the most responsible stewards of the world’s resources, demonizing the rich is not healthy; we need to fix the system that helps the rich get richer while most people struggle to get by.
The demonization of the rich allows right-wing critics to paint progressive taxation as “punishing success.” Raising taxes on the rich is not a punishment, but an important step to correct the growing inequity that could fracture society. It would raise revenue from those who can most easily afford it (and who most benefit from the existing economic system) and it would reduce their power, which has grown enormously. Taxing capital gains at the same rate as labor, eliminating the carried interest loophole, not exempting inherited stocks from taxes on their appreciated value, and increasing the top income tax rate would reduce the advantage the current system gives the wealthy and begin to restore a society in which there are still rich and poor, but they live in the same world.
Kent James, of East Washington, has a doctorate in history and policy from Carnegie Mellon University.