When all federal, state and local taxes paid are viewed as a percentage of one’s wealth or net worth rather than of one’s current income, the U.S. tax system is not progressive. It is enormously regressive. The rich pay a much smaller percentage of their wealth or their net worth in total taxes each year than average Americans. The average American pays more than 20 times what our corporations pay in taxes when measured as a percent of the market value of their net worth.
Three men in the U.S. have more accumulated wealth than half of all Americans, 165 million people.
90 percent of us have less than 7 percent of the wealth in the country if you exclude pension assets, which may be of great interest to younger Americans given the difficulty in today’s market of finding a job with pension benefits.
Like most, you probably think the U.S. tax system is progressive, that rich people pay a higher percentage than low-income people. Certainly, marginal federal income tax rates appear to be progressive as they increase from 10 percent to 37 percent as one’s income increases.
Which brings us to Table 1:
When all federal, state and local taxes paid are viewed as a percentage of one’s wealth or net worth rather than of one’s current income, the U.S. tax system is not progressive. It is enormously regressive. The rich pay a much smaller percentage of their wealth or their net worth in total taxes each year than average Americans.
As can be seen in Table 1, the average or median American family pays 12 percent of their net worth in taxes, more than 2,000 times the wealth tax rate of a billionaire like Warren Buffett. And Buffett is not the worst offender. Many wealthy people go years without paying federal tax.
Equally important, the average American pays more than 20 times what our corporations pay in taxes when measured as a percent of the market value of their net worth.
There are four reasons why we have been fooled all our lives about whether the US tax system is progressive.
One, according to the Institute on Taxation and Economic Policy, when we look at all federal, state and local income taxes paid, the system is much less progressive than if we just look at federal income taxes alone. Payroll taxes covering Social Security and Medicare as well as sales and excise taxes hit average Americans much harder than rich people. Even local property taxes are ultimately regressive as they hit poorer renters harder than wealthier homeowners because the tax gets passed through in higher rents. Middle income homeowners have big mortgages, and home wealth represents a small percentage of total wealth for the very rich.
Two, wealthy people often dramatically under-report their incomes. This allows them to pay far less tax each year than the progressive marginal income numbers suggest. Offshore tax havens, corporate shells and trusts, derivative and insurance contracts, questionable deductions, Sub S corporations and other tax schemes are all utilized by the wealthy to avoid paying the taxes they should.
Three, if your stocks and assets go up in value over time, this appreciation goes untaxed until the asset is sold in the future. This way, paying taxes on the appreciation in value of your investments can be postponed indefinitely. And, at death, all such capital gains taxes are forgiven and thus never paid. This allows the rich to grow and compound their dynastic fortunes at a nearly tax-free rate.
Four, the right measure of how progressive a system is what percentage of their wealth people pay, not what percent of annual income they happened to report to the IRS last year. While the rich may have 20 to 30 times the income of typical Americans, their net worth can easily be a hundred to a thousand-fold higher, so taxing incomes rather than wealth will never adequately address inequality in the U.S..
Looking at Table 1, one can also understand why working-class Americans might be attracted to an anti-big-government political message. Forty percent of Americans are forking over not only their annual income, but almost their entire life savings to pay living expenses and taxes. When you have no life savings, you probably are less inclined to support broad-based government efforts to help disadvantaged, sick or elderly people, or to solve collective problems like global warming. A member of the yellow vest protests in Paris said it best: “Macron is concerned with the end of the world…. We are concerned with the end of the month.”
A wealth tax of 3 percent on the top 1 percent wealthiest U.S. households, those with a net worth of more than $10 million, would raise an additional $1,310 billion dollars a year. But this small-percentage wealth tax will do little to address the dramatic wealth disparity in the U.S., as most of these fortunes have been growing at 6 percent to 7 percent per year according to Thomas Piketty, the author of the phenomenally successful book on inequality entitled Capital in the Twenty-First Century.For this, we also need a substantial inheritance tax. The current estate tax raises very little money: Trusts, corporate shells, insurance plans, gift exchanges and hidden assets result in most estates avoiding any tax.
It is estimated that $30 trillion over the next 30 years will be transferred to the next generation through inheritances by just the top 10 percent wealthiest households — worth more than a million dollars each. That is $1 trillion annually being bequeathed. If we instituted an 80 percent estate tax on estates worth more than one million dollars and closed all the loopholes, this estate tax could raise an additional $800 billion a year.
Table 1 shows that it also makes sense to raise the taxes on publicly owned and privately owned corporations. All the corporations in the U.S. in total paid only $261 billion in federal and state taxes last year. That is only 4 percent of the total taxes raised in the country and only 0.5 percent of the total market value of their net worth of $49,000 billion. Sixty profitable corporations among the Fortune 500 list of the biggest companies in the U.S. paid no federal income tax in 2018 even though they earned $79 billion in total pre-tax profits.
If we taxed the richest 1 percent of all households (with a net worth of more than $10 million) a wealth tax of 3 percent per year, taxed million-dollar-plus estates at 80 percent and taxed corporations a market value net worth tax of 2 percent per year we could generate an additional $3.1 trillion a year in tax proceeds. This would be enough to pay for Medicare for All, free universities, parental leave programs, rebuilding our infrastructure, climate change research, subsidies for alternative energy, pay raises for teachers and high-quality child care — with enough left over to close the annual trillion-dollar-plus government spending deficit.
But consider an alternate use for these proceeds: What if we made an annual tax-free distribution of approximately $25,000 to every family in the U.S. each and every year? This will give every American family the opportunity to get out of debt and save for their children’s education, medical emergencies and retirement.
Just as importantly, it would give young people starting out the monies they need to plan for their future. They can spend it on a university degree, pay off student debt, put a down payment on a house, or even start a new business.
The annual stipend to U.S. families would not be the same as a universal basic income stipend. Under this plan, adult recipients would have to be fully employed, disabled or advancing through university or a trade school. Rather than guaranteeing people full-time employment with the government, the private sector should be convinced to hire one more U.S. worker for every 20 they currently employ, thus eliminating unemployment as we know it.
This plan should have appeal across much of the political spectrum: Some people will like that it supports poor and working-class Americans, populists will like that middle America sees a big benefit, true conservatives will like that government is not getting any bigger and net taxes are not increasing and libertarians will like that individuals, not the government, will decide what to do with their life savings. Oh, and did I mention every American family would be receiving $25,000 each year under this plan? That might provide the necessary push for those sitting on the fence.
The rich may argue that the wealth tax is a form of double taxation, as they have already paid income taxes on the wealth they have accumulated. Table 1 suggests they may have already paid some taxes, but not nearly the appropriate taxes they should have relative to their fellow citizens.
The wealthy may try to claim that the 3 percent wealth tax is discriminatory as it singles out only certain families for payment. There is another alternative. Get rid of all federal and local taxes, including payroll taxes, property taxes and the corporate income tax and replace it all with a flat 9 percent tax on the wealth of all American families. This would still allow for the $25,000 annual distribution to all American families so the less-advantaged and average Americans would be much better off. But I doubt the wealthy would prefer a flat 9 percent wealth tax over a “discriminatory” 3 percent wealth tax that hits only them.
The wealthy will not like that the 3 percent wealth tax may eat into their real wealth over time. But the average age of the wealthiest 1 percent is 61 years old, and wealth is supposed to go down, not up, in retirement. According to Robert Merton’s theory of life cycle investing, and embraced by conservative economist Milton Friedman, people are supposed to save during their working years and then watch those savings slowly decline as they use the proceeds to fund a portion of living expenses in retirement. Theory never foresaw that the rich would grow even richer as their nest eggs continued to grow even after retirement.
Finally, it might be argued that what we are trying to achieve here is an equality of outcomes, not an equality of opportunity. One need only look at the existing system to see that wealth inequality in the U.S. is causing an enormous disparity in opportunity across wealth classes. The rich and the poor in the U.S. have different neighborhoods, different protections against crime, different medical care, different schools, different universities, different job opportunities, different lawyers, different child care support, different diets, different exposure to alcohol and drug abuse, different levels of anxiety and stress, and differing rates of depression and suicide.
Some will argue that collecting this tax on wealth is not practically feasible. Rich people will learn how to hide their wealth just as today they hide their incomes. To address this issue, as part of this plan we would create an organization of independent appraisers, completely separate from the IRS. One percent of the annual proceeds raised, or approximately $33 billion a year, would be sufficient to conduct thorough professional wealth audits. This is three times the budget of the entire IRS for 2018. And we would audit all 1.25 million families in the top 1 percent every year. This would not be as big a job as you think. A great proportion of the 1 percent’s wealth is in publicly traded stocks and bonds which have a stated market value. To the extent they also own private companies, these are easily valued as a multiple of pre-tax cash flows. And after the first year’s valuation work, updating the asset values to market prices in future years would be quite simple.
Substantial penalties for underreporting assets, including possible jail time, would encourage the wealthy not to hide assets. For example, if anyone ever valued their net worth at less than half of its true market value and stuck by that appraisal after being challenged, the government would have the right to sell those assets in an auction and keep any proceeds beyond what the person claimed their net worth to be.
Another argument against this plan might be that wealthy individuals will choose to give up their citizenship in the United States and move to foreign countries. To those wealthy individuals who would like to give up their citizenship and leave — good riddance. We don’t need their money. Capital today is fungible and moves instantaneously on the internet across national borders.
To those corporations who are thinking about headquartering in a low-tax country to avoid the new tax, the solution is simple: Prohibit them from accessing the U.S. market with their products and services if they choose to try to avoid U.S. taxation. End of problem.
There is no question that implementing this tax plan will cause explosive growth in the economy. When we give tax cuts to the rich, they just add the monies to their already over-stuffed bank accounts and investment portfolios. However, average Americans will make life-changing decisions with their $25,000 a year, bringing tens of millions of Americans back into a hugely dynamic and inclusive economy.