Can we at least make the rich bear a heavier burden than the poor?

By Herbert Rothschild

The quickest and most effective way for governments to promote economic justice is through their power to tax. A recent and dramatic illustration of that assertion was the result of the temporary expansion of the federal Earned Income Tax Credit in March 2021 as part of the American Rescue Plan. The child poverty rate immediately fell from 9.7% to 5.2%, the lowest rate on record, according to Census Bureau measures. Then, because Congress failed to renew the changes when they expired at the end of that year, the child poverty rate jumped to 12.7% in 2022, its pre-pandemic level.

Despite the proven power of tax policies to mitigate our gross economic inequalities, it’s more common for tax policies in the U.S. to exacerbate them. This is especially so at the state and local levels of government.

According to a 2024 report by the nonpartisan Institute on Taxation and Economic Policy, 41 of the 50 states tax the top 1% at the lowest rate of all earners. Even worse, 34 states — well over a majority — tax the lowest 20% at the highest rate of all earners. Only the District of Columbia and six states — Minnesota, Vermont, New York, New Jersey, Maine and New Mexico — tax the lowest 20% of earners at the lowest rate. In Oregon, it is the middle 20%.

On average nationally, the lowest-income 20% of taxpayers face a state and local tax rate nearly 60% higher than the top 1% of taxpayers. On average, states levy an effective state and local tax rate of 11.3% for their lowest 20% of earners, 10.5% for their middle 20%, and 7.2% for their top 1%. So, the top 1% are contributing 37% less of their incomes toward funding state and local services than the poorest households.

The progressive income tax is the main way to distribute the tax burden fairly, and those states that rely heavily on it do much better on equity scales than those that mostly rely on the sales tax. Six of the eight least equitable states have no income tax, and the other two have a flat income tax. At the federal level, during the decades when the income tax was at its most progressive — the 1950s through the 1970s — income inequality was at its lowest. The regressive changes that began in the administration of President Ronald Reagan and were exacerbated by George W. Bush and Donald Trump were a major factor in ushering in our nation’s second Gilded Age.

For redressing economic inequity, an alternative to the progressive income tax is the wealth tax. It gained attention when Sen. Elizabeth Warren proposed her “Ultra-Millionaire” wealth tax during her campaign for the Democratic presidential nomination in 2016. Her plan would have levied a yearly 2% tax on every dollar of net worth above $50 million and a 6% tax on every dollar of net worth above $1 billion. Because wealth is so concentrated, only about 75,000 households would be taxed, but Warren estimated the yield at $3.75 trillion over a 10-year period.

In his 2023 State of the Union message, Biden called for a wealth tax, and his fiscal 2024 budget proposal that year included a 25% tax on all wealth over $100 million. He estimated the tax would apply to just 0.01% of Americans. However, that proposal didn’t even get consideration in the Republican-controlled House, where budget bills must start.

It’s amazing but little-known that in 1999, when Trump was seeking the nomination of the Reform Party, he proposed a one-time 14.25% tax on all individually held wealth over $10 million. He claimed that it would raise enough money to pay off the federal debt and deeply reduce everyone else’s federal income tax. But we know that as a Republican candidate 16 years later and then as president, he never revived that idea.

Whether a wealth tax would withstand constitutional challenge is an open question. Assuming it would, my suggestion is that its advocates steal a page from advocates of a flat income tax and propose a flat wealth tax. It would have the shared virtue of greatly simplifying the tax code but avoid the gross inequity that, in practice, the flat income tax entails.

Back in 2016, when I was publishing Relocations in the Daily Tidings, I demonstrated the fairness and the effectiveness of the flat wealth tax. Suppose now we adopt Warren’s proposal of a 2% tax and see how it would play out.

Forty percent of our population has almost no assets. Some might have equity in their homes, but I’d exempt primary residences since their owners pay local property taxes. Solidly middle-class households might have an additional $500,000 in wealth; they would pay $10,000 annually, which is probably less than their current income tax bill. Those with $100 million in wealth would pay $2 million, which is probably more than their current income tax bill. Those with $1 billion would pay $20 million, which is almost certainly much more than the income tax they’re now paying.

In the aggregate, what would be the numbers? According to the Federal Reserve, 1/10th of 1% of our population owns 14% of the nation’s wealth. Fold them in with the other 0.9% and the top 1% owns 30%. Fold the top 1% in with the rest of the top 10% and together they own two-thirds of the nation’s total wealth, which is about $147 trillion. Each year, a 2% flat tax on wealth would generate almost $3 trillion, which would easily fund the federal government when the trust funds like Social Security, which have their own income streams, are excluded.

Would such big tax bills punish the wealthy? Hardly. Wealth generates wealth. People don’t become rich by averaging a 2% return on their investments. Currently, a wealth manager can get 5% without trying hard. It would take a wealth tax of at least 6% to prevent the very rich from increasing their wealth year over year. But the goal isn’t to punish the rich. The goal is to fund public programs equitably and adequately, especially those programs that lift people out of poverty.

Herbert Rothschild’s columns appear on Friday in Ashland.news. Opinions expressed in them represent the author’s views. Email Rothschild at [email protected].