Privileging the Income of the Privileged

[Cross-posted from Inequality.org]

The Trump tax plan reserves its highest rates for the income people actually labor to earn — and extends lavish preferential treatment to income from wealth.

Four years ago, my Institute for Policy Studies colleague Sam Pizzigati and I observed in the Los Angeles Times that we effectively have two tax systems in America: one that taxes wealth and the income derived from wealth and another that taxes the income from labor. Since 1980, the first of those systems, the “wealth-based system,” has become more forgiving. The “labor-based system,” by contrast, has become increasingly harsh, and a major chunk of the second system’s tax base has migrated into the first.

Those trends obviously place increasing pressure on the labor-based system. Ultimately, we noted, the movement towards complete reliance on the labor-based system would be unsustainable.

But President Trump disagrees. His recently announced tax proposal takes a giant step towards completely eliminating taxes on wealth.

Indeed, if the President’s proposal were to become law, little would be left of the wealth-based side of America’s tax system. The Trump proposal would erase entirely the one tax in America that directly impacts grand private fortunes, the estate tax. If President Trump has his way, the inter-generational passage of billions in wealth from the President and his plutocrat peers to their children would not be subject to any toll charge at all.

Remarkably, eliminating the estate tax would not be President Trump’s most devastating blow to the wealth-based tax system in America. The tax proposal the President has proposed this spring would single out a new category of income for preferential tax treatment. Ordinary income from unincorporated businesses – that is, ordinary income derived from wealth — would be taxed at a bargain-basement rate of 15 percent. Corporate income also would be taxed at 15 percent.

Half a century ago, American policy makers made a decision to tax the income from labor at a preferential rate. The maximum tax rate at the time was 70 percent. Lawmakers opted to tax earned income at a maximum rate of 50 percent.

The philosophy underlying the preferential tax rate for earned income – that those who earn their income from work should not be taxed as heavily as those whose income is derived from wealth – is lost on our President. In Donald Trump’s mind, the most heavily taxed income should be the earned income that was formerly taxed at a preferential rate. Capital gains, dividends, corporate income, and income form unincorporated businesses all should now be taxed, the President believes, at preferential rates. The top proposed Trump tax rate of 35 percent, about double the top rates applicable to all other forms of income, would be reserved only for income from labor.

The bottom line: If President Trump has his way, workers will bear almost the entire tax burden in America. The income derived from wealth, income that nobody lifts a finger to earn, would be subject to a modest 15 to 20 percent tax. The passage of wealth from one generation to the next no longer would be a taxable event. The growth of the enormous family fortunes would not be interrupted.

A generation ago, mega-millionaire Leona Helmsley opined that only “little people” should bear the country’s tax burden. Helmsley’s arrogance disgusted Americans. Are we still disgusted? We’ll soon find out.

6 Responses to Privileging the Income of the Privileged

  1. John Huppenthal

    Pure bullshit. In 1980, the top 1% paid 19% of all personal income taxes with a top rate of 72%.

    Today, that same group pays over 50% at a much lower average tax rate. Lower rates = more revenue, much more revenue, much much more revenue. Scientific taxation as Treasury Secretary Andrew Mellon described it in creating the roaring 20’s.

    • – Personal income taxes aren’t the only form of tax being paid. Most other taxes are far less progressive, and many are regressive.

      – Percentages are meaningless without also considering how the income distribution has changed in the interim. Those numbers seem just as likely to be symptomatic of a widening in the income inequality gap as anything else. Not to mention the enormity of the wealth gap, which is even more extreme than the income gap.

      • Exactly, Edward.

        But you are aware that you’re not telling him things he hasn’t had explained to him before, right? There’s no way to reach him. Heck, he can’t even get the concepts right here. My opinion piece wasn’t addressing the 1%. A huge slice of the income of the top 1% is income from labor (doctors, lawyers, etc). So, besides being misleading factually, as you pointed out, his comment wasn’t even on point.

        I’m thinking if he doesn’t give us a frank apology for all his BS over the years we should terminate his commenting privileges. I actually enjoy the back and forth with conservatives, so it’s not about his viewpoint. There’s just no way he’ll learn anything from commenting here, and he just annoys the bloggers and other commenters. So nobody, including him, benefits from his commentary. Thoughts?

      • John Huppenthal

        Ed,

        The toughest thing is to know what would have happened had we not chosen a given path. For the US, Europe gives us that perspective.

        Household consumption in the United States has gone up double that of Europe since 1980. Their household consumption was 26% higher than ours in 1980. Now we are 50% higher than them. These are stark numbers.

        Bob can only get away with his nonsense because there is a horde of corrupt economists committing wholesale specification error. And, they know it. Austan Goolsbee is very explicit about it when you read his papers, he literally lists everything his analysis ignores. He may be corrupt but he is honest about it. By citing each other and being disciplined about never citing anybody outside the daisy chain, they create the research consensus that feeds into the Congressional Budget office analysis and Joint Tax Committee economic models.

        Not only completely defining the response to taxation along two very narrow dimensions of economic activity but not even putting any controls in place for that analysis.

        The contrary data is getting so overwhelming that there is a chance that the truth will emerge in the next four years.

        By the way, I clicked on your name to pull up your comment and it sent me to a web site. I take it that you are running for the legislature?

        That’s pretty idealistic, running as a Green party candidate. Good luck. Are you running clean?

        • There is one major confounding variable that your consistent references to the Reagan tax cuts miss, though.

          In 1980, Paul Volcker was on a massive anti-inflation push at the Fed, and interest rates were sitting at around 18% for several years. Further, 1982 was a recessionary year, following the first round of tax cuts, but before Volcker finally tamed the inflation beast. It wasn’t until interest rates were cut in half in 1984 that we truly saw the higher levels of economic growth that you attribute solely to the Reagan tax cuts.

          One other confounding variable is that oil prices finally started falling after Reagan’s inauguration coincided with the end of the Iranian Hostage Crisis, which would lower business costs and lead to decreases in inflation and increases in output, ceteris paribus.

          And one final confound is that the United States has been a lot less constrained in terms of available land area (per capita) relative to France or Great Britain. This would lead rents to be lower (outside of a few specific locations, such as Manhattan and San Francisco), increasing the returns to both labor and capital at the expense of returns to land rent. That’s not a specific confound to the difference-in-difference estimator, but if you’re just looking at absolute numbers, we should be mindful of what the trend looked like and what might effect that trend.

          This is not to say, of course, that the tax cuts had no effect. An increase in deficit spending (lowering taxes and increasing government spending, largely on the military) is almost certainly going to be a positive for growth. But there are at least other major confounds to consider.

          Now, was 70% the optimal tax rate? Almost certainly not – I think the labor elasticity figure you cite understates the optimal tax rate because there are complementarities which take effect on the macro scale – if one person chooses not to work, it (marginally) increases the incentives for other people to work, so I don’t believe that 25% is the revenue-maximizing rate, which seems justified by the fact that Obama’s rescission of the 35% rate under GWB and return to 39.6% did seem to have revenue-increasing effects (what the counterfactual was, of course, we can’t *know* for sure). I am not, by trade, an expert in macroeconomics and tax policy – my work is in applied micro theory – so I won’t speak to being an expert in the field, but it seems reasonable that the revenue-maximizing tax rate is probably around 45-50%.

          And yes, I ran for the legislature last year and am likely to run again.

        • There’s one other thing that’s been bothering me about this comment.

          Sometimes, you’re talking about a very valid point, and one that I actually agree with – thanks to tax loopholes and special interest deductions and an overall tax structure way more complicated than it needs to be, some groups are paying very high statutory rates, while others are paying a mere fraction of that. I bet the local restaurants and small businesses shell out a lot more of their profit in taxes than Intel or Raytheon do!

          And that is what this post is all about. Why do the Warren Buffetts and Bill Gates of the world get to take advantage of a tax system where they are paying a top statutory rate of 15% on their income, most of which is capital gains, and which can be indefinitely deferred by not selling shares, while a senior doctor or lawyer working 60 hours a week and making 460,000 a year (putting them just inside the top 1%) paying an effective marginal tax rate slightly over 40%, with limited opportunities for deferral?

          I would have thought that given your spiel about disincentives to labor and the unfairness and complexity (billions of dollars in compliance costs funneled to the likes of H&R Block, Intuit, etc.) of the tax code, that you would support the topic of this post and perhaps offer some constructive criticism about how the tax system might be made more fair and which loopholes and tax expenditures should be examined and potentially repealed.

          But it does seem like you’re more interested in reflexively opposing anything that gets posted here with the same set of cherry-picked data.