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Demanding tax increases on the rich is back in fashion – both in the corridors of the U.S. House of Representatives and on the red carpet of the Met Gala. The House Ways and Means Committee outlined plans on Sept. 13 to move the top marginal income rate up a couple of notches to 39.6%
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The progressivity of the U.S. tax system has dramatically declined over the past seven decades.In 1950, when looking at all federal, state and local taxes, the top 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 corporate tax rate of 50%. Meanwhile, the rich were subject to high tax rates on wages, dividends, interest and income from partnerships. The progressivity of the U.S. tax system has dramatically declined over the past seven decades. The upshot is that for most income levels, the U.S. tax system now resembles a flat tax that becomes regressive at the very top end, meaning the super-rich pay proportionately less. Today, virtually all income groups pay roughly 28% of their income in taxes – except for the 400 richest Americans, who each own more than $2 billion in wealth today and pay around 25% in 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 state and local sales taxes, which are regressive – they take a bigger chunk out of a smaller wage than out of a large income. Even households that pay no federal income tax because of low earnings hand over a percentage similar to that of wealthier households because of these other taxes. The super-rich’s low tax rates of today are in part aided by the collapse of federal corporate taxation. In the 1950s, 5% to 7% of national income came from corporate taxes. By 2018, that figure had fallen to just 1.5%. The effective tax rate collapses for billionaires further because they can avoid reporting individual income by instructing their companies not to pay dividends and holding on to their shares without realizing their gains. The proposal unveiled by House Democrats would increase taxes on millionaires significantly. But it would largely leave billionaires off the hook, despite the explosion of their wealth during the pandemic. More-ambitious proposals in the Senate would tax their unrealized capital gains. This would be a bold addition that would help the United States reconnect with its tradition of tax justice. Gabriel Zucman is an associate professor of economics at the University of California Berkeley. Distributed by The Associated Press.
