The Case for Taxing the Rich

The current pandemic has laid bare the extreme inequality in our society, including the shortage of food, health care, and other basic resources for many citizens who live paycheck to paycheck. Doing something about this will require us to turn to the complex and prosaic subject of tax reform. In their new book, The Triumph of Injustice (W.W. Norton & Co. 2019), Emmanuel Saez and Gabriel Zucman, Berkeley professors and former advisors to Elizabeth Warren’s campaign, make a strong case for why the rich should be taxed way more than the US is currently doing, and how that can be done. Here are four big take-aways:

  Taxing the Rich More Makes Good Economic Sense
Although it may seem intuitively obvious that taxing the rich a lot more will mean a lot more money flowing into government coffers, those on the right have argued that raising taxes on the rich is a bad idea, because it will discourage productive economic activity among the “job creators” and therefore lead to a loss of revenue as society’s wealth declines. This notion is the conceptual cornerstone of trickledown economics. It is true that at some point tax rates can be so high that they will lead to a loss of revenue, e.g. if the tax rate on incomes was 100 percent, who would want to work? But the question is, where is optimal level of taxation for the rich, the point above which they would be so discouraged from further economic activity that tax revenue would fall? Drawing on empirical research on the behavior of actual rich people in various situations, the authors conclude that our current tax rates for the top one percent, around 30 percent of income, is far below that optimal level, which they estimate to be around 60 percent. In fact, during the 1950s, when our economic growth was far more robust than it is now, the average tax rate on the one percent was about 55 percent. At the 60 percent rate, the public coffers would be enriched to the tune of $750 billion, which would allow public investment in health care, child care, education, and improved infrastructure to address climate change, without the tax burden being so onerous as to persuade Mark Zuckerberg that being the CEO of Facebook doesn’t pay.

      Taxing the Rich Makes Political Sense
Saez and Zucman further argue that raising taxes on the astronomic incomes of the superrich (the multibillionaires) even beyond the above optimal point, to near confiscatory levels, would be desirable even if it would discourage some productive activity among the superrich and would not result in more revenue. Their argument is political. “Wealth is power. Extreme concentration of wealth means an extreme concentration of power. The power to influence government policy. The power to stifle competition. The power to shape ideology. Together, they are the power to tilt the distribution of income to one’s advantage — in the marketplace, in governments, in the media. This has, and always has been, the core reason why extreme wealth owned by some can reduce what remains for the rest of us. Why the income of today’s superrich can be gained at the expense of the rest of society.” (p. 158). It is the reason why James Madison, as much the drafter of the Constitution as anyone, feared the corrupting power of “the inequality of fortunes.” When the very wealthy can bend the government to serve their own interest instead of the public interest, when, for example, they can persuade the government to take no action on climate change, knowing that inaction will place the planet in dire peril, then democracy ceases and we have government by the few for the few. Under the authors’ desired tax rates, there would still be billionaires, but Jeff Bezos would have to scrape by on only a few billion rather than the hundreds of billions he has currently socked away.

The Rich Can Be Taxed
One thing that always comes up when we talk about increasing taxes on the wealthy is that the effort is futile, the rich will always be able to evade and avoid higher taxes. The authors argue persuasively that tax avoidance isn’t inevitable and can be rooted out if there is sufficient political will. First, we need leadership at the top that sees the value of government and just taxation as a moral issue. The tax avoidance industry got into high gear starting in the 1980s, when we had a President (Reagan) usher in an era of hostility to government in his first inaugural address by stating that “government is not the solution to our problems; government is the problem.” The authors point to a number of measures that can be taken to close the major loopholes. For example, one of the most common and successful means of tax avoidance is for corporations to use various mechanisms to transfer their profits, although not their actual presence, to low tax countries like Ireland or Bermuda. Governments can combat that move by doing what individual states in this country do when they impose their corporate income tax on companies doing business in the state: they base the tax on sales made in the state regardless of where the profits show up on the corporate books. Foreign cooperation among high tax states and sanctions against low tax states will also discourage evasion. Taxing wages and capital gains at the same rate will remove one large tax advantage the rich have and keep them and their accountants from playing games by characterizing income as the (lower taxed) latter rather than the (higher taxed) former.

We Need a Wealth Tax
Because most of the wealth of the wealthy does not show up as taxable income, income tax itself will be an insufficient means of taxing the rich. Most of their wealth is in intangible property, like stocks, that are not taxed if they’re not sold or don’t pay dividends. This is why Warren Buffett reported $1.8 million in taxable income in 2015, although his true income in the form of the further accumulation of nontaxable shares in his company, Berkshire Hathaway, is estimated to be around $3.2 billion. In order to achieve that optimal tax rate of 60% of income for the superrich, a wealth tax is essential. (p. 146). There are now good tools to track wealth, and in cases in which the valuation of certain assets are difficult, e.g., shares in a privately owned company for which there is no market, the authors propose that the government estimate the value from comparable publicly traded shares, and then (ingeniously) suggest giving the taxpayer the option of paying the government in shares rather than in cash. And although the authors don't go into it, it's probably the case that, contrary to some news reports, a wealth tax would be constitutional[1].

A more progressive tax structure is not a panacea. We must spend the extra revenue it yields wisely for the common good. But this kind of tax reform is necessary for the creation of a just society. The authors of The Triumph of Injustice show us how this can be done.

[1]  (See C. Johnson, A Wealth Tax is Constitutional,  groups/taxation/publications/ abataxtimes_home/19aug/19aug-pp-johnson-a-wealth-tax-is-constitutional/.)
Robert Katz served as a staff attorney and supervising attorney at the California Supreme Court from 1993-2018. Before that he was in private practice representing public agencies, and worked as a newspaper reporter covering local government in Santa Cruz County. He has a Master’s Degree in Political Science from UC Santa Barbara and a JD degree from Stanford Law School.

Subscribe to this blog by email: click here.


Popular posts from this blog

Which Side Are You On?

Autocracy is Hazardous to Your Health

"Lincoln's Greatest Speech" Offers Lessons for Today