Regressive Taxation Must Be Reversed

Yves here. While Sundaram makes an important point about taxation, spending is also key to redistribution. One of my tax mavens points out that the US has regressive spending (lots of bennies to the rich), while many other economies, with their heavier dependence on sales taxes, have more regressive taxation but far more progressive spending.

Another issue is that as much as I like the idea of a wealth tax in concept, in practice it’s even less likely to go anywhere in the US than skeptical NC readers would think. Not only are the obstacles to passing the tax code changes high, but the issues on valuing assets for wealth tax purposes are the same as for estates tax purposes. The IRS has not won a large estate tax case since the 1980s.

By Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at the Inter Press Service

With many in the world experiencing declining living standards, there has been growing frustration. Many hope that progressive taxation will improve things. While some economies once had progressive tax systems, recent decades have seen regression.

Competing, Contradictory Trends< Triumph of Injustice, the recent book by Emmanuel Saez and Gabriel Zucman, both associates of ‘rock-star’ economist Thomas Piketty, calls for a US return to progressive taxation. The duo show that the US had one of the world’s most progressive tax systems, but now, the richest pay a lower tax rate than the poorest.

The two French economists at Berkeley consider the two major competing US ideologies on taxation based on rival claims with contemporary echoes. The socially regressive, ostensibly libertarian tradition has its roots in property, including slaves, who once accounted for 40% of the population of the US South.

Plantation owners and slaveholders opposed property taxes in the name of freedom and liberty. Meanwhile, the myth of the wealthy that low taxes have long been part of US history and tradition has become far more influential.

Another more progressive tax ideology can be traced to more egalitarian traditions, including some involving wealth taxation. The US has actually had some of the highest tax rates on the rich in world history, as taxation became more progressive from the 1930s, especially after the Second World War.

Those most responsible for the U-turn from the 1980s have been US Presidents Ronald Reagan and Donald Trump. The authors attribute the great recent increase in US economic inequality to the “negative spiral” involving regressive tax reforms over the last four decades.

However, empirical support for their claim is suspect as the ‘primary’ distribution of income before taxation is hardly egalitarian. Besides the traditional division between capital and labour, rentier incomes and much higher executive remuneration have become far more significant in recent decades.

While regressive tax incidence has undoubtedly made things worse, exaggerating the fiscal system’s redistributive impact detracts from a more comprehensive understanding of contemporary inequality.

Avoidance and Evasion

Successive US governments have also enabled tax evasion and avoidance by not investing enough to effectively enforce what remains of the US tax code. These have been portrayed by beneficiaries and their propagandists as ‘unavoidable’.

They then claim that the best option to ensure greater compliance is to lower ‘headline’ tax rates. Thus, instead of greater efforts to reduce tax avoidance and evasion, they urge further reduction of tax rates.

Saez and Zucman insist that governments, especially the world’s most powerful one in Washington, DC, must come down hard on tax dodgers, pointing out that not doing so is due to political choices made. They propose a Federal Protection Bureau to enhance capacity against tax evasion and avoidance.

The duo show that corporate taxes were crucial in narrowing the gap between rich and poor during the Keynesian Golden Age for a quarter century or so in the mid-20th century after World War Two

While very high top personal income tax rates, and much more inheritance and property taxes can help, they show that corporate taxation was crucial. The corporate income tax rate then was 50%, taking half of firm profits.

The high tax rate also encouraged re-investing profits, rather than paying dividends and bonuses, encouraging firm growth with higher capital accumulation in the long-term.

Meanwhile, progressive government expenditure complemented progressive taxation, including more direct taxes, for a comprehensively progressive fiscal system, reducing overall economic inequality.

Proposals to Reduce Inequalities

Saez and Zucman persuasively offer a comprehensive set of proposals to reverse the downward spiral to rebuild a much more progressive US tax system, with many lessons very relevant elsewhere as well. Importantly, they discuss various options for the US, including many not requiring international cooperation.

They acknowledge that the US has already shown the way with its Foreign Account Tax Compliance Act (FATCA). FATCA compels all US citizens, both at home and abroad, to file annual reports on all their foreign holdings, ensuring greater financial transparency in the age of globalization.

Nevertheless, they insist it is not enough, arguing that “when it comes to regulating the tax industry, the Internal Revenue Service (IRS) brings a knife to a gunfight”, instead of enhancing US tax capacities and capabilities

‘Tax All Incomes Equally’

The first principle of taxation for them is that all income should be taxed equally, whether from work or assets. Today, capital income is taxed much less than labour income, increasing inequality contrary to the popular presumption that taxation is progressively redistributive.

Saez and Zucman also show that the rich can afford to pay 4% of national income, or US$750 billion more in tax. Four sets of taxes would double their current average tax rate from 30% to 60%.

They propose a steeply progressive income tax, arguing that a top rate of 75% is most viable. The duo also recommend strongly enforced corporate taxdoubling inheritance tax revenues, and introducing a wealth tax.

Wealth Tax Necessary

The duo also insist that it will be impossible to reduce inequality in the contemporary world only by raising corporate, inheritance and income taxes, as important as these are to the overall effort.

At the rates recommended, a wealth tax would raise significant sums, but still would not radically reduce inequality or extreme wealth concentration. Hence, the authors argue for higher rates, not only to raise more government revenue, but also to reduce extreme wealth inequality and concentration.< Saez and Zucman argue that extreme wealth concentration has led to growth benefits being captured by a few. They argue for taxing the rich, not only to enhance revenue, but also to reduce extreme wealth concentration. For them, “a radical wealth tax would lead to a reduction in the number of multibillionaires. More than collecting revenue, it would deconcentrate wealth”. They suggest a 10% rate on fortunes over US$1 billion. This would not only make it harder to be a billionaire, but also much harder to become and remain a multi-billionaire. If their proposed wealth tax was in place from 1982, most of the 400 richest Americans would still be billionaires, but worth much less. Their wealth shares would be closer to what they were in 1982, before the rapid rise of wealth inequality. Mark Zuckerberg would still have US$21 billion, instead of US$61 billion, while Bill Gates would be worth US$4 billion, instead of US$97 billion. Inequalities Linked

Under President Franklin Delano Roosevelt in the 1930s, an income tax top rate of 94% was introduced, apparently not to raise revenue, but rather, to limit high incomes and wealth concentration.

This effectively limited income differentials between the highest and lowest paid to far more reasonable levels. As top tax rates have drastically fallen since, executives now get several hundred times more than their lowest paid employees.

In a recent interview, Gates commented, “I’m all for super-progressive tax systems…I’ve paid over $10bn in taxes. I’ve paid more than anyone in taxes. If I had to pay $20bn, it’s fine. But when you say I should pay $100bn, then I’m starting to do a little math about what I have left over.”

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  1. Keith Newman

    To pick up on one comment made by Yves. Progressive spending on universal social programs is, in my opinion, even more important that progressive taxation in correcting inequality. Who would benefit the most from universal, public and comprehensive health care (including dental care), childcare and long term care? Who would benefit the most from universal sick leave, generous unemployment insurance and pension benefits? The lower you are on the income ladder the more you would benefit. Obviously.
    This is why the top, say, 10 percent of income earners, let alone the top 0.1%, have little or no interest in this spending. In addition, given the vast size of such programs, taxes on would likely have to rise on top earners, again not something the elite wants.

  2. Hayek's Heelbiter

    And we mustn’t forget the tax law changes re executive salaries that happened on Clinton’s watch and aren’t likely to go away soon..

  3. Keith Newman

    To finish: The top 10 percent of income earners, let alone the top 0.1%, would benefit the least. This explains why they have little or no interest in these programs. In addition, since these would be very big programs, taxes would have to rise on top earners, another reason they would not be in favour. Surprise, surprise, it’s a class issue!

  4. Altandmain

    In a recent interview, Gates commented, “I’m all for super-progressive tax systems…I’ve paid over $10bn in taxes. I’ve paid more than anyone in taxes. If I had to pay $20bn, it’s fine. But when you say I should pay $100bn, then I’m starting to do a little math about what I have left over.”

    To put it bluntly, Gates is going to be a big barrier, and his fellow billionaires are going to be an even bigger barrier.

    We are going to need to tax billionaires a lot more (think FDR like levels) to lower inequality.

    Generally people are happiest where taxes are highest.

    No to mention, progressive taxes make people happier:

    The main problem is the 1% have the political power to avoid making these changes, as do the “1% wannabes” in the ` upper 10%.

    1. Offtrail

      If Gates’ net worth is $97 billion (as stated here) and he had to pay $100 billion in taxes, he would wind up with a net worth of -$3 billion. I too would “be a big barrier” to that, if it were me.

      1. kevin

        Gates was referrencing all of the wealth (and taxes paid) over his entire life – not in any one year. He would still be a billionaire multiple times over if he paid 100 billion over his lifetime

  5. Starry Gordon

    This essay, like so much that is said about taxation and spending, seems to assume that money (which is what taxation is usually about) consists of hard little nuggets of value that persist unchanged as they are passed around. However, at least in the world I observe, most money is at least partly fictional and exists in different forms for different economic classes. For many working-class people, money is closely connected with their labor; they obtain money by doing labor and use it to obtain goods and services which are products of labor. At the other end of the wealth spectrum, the very wealthy are given large amounts of what I call funny money. by such means as credit expansion, which is created for them with no connection to labor whatever beyond the bureaucratic game which creates it. In the US, all kinds of money are denominated in dollars, thus confusing the picture, much as the quick movements of a three-card-monte operator confusion the mark. The non-fictive side of money (again, for working-class people) that gives money its actual, operative value is the probability that, in the future, they will be able to exchange money for future goods and services produced by future labor. In a sense, this value is also fictive, but it has some chance of existing eventually.

    So when we talk about taxes, it makes quite a difference whether the taxes are to be extracted from the working class or the rich. In the former case, taxes like income, payroll, and sales taxes actually deprive the workers of some of their labor. In the latter case, we are in a kind of cloud-cuckoo-land of mostly fabulous monetary images unconnected with actual goods and labor. Hence, an attempt to move money from the latter category into the former would have only two likely, unpleasant outcomes: (1) the rich people’s monetary units given to the working class, being unconnected with labor and the goods and services which labor produces, would quickly run up the prices of those goods and services, resulting in severe inflation; or (2) the rich would simply have the government and their lawyers and accountants disappear the present manifestation of their funds and transform them so that they would be out of reach of the new tax program.

    Absent the creation of a monetary system based on labor and personal value, it appears useless to try to reduce wealth inequality through tax policy. As noted above, however, one can probably mitigate the presently growing inequality by introducing essentially flat taxes on all sources of income, including wages, profits, capital gains, inheritance, windfalls, and so on with a reasonable exemption for the low end of the income spectrum, and by increasing public expenditures for goods and services equally available to everyone. Of course the working class will still be providing the labor — there is no other real source of wealth — but at least they will have a hope of getting a good proportion of its value back, instead of having it ground up and destroyed in the machinations of the wealthy and their parasitical financial system.

  6. cnchal

    From links today.

    > Lossmaking Giant Uber, Hoping To Stay Around For Decades, Says It is Aiming For 100% Zero-Emission Transport by 2040 VentureBeat

    What is the corporate tax rate again?

    It’s the year 2511 and finally Uber paid a dollar of income tax after whittling down the equivalent of fleets of Nimitz units in carry forward losses. Of course in 2511 it takes a million bucks to buy a stick of bubble gum.

  7. Margaret Bartley

    I’m always always always suspicious of tax proposals that don’t have a lot of policy-wonk details in them.

    Several decades ago, I started looking for the data behind the theme that the lowest quintile pays a higher tax rate than the top quintile.

    Maybe someone here can source that data?

    I live in Washington state, touted as being one of the most regressive tax states, where the lowest quintile pays 16% of their income in taxes.

    Really? How can that be?

    People earning very little money get the earned income tax credit, which basically rebates their share of their Social Security tax. And the personal tax for the lowest quintile is practically zero. Washington has a high sales tax – more than 10% in most of the state, but varies because of local taxing districts.
    Yet food, medication, day care, medical bills, insurance, student loans are exempt. I was low-income for a long time. I bought my “stuff” at yard sales, even my clothes – they are tax exempt.

    About the only thing that’s taxed is what you buy at the malls. As a very-low income family, we never shopped at the malls.

    So how do the lowest income people pay 16% of their income in taxes?

    It’s because most of them are getting subsidized housing and utilities, free food, free transportation, free medical care, free child care, subidized tuition assistance, and spend a significant amount of their money on booze and cigarettes, which are highly taxed!

    Discussions of taxes always start off talking about billionaires and the lowest paid workers, but when legislation time comes out, it ends up about taxing the working class more. Always.

    1. Keith

      And there is the always constant fight to impose an income tax in WA state, nicely labeled as a focus on progressive taxation. These calls essentially force me to vote for the same people who will push against yet another tax for me to pay. Like you said necessities are not taxes, and with a little forethought, consumption taxes can be avoided.

      It seems the goal of increased taxation has little to do with helping others, it is just a way for people to break into politics and buy votes with other people money. Some of these people call themselves, civil servants, others businessmen, the new fad being community organizers. Same motives, just different bases to buy.

    2. a different chris

      >Several decades ago,

      Sigh. Let me introduce you to the 80’s, 90’s, 00’s, 10’s, and the start of the ’20s.

      It’s not the lowest quintile whose burden has changed, it’s the fact that the top of the scale now pays so very much less. Have you heard of, you know, the “exploding deficit”?

      It’s not because the people that didn’t pay hardly any taxes still don’t pay hardly any taxes. It’s not the MIC so much, although that doesn’t help.

      It’s the rich don’t contribute anything at all anymore. If you are worth a million dollars, Bill Gates is worth 100,000x that. Do you understand that? If so, I’m impressed because most mortals like me can’t get their heads around it.

      You worth 100k? Gates has a cool million dollars for every one of yours.

      But he is so productive with it, and apparently you are not. I guess you think that’s the way things should be.

      >but when legislation time comes out, it ends up about taxing the working class more

      Yup. Well fight it. And when you lose get up off the mat and fight again. And again.

      Giving up seems a bit wrong, and kicking the poor to hide your own shame is pretty darn ugly.

    3. ScottB

      The source of the impact of state & local taxes:

      “It’s because most of them are getting subsidized housing and utilities, free food, free transportation, free medical care, free child care, subidized (sic) tuition assistance, and spend a significant amount of their money on booze and cigarettes, which are highly taxed!”

      Really? How did you come to that conclusion? Was that your experience when you were low-income? I suggest you do some research. Maybe start by reading “Two Dollars a Day” by Kathryn J. Edin and H. Luke Shaefer.

      “Discussions of taxes always start off talking about billionaires and the lowest paid workers, but when legislation time comes out, it ends up about taxing the working class more. Always.”

      Well, no actually, which is the point of Piketty’s latest book and the research he and Saez and Zucman and others have been doing. It hasn’t always been that way, it doesn’t need to be that way, and we should be organizing to change things.

  8. Jeff N

    Here in Illinois we have a proposed state constitution amendment coming up in the election to allow a progressive tax structure instead of current flat tax.
    The richest will probably move their home state to something like Florida or Texas, but then I would think they’d lose their homeowner exemption discount on their primary residence’s property tax.
    Needs 60% to pass. It was polling above 60% in March (most recent poll I can find) but anti-progressive-tax adverts have been running non-stop on TV here.

  9. Sound of the Suburbs

    Economics the timeline.
    Classical economics – observations and deductions from the world of small state, unregulated capitalism around them
    Neoclassical economics – Where did that come from?
    Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics
    Neoclassical economics – Why is that back again?
    We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics.
    On bringing it back again, we had lost everything that had been learned in the 1930s and 1940s, by which time it had already demonstrated its flaws.
    The Mont Pelerin society developed the parallel universe of neoliberalism from neoclassical economics.

    Keynesian economics was a solution to the problems of neoclassical economics that preceded it.
    They tried running an economy on debt in the 1920s.
    The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.

    Keynes looked at the problems of the debt based economy and came up with redistribution through taxation to keep the system running in a sustainable way and he dealt with the inherent inequality capitalism produced.

    The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living
    Disposable income = wages – (taxes + the cost of living)

    Strong progressive taxation funded a low cost economy with subsidised housing, healthcare, education and other services to give more disposable income on lower wages.
    Employers and employees both win with a low cost of living.

    Keynesian ideas went wrong in the 1970s and everyone had forgotten the problems of neoclassical economics that he originally solved.

    Neoclassical economics – Why is that back again?
    Well there was a reason.
    After a few decades of Keynesian, demand side economics the economy had become supply side constrained.
    Too much demand and not enough supply causes inflation.

    Neoclassical, supply side economics should be just the ticket to get things moving again.
    It does, but it’s got the same old problems it’s always had.

    Keynesian economics was a solution to the problems of neoclassical economics, but it did have a few problems of its own, which wouldn’t become apparent until the 1970s.
    At this point you should move forwards, not backwards.

  10. YuShan

    The most regressive tax is inflation. The lower you go in wage scale, the stickier wages become, so inflation is really a tax on low wage earners. Higher earners (more wage bargaining power) can avoid this and the already rich can benefit by leveraging their assets with loans at negative real rates to buy even more assets.

    Just start by getting inflation to zero (or better: below zero) and normalise interest rates. This will go a long way in closing wealth disparity over time and help lowering prices of stuff people need, like houses.

    1. tegnost

      I don’t know one way or the other, but the measure of inflation in bankster circles reflects, IMO, higher wages. Stopping higher working class wages is job 1, 2, and 3 of controlling inflation.

      1. YuShan

        Higher wages are not in the realm of central banks. All they measure is CPI.

        Anyway, it’s not that wages have not gone up. It’s just that CPI inflation goes up more than wages, so therefore the lowest incomes have lost actual purchasing power over the last four decennia thanks to central bank policies. Of course CPI is even understating the problem in a massive way because it excludes house prices. Still central banks tell you that inflation is too low while low/ middle wage earners can afford less every year.

        While central banks are blowing massive bubbles in housing, stocks, land, etc benefiting the rich and screwing the poor and middle class. Also preventing the poor to accumulate any wealth by saving, because real rates are negative.

  11. Cameron

    I know I’m an old fossil, but are there any other fans out there of land value taxation? I don’t think it’s the panacea that Henry George thought it was, but I do think it’s a step in the right direction.

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