The top 1 percent on average already pay roughly a third of their incomes to the federal government, according to a Treasury Department analysis that takes into account the entire menu of taxes — including income tax, payroll taxes that fund Medicare and Social Security, estate and gift taxes, excise and custom duties as well as investors’ share of corporate taxes. The tax bite on the top 0.1 percent is a bit higher. Most of those taxpayers insist they are already paying more than enough.
By comparison, the band of taxpayers right below them, in the 95th to 99th percentile, pay on average about $1 out of every $4. Those in the bottom half pay less than $1 out of every $10.
Sidestepping for the moment the messy question of just which taxes would be increased, how much more revenue could be generated by asking the rich to pay a larger share of their income in taxes?
To get the most accurate picture possible, throw in all the scraps of income, from the most obvious (like wages, interest and dividends) to the least (like employer contributions to health plans, overseas earnings and growth in retirement accounts). According to that measure — used by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution — the top 1 percent includes about 1.13 million households earning an average income of $2.1 million.
Raising their total tax burden to, say, 40 percent would generate about $157 billion in revenue the first year. Increasing it to 45 percent brings in a whopping $276 billion. Even taking account of state and local taxes, the average household in this group would still take home at least $1 million a year.
If the tax increase were limited to just the 115,000 households in the top 0.1 percent, with an average income of $9.4 million, a 40 percent tax rate would produce $55 billion in extra revenue in its first year.
That would more than cover, for example, the estimated $47 billion cost of eliminating undergraduate tuition at all the country’s four-year public colleges and universities, as Senator Bernie Sanders has proposed, or Mrs. Clinton’s cheaper plan for a debt-free college degree, with money left over to help fund universal prekindergarten.
A tax rate of 45 percent on this select group raises $109 billion, more than enough to pay for the first year of a new $2,500 child tax credit introduced by Senator Marco Rubio, Republican of Florida.
Move a rung down the ladder and expand the contribution of those in the 95th to 99th percentile — who earn on average $405,000. Raising their total tax rate to 30 percent from a quarter of their total yearly income would generate an additional $86 billion. That’s enough to cover the cost over eight years of repealing the so-called Cadillac Tax on high-cost health plans, which Senator Sanders and Mrs. Clinton have endorsed.
A 35 percent share produces $176 billion — roughly the amount that the Federal Highway Administration has estimated is needed each year to improve conditions significantly on major urban highways.
Alternatively, those tax increases could be used to help reduce government borrowing: Some combination of those raises could go a long way toward wiping out this year’s estimated federal deficit of $426 billion.
“Most economists today would agree that raising taxes modestly would bring in more revenue” without doing any serious damage to the economy, said Roberton Williams, a fellow at the Tax Policy Center. The big question is how much is too much, because at some point, higher tax rates would discourage extra investment and work.
All the Republican candidates share the party’s traditional opposition to raising taxes on the wealthy, arguing that it would ruin the economy by sopping up money that would otherwise be used to create jobs. Lowering taxes, they say, will unleash a torrent of economic activity that will in the long run spur growth and revenue.
But most mainstream economists, including some on the conservative side of the divide, concede that even with optimistic projections about growth and spending cuts, the Republican plans would leave a whopping budget gap, requiring more borrowing, not less. Revamping the tax code along these lines would also decrease the share paid by those at the top.
The argument for raising tax rates on the rich tends to focus on the vast gains that this group has enjoyed in recent years compared with everyone else. The top 0.1 percent of American families — each with net assets greater than $20 million — own more than 20 percent of the all the household wealth in the country. In the 1970s, that same sliver of the population controlled 7 percent.
That shift is behind Senator Sanders’s repeated vow to compel Wall Streeters and others in the Rolex-and-Maserati set to pay more than they do now.
“Let me tell you, Donald Trump and his billionaire friends under my policies are going to pay a hell of a lot more in taxes today — taxes in the future than they’re paying today,” he declared in Las Vegas.
Middle-income families make substantially less money than they did 15 years ago, once inflation is taken into account. The economist Thomas Piketty blames, among other things, “the spectacular lowering of top income tax rates” for the sharp rise in inequality.
The lower rate — generally a maximum of 23.8 percent — on capital gains, or profits from investments, is particularly problematic, Mr. Piketty argues. Estimates show that nearly 70 percent of capital gains benefits go to the top 1 percent. A recent study by Adam Looney at Brookings and Kevin B. Moore at the Federal Reserve found that “the reduction in the long-term capital gains rate is the primary reason” that the income tax system had become less effective in reducing wealth inequality.
Aided by a phalanx of lawyers and accountants, the rich have become adept at figuring out ways to shift earnings that would normally be taxed at the top 39.6 percent rate on ordinary income into capital gains, said the economist Gabriel Zucman of the University of California, Berkeley, who is researching the link between widening inequality and tactics — legal and illegal — used by the wealthy to sidestep taxes.
Shifting earnings from one tax category to another is part of the reason that even the top 0.1 percent pay on average no more than a quarter of their income in federal individual income taxes — despite that top tax bracket of 39.6 percent, according to a Treasury Department analysis.
“Why give a blank check to all of these guys?” Mr. Stiglitz, the liberal economist, asked. He pointed out that current tax law makes no distinction between, say, investing abroad, speculating in land or building a new factory. A better approach, he said, is to say: “We’ll give you generous deductions if you invest in America.”
Eliminating the preferential rates on capital and dividends would generate $1.34 trillion over the next 10 years, according to the nonpartisan Congressional Budget Office.
Other breaks that critics say subsidize wealth inequality include one that allows people to avoid capital gains taxes on inherited assets. Getting rid of that adjustment would generate $644 billion over a 10-year period, according to the Congressional Budget Office.
Ending the deferral on corporate profits kept overseas — a boon for the wealthy that Robert S. McIntyre, the director of Citizens for Tax Justice, calls “the biggest corporate loophole” — would generate $900 billion over 10 years. (Mr. Trump also supports shutting down that deferral.)
Although an overwhelming proportion of Americans complain that many wealthy people don’t pay their fair share in taxes, Democratic voters are more likely to be upset about it than Republicans. According to the Pew Research Center survey, nearly three out of every four Democrats said it bothers them “a lot” compared to 45 percent of Republicans.
Yet the problem that any president — Democrat or Republican — is going to face in altering the tax code is getting Congress to agree. Researchers have repeatedly found that a top priority of the wealthy is reducing their tax burden and that they largely prefer, unlike a majority of the general public, to cut spending rather than raise taxes.
Senator Ron Wyden, the top Democrat on the Finance Committee, said maneuvering any tax overhaul “through that gauntlet of special interests is a herculean task.”Continue reading the main story
An earlier version of this article misstated the estimated amount of federal tax revenue that would be generated by ending the deferral on corporate profits kept overseas. It is $900 billion, not $900 million.
It also misstated the amount of additional tax revenue that would be produced by raising the total tax burden of the top 1 percent of taxpayers to 45 percent. It would bring in $276 billion, not $267 billion.
The Republican tax plan is a scam—a massive and destructive financial giveaway masquerading as pro-growth tax reform. Which is why our first response must be to demand not one penny of tax cuts for big corporations and rich guys like me. In fact, if I were Benevolent Dictator, I would substantially raisetaxes on myself and my wealthy friends. Why? It is the only way to sustainably grow the economy, boost productivity, increase business opportunities, and create more and better jobs.
Now, I know what you’re thinking: That’s crazy talk! For decades, rich guys like me have been selling you tax cuts on the merits of pure economic stimulus. The rich are “job creators,” we’ve told you. The more money and incentives we wealthy few have to invest in creating jobs, the better the economy is for everybody—especially you.
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That’s a lie.
There is is simply no empirical evidence nor plausible economic mechanism to support the claim that cutting top tax rates spurs economic growth. When President Bill Clinton hiked taxes, the economy boomed. When President George W. Bush slashed taxes, the economy ultimately collapsed. It wasn’t until after most of the Bush tax cuts expired during the Obama administration that the post-Great Recession recovery started to pick up steam—an ongoing recovery that, as uneven as it has been, has grown into one of the longest economic expansions in U.S. history.
And then, of course, there’s Kansas.
In 2012, Kansas Governor Sam Brownback famously embarked on what he called “a real live experiment,” pitting pure trickle-down theory against economic reality. Unfortunately for Kansans, reality won. Kansas has dramatically underperformed its neighboring states and the nation as a whole in economic growth and job creation since slashing taxes on individuals and corporations to as low as zero. Compare that to California, which in 2012 elicited the usual apocalyptic warnings from trickle-downers by daring to raise its top income tax rate to a highest-in-the-nation 13.3 percent. By 2015, California had the fastest-growing economy in the nation. Kansas? Dead last.
And the evidence is more than just anecdotal. Multi-decade statistical reviews by the Center on Budget and Policy Priorities, the nonpartisan Congressional Research Service, and the highly regarded Brookings Institution have all failed to find any negative correlation between top tax rates and growth. And the same holds true of every other economic indicator the trickle-downers like to go on about: tax revenue growth, investment growth, employment growth, productivity growth, real median income growth. If they show any statistically significant correlation between top tax rates and growth, the slope is positive, suggesting that raising taxes on the rich is actually pro-growth. “The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel,” the Brookings authors conclude. “However, theory, evidence, and simulation studies tell a different and more complicated story.”
President Donald Trump boasts that the “biggest winners” from his tax cuts for the rich “will be the everyday American workers as jobs start pouring into our country, as companies start competing for American labor, and as wages start going up at levels that you haven't seen in many years." But the Republicans’ problem is that they have economic cause and effect reversed: Low wages and rising inequality are not symptoms of slow growth, low wages and rising inequality are the disease that causes slow growth—and inequality cannot be cured by creating even more inequality. In reality, our modern technological economy is best understood as an evolutionary feedback loop between innovation and demand. Innovation is the process through which we evolve new solutions to human problems, while consumer demand is the mechanism through which the market selects and propagates successful innovations. And it is economic inclusion—the full participation of as many people as possible in as many ways as possible, as innovators, entrepreneurs, workers and robust consumers—that drives both innovation and demand. The more we invest in the American people—in our wages, our education, our health care and our infrastructure—the more dynamic that feedback loop, and thus the faster and more prosperous our economy grows. But the Trump/Ryan tax cuts—which promise to slash rates for the wealthy and the corporations they run—would do nothing to increase innovation or demand.
Today, wealthy corporations and investors already have more money than we know what to do with—literally trillions of dollars of hoarded cash just sitting in U.S. bank accounts doing absolutely nothing—and yes, that includes the several trillion dollars of foreign earnings the Trump administration wants to “repatriate” tax free. The truth is, these “overseas” reserves are largely an accounting trick. According to the Federal Reserve Bank of Atlanta, much of this money is already held in U.S. bank deposits, in U.S. Treasury notes, and in dollar-dominated corporate securities. That’s why the most recent time Congress enacted a foreign earnings “tax holiday,” far from boosting the economy, the biggest corporate beneficiaries actually cut thousands of domestic jobs, choosing instead to funnel their after-tax windfall into (surprise!) stock buybacks and dividends. Every “$1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders,” Harvard and MIT researchers concluded. Obviously, a tax holiday can’t possibly deliver an economic boost from bringing home dollars that are already here.
The real problem with our economy is that we are concentrating wealth in the hands of people who aren’t spending or investing it, while starving working- and middle-class Americans of the ability to invest in themselves—not to mention sapping the consumer spending power that accounts for 70 percent of GDP. We rich Americans may not all be idle, but these days, much of our money is—and you will not get it flowing back through the economy again by cutting our taxes even further. I already earn about 1,000 times more per hour than the average American, but I couldn’t possibly buy 1,000 times more stuff. I only own so many pairs of pants. My family and I can only eat three meals a day. We enjoy a luxurious lifestyle, but we already own several houses, a private jet and one too many yachts (turns out, the optimal number is two). Cutting our taxes will make us richer, but it won’t incentivize me or my venture capital partners to spend or invest more than we already do. What’s holding us back isn’t a shortage of cash, but rather a shortage of demand—from you.
That’s why I join the Not One Penny campaign in opposing any effort to cut taxes on wealthy people like me. The American tax code is already rigged in favor of the rich and powerful, and the Trump/Ryan tax plan would make it only worse. If we truly want an economy that works better for all Americans, we need to move in the other direction.
We should create more tax brackets, not fewer, with substantially higher tax rates on our wealthiest households and our largest inherited estates. As for simplifying the tax code, here’s an idea: Let’s treat all income equally. For example, I’d eliminate the cap of $127,000 on payroll taxes, apply it to all income, and then slash the rate, increasing the spending power of most Americans. Rich people like me make most of our money from dividends and capital gains, and it’s just plain crazy that I pay a lower tax rate on investment income than a truck driver or school teacher pays on their hard-earned wages or a small businessperson pays on her hard-won profits. As for the corporate income tax rate, cut it if you want—but only if those cuts are more than offset by eliminating corporate tax loopholes. As a percentage of federal tax revenue, corporate income taxes already account for only a third of what they did in the 1950s, despite years of record profits. What corporate America needs and deserves is a fairer, simpler, more predictable tax code, not a cheaper one.
More importantly, what our economy needs now, at this moment in time, is a massive reinvestment in expanding and enriching the working and middle classes. Tax the rich to put money back in the hands of the American people, and corporations will expand production and payrolls to meet the resulting spike in consumer demand. Tax the rich to invest in roads, transit, bridges, health care, schools and basic research, and America will rebuild the physical and human infrastructure on which innovation and thus our collective prosperity relies. Tax the rich not just because it is fair, but because experience teaches us that in America fairness and growth always go hand in hand.
The trickle-down myth on which the Trump/Ryan tax plan relies represents much more than just a fundamental mischaracterization of how market capitalism works. It is, in fact, a scam and an intimidation tactic. When rich guys like me tell you that if you cut our taxes we’ll invest in creating more and better jobs, that is a scam. When we tell you that if you raise our taxes (or your wages) you might lose your job, that is a threat. Either way, if we can get you to believe that taxing the rich is bad for you, then we will get richer. The beauty of this con job is that it hides our true intent: We’re rich, you’re poor, and we’d like it to stay that way. And like any good con, rather than stealing your money, we just persuade you to hand it over voluntarily.
But we’ve been playing this con so long that we rich folk have started to con ourselves into believing that there is no limit to how much we can enrich ourselves at your expense. This epidemic of greed is crushing new investment opportunities before they can arise. The irony is that it was always you who enriched us, not the other way around. Back when we paid our fair share and invested in growing the middle class, prosperity always trickled up.
So please, don’t just raise taxes on me because it’s good for you. Do it for me and for all my rich friends. Raise our taxes. And watch America grow.
Nick Hanauer is a Seattle-based entrepreneur.
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