The Moral Imperative of Tax Policy

Posted by Bob Lord

If we don't arrest and ultimately reverse the concentration of wealth (and, with wealth, power) in America, nothing else will matter in the end. The America we know, the America we think of when we refer to it as the greatest country on earth, doesn't exist if fewer than 1% of the population controls more than 90% of the wealth. That's already a possibility. And if Mitt Romney and Paul Ryan win in November, they'll make absolutely sure of it. 

The only brake on the undue buildup of wealth at the top in a capitalist society is tax policy. Thus, tax policy has a purpose beyond the obvious one of raising revenue to run the government. In this critical respect, Romney and Ryan aim to turn tax policy entirely on its head. In doing so, they intend to destroy American society as we know it. 

Consider how wealth accumulates. I earn income from my labor and capital. I pay taxes and pay living expenses. Anything remaining represents an increase in wealth. Even if I'm flirting with membership in the top 1% of income earners, my wealth isn't increasing all that fast. Most of my income is from labor, so I pay a healthy rate of employment tax and income tax, and my living expenses consume the great majority of what's left. But if I'm really wealthy, say top point one percent or better, my living expenses are a much smaller piece of my income and my employment taxes are a negligible portion of my income. So, without the appropriate income and estate tax policy, the rate of growth of my wealth will outstrip that of all others. Eventually, virtually all wealth will be held by me and my uber-rich friends. 

Decades ago, we had tax mechanisms that impeded the undue accumulation of wealth. We had steeply progressive income tax rates, at one point topping out at over 90%. We had an estate tax topping out at 55%. The latter of these was especially important. It essentially cut Buffet size estates in half if passed to children. With an effective estate tax rate of 50% on the ultra-wealty, but 0% on average folks, the generation to generation concentration of wealth in the ultra-wealthy is eliminated as long as the pre-estate tax generation to generation growth in the wealth of the ultra-wealthy is no greater than twice that of others. If my siblings and I grow the wealth we inherit from our parents by a factor of five during our generation, while the children of David Koch grow the weath they inherit from him by a factor of ten, but have to pay a 50% estate tax, the ratio of the Koch family wealth to my family's wealth has not changed. There has been no further concentration of wealth at the top.

Of course, tax policy in America since the election of Reagan, with a few temporary detours, has been in the absolute wrong direction. We've pretty much destroyed the progressive nature of the income tax code. Besides a dramatic flattening of rates, we've allowed massive tax-exempt pools (IRA's [particularly Roth IRAs], permanent life insurance products, municipal bond portfolios, etc) to proliferate. While we temporarily restored parity between the relative tax rates on income from labor and capital, we now tax capital gains at historically low rates, and have conferred a preferred rate on dividends as well. On the estate tax side, we've lowered the top rate to 35%, and done nothing to address the gaping loopholes in the estate tax code that have generated increasingly creative yet entirely legal schemes to shield huge estates from taxation. 

The result is no surprise. In the seventies, the concentration of wealth and income in America was at an historic low. Now, it is at an historic high, and getting worse. 

But what's happened to the distribution of wealth over the past 30 years pales in comparison to what will happen if Romney and Ryan have their way. Under the Ryan plan, income from capital, the primary source of income for the ultra-wealthy, will not be subject to income tax. Romney would continue to tax income at the paltry rate of 15%, but we all know in his heart of hearts he loves the Ryan plan on this front. And under both Ryan's plan and Romney's plan, the estate tax would be gone. Essentially, the vast fortunes of the ultra-wealthy would grow unabated. They'd pay a sliver of their earnings each year for living expenses and an even tinier sliver in income and employment taxes each year. Unlike the rest of us, they wouldn't consume their wealth during their retirement years. And, thanks to Mitt, they'd pass the whole bloody fortune, unreduced by inheritance tax, to the next generation at death.

Under the Romney / Ryan plan, our distribution of wealth will join that of the third world, and it won't take all that long. Anyone who cares about preserving what's left of your supposedly egalitarian society should view stopping Romney and Ryan, and their crazy tax policies, as a moral imperative.