Taxes on Wealthy Could Generate Revenue, Help Prevent Future Economic Crisis

In the United States, the wealthiest citizens pay relatively little in taxes compared to the rest of us.

According to a recent article by the Institute for Policy Studies:

“As recent IRS data show, these elites are paying less in taxes – much less – than their deep-pocket counterparts used to pay. In 2006, the 400 highest-income Americans together reported $105 billion in income, an average of $263 million each.

Having trouble visualizing that? To pocket $263 million a year, you would have to take home over $60,000 an hour – and work 12 hours a day, seven days a week, for an entire 12 months. Sounds tiring, doesn’t it? But most of the top 400 make their fortunes buying and selling assets, everything from stocks and bonds to the exotic paper that helped inflate the housing bubble.

Uncle Sam taxes income from those assets – whether that income be capital gains or dividends – at a much lower rate than income from work.

The current top tax rate on “ordinary” work income sits at 35 percent. But dividends and capital gains from the buying and selling of most assets face only a 15 percent top rate. That’s why in 2006, America’s top 400 paid just 17.2 percent of their $263 million average incomes in federal tax.

Millions of middle-class American families, once you tally income and payroll taxes, pay far more of their incomes in tax. One particularly striking example from billionaire investor Warren Buffett: In 2006, he paid 17.7 percent of his income in total taxes. His secretary, who made $60,000, paid 30 percent of hers.

How did we end up with this sorry state of affairs? Lawmakers in Congress have spent the past several decades systematically slicing the tax rates on America’s top income brackets. Their rationale? Lower taxes on the top, free up capital for investment, and boost productivity.

In actual economic practice, those lower taxes have served instead to fuel speculation and increase budget deficits. For the ultrarich themselves, the tax savings have been nothing short of breathtaking. Back in 1955, America’s top 400 paid more than 50 percent of their incomes in federal tax, almost triple the rate of today’s top 400.”

A Solution to Revenue Problems: Increase Taxes on the Wealthiest

Late last month, the Institute for Policy Studies released a report that argues that taxes should be raised for the wealthiest Americans in order to fuel the economic recovery and address major national crisis like health care and global warming. Unlike what is frequently reported in the media and in Washington, the think-tank argues that this would make the U.S. economy stronger:

“Higher taxes on the wealthy, in our current economic situation, would actually have a positive impact. Appropriately targeted, these taxes would dampen the speculative frenzy of the last several decades. Over these years, grand concentrations of private wealth have been the engines behind the high-risk, high-return speculation that fueled economic bubbles in technology, housing, and commodities. Reducing these grand concentrations of wealth will help discourage future economic bubbles.

By the same token, carefully targeting higher taxes on U.S. corporations that have hidden dollars overseas to game the tax system would also raise federal revenues and, at the same time, help strengthen our basic economic foundation.”

Moreover, the report argues that increasing taxes would not impact consumption, which it says drives employment, thus refuting common arguments that raising taxes would result in lost jobs.

Specific Tax Changes Proposed

The report recommends seven specific tax proposals that it says would raise $500 billion a year in revenue and $3 trillion over five years.

These proposals include:

1. Repeal tax breaks for households with annual incomes over $250,000: $43 billion per year.
2. Tax speculative financial transactions: $100 2. billion per year. A modest tax on every transaction that involves the buying and selling of stock and other financial products — a penny, for instance, on every $4 traded — would both generate substantial revenue and, if calibrated to impose a stiffer burden on rapidly flipped investments, discourage economically reckless speculation. Several European countries already tax stock trans- actions.
3. Eliminate the high-income tax preference for capital gains and dividends: $95 billion per year. Current law subjects most dividend and capital gains income — the income that flows overwhelmingly to wealthier Americans — to a 15 percent tax rate. The tax on wage and salary income, by contrast, can run up to 35 percent.
4. Levy a significant estate tax on grand fortunes: $60 billion per year.
5. Establish a recovery emergency tax rate on extremely high incomes: $60-105 billion per year. High-income Americans currently face a top tax rate that runs less than half the top rate in effect over the half-century before 1981. Restoring a higher tax rate on high incomes could help finance our economic recovery.
6. End overseas tax havens: $100 billion per year. Individual American taxpayers are now annually evading between $40 and $70 billion in U.S. taxes through offshore tax dodges. U.S. corporations use similar offshore schemes to evade another $30 billion.
7. Eliminate subsidies for excessive executive compensation: $18 billion per year. As taxpayers, we subsidize over-the-top management pay through a host of tax loopholes. Congress should close these loopholes, starting with immediate action to deny all corporations, not just companies getting bailout dollars, tax deductions on any executive compensation that runs over $500,000, or 25 times, the pay of a company’s lowest-paid workers.