Partisan Number 22
Tax system increases economic inequality
In the United States, we do not distribute our resources fairly, and we provide ever more poorly for citizens' shelter, health care, employment, old age security, and education. One obvious reason for this state of affairs is the failure of the tax system to do what it could to make our society more fair and democratic.
The rich pay a higher percentage of their income in taxes than the poor, but taxes on the rich are and have always been much too low. When Reagan took office in 1981, multi-millionaires paid just 37% of their income in taxes. It has since dropped to 31%. In real numbers, this means that the federal income tax bill for someone like Kevin B. Rollins, CEO of Dell, who earned nearly $40 million in 2005, dropped by nearly $2.5 million a year. As taxes on the rich came down, their shares of wealth and income soared. America's richest fifth has always owned the lion's share -- 80% or more -- of the nation's property: bank accounts, real estate, stocks, bonds, unincorporated businesses, insurance policies and even pension benefits.
Distribution of income has also been tilted in favor of the rich throughout American history. In recent decades, the pattern of who gets what has become even more skewed toward the "haves." In September, 2006, Forbes reported that the 400 richest Americans own at least $1 billion each. Their collective net worth is a staggering $1.25 trillion dollars. The richest 1% now owns 40% of the nation's wealth and receives 13% of the national income. The typical member of this economic elite owns 473 times more wealth than the average person in the bottom 60% of the population and receives 24 times more income -- after taxes are taken into account.
We have two primary types of taxes: progressive, (the rate goes up as wealth or income increase), and regressive (the rate goes up as wealth or income goes down). Much the most progressive is the estate tax, the sole federal levy based on wealth. It only affects the very richest families. Unless someone dies with more than $2 million dollars, the heirs do not pay this tax. Income taxes are also progressive, especially after figuring in stockholders' shares of the taxes paid by corporations. Provisions favoring the well-to-do, such as those that allow dividends and profits from property sales to be taxed at much lower rates than income from work, weaken this progressivity. State and local property taxes are somewhat progressive, since those who own property are better off than those who do not. But they apply only to real estate, the most widely held kind of property. They leave out the types of assets that are held primarily by the very rich.
The social security tax is regressive as it is imposed only on wages and self-employment earnings up to a certain amount, and exempts investment income, which flows largely to those well off. For 2007, social security tax will be paid on wages up to $97,000. If you are a Kevin Rollins, earning $40 million a year, you'll pay social security tax on .02% of your income. If you work full time at a minimum wage job, however, you'll pay social security tax on 100% of your $15,600 earnings. (Many Americans pay more in social security tax than income tax.) Taxes on sales of everyday goods and services are the most regressive. They fall most heavily on people with low incomes, who must devote nearly every dollar they earn to buying such goods and services, and most lightly on those with high incomes, who do not have to spend all their income immediately, but can set aside a considerable chunk for investments. The net effect of these taxes is to preserve the great advantages in wealth and power that the best-off enjoy over the bulk of the population. Mainstream Democrats and Republicans have done little to lessen this inequality. Democrats willing to brave charges of inciting class warfare may express outrage at the worsened situation. However, they rarely propose changes to the tax system that would actually reduce the proportions of wealth and income owned by the very rich to levels that no longer block economic democracy. Such changes are easy to describe.
We could do away with taxes that fall more heavily on people with lower incomes than on the rich. We could replace the current complex state and federal tax structure with national income and wealth taxes that would largely spare the least affluent four-fifths of the population while imposing very high effective tax rates on the most privileged. But few Democrats have the courage to mention raising top income tax rates above current levels.
Even fewer would dare suggest eliminating regressive taxes. Instead, liberals and moderates generally talk about taxes and fiscal responsibility in terms of the need for shared sacrifice. When the benefits of our nation's productive capital are shared so inequitably, this way of viewing taxation, that "we're all in this together" and "everyone needs to pay taxes as the cost of civilization," amounts to an insult to the great, nonaffluent majority. Taxes should become a means of providing working people, the real creators of wealth, with control over the way the wealth is used, so they can take good care of themselves and their environment. We need a new tax structure that will both bring in enough money to finance a generous set of universal economic rights and remedy the massive economic inequality which afflicts American society.
Randy Silverman is former chair of the Berkeley Rent Stabilization Board.