Calling for tax hikes on the rich is all the rage again – both in the halls of the House of Representatives and on the red carpet at the Met Gala.
The House Ways and Means Committee on September 13 presented its intention to raise the highest marginal income rate a few notches to 39.6% and to introduce a 3% surtax on income above $ 5 million. of dollars. The proposal would fall short of calls to truly “tax the rich,” as demanded by Rep. Alexandria Ocasio-Cortez’s dress at a glitzy night out in New York a few hours later.
Tax policy is considered progressive if the share of income collected increases with the individual’s income – rich Americans would therefore pay a greater proportion of their income than poorer ones. With a regressive fiscal policy, the lower incomes pay a greater percentage of their income in taxes than the richest. The committee’s plan would return tax escalation to roughly what it was just before President Donald Trump approved Republicans’ tax cuts in 2017.
This would still be well below the level of progressivity adopted by the United States in the mid-20th century – when the wealthiest individuals paid a much higher share of their income in taxes than the poor.
In 1950, looking at all federal, state and local taxes, the richest 0.01% of earners paid almost 70% of their income in taxes. In the postwar decades, corporate profits – the main source of income for the rich – were subject to an effective tax rate of 50%. During this time, the rich were subject to high tax rates on wages, dividends, interest and income from partnerships.
The progressivity of the US tax system has declined dramatically over the past seven decades. The result is that for most income levels, the US tax system now looks like a flat tax that becomes regressive at the top, meaning the super rich pay proportionately less. Today, virtually all income groups pay about 28% of their income in taxes, with the exception of the richest 400 Americans, who each have over $ 2 billion in wealth today and pay about 25%. taxes.
Working-class and middle-class Americans pay a substantial amount of taxes because of payroll taxes, which are high and barely affect the rich, and local and state sales taxes, which are regressive – they levy a greater part of a lower salary than that on a large income. Even households that do not pay federal income tax because of their low income pay a similar percentage as wealthier households because of these other taxes.
The low tax rates of today’s super-rich are in part aided by the collapse of the federal corporate tax. In the 1950s, 5-7% of national income came from corporate income tax. By 2018, that figure had fallen to just 1.5%.
The effective tax rate falls further for billionaires because they can avoid reporting individual income by asking their companies not to pay dividends and to hold their stocks without realizing their earnings.
The proposal unveiled by House Democrats would significantly increase taxes for millionaires. But that would largely leave billionaires off the hook, despite their wealth exploding during the pandemic. More ambitious proposals in the Senate would impose their unrealized capital gains. In our view, this would be a bold addition that would help the United States reconnect with its tradition of tax justice.
Gabriel Zucman is associate professor of economics at the University of California at Berkeley. Emmanuel Saez is professor of economics at the University of California at Berkeley. This was first published by The Conversation – “‘Tax the Rich’? The Democrats’ plans to make the rich pay a little more will hardly shake America’s long slide towards progressive taxation ”.