BY PHILIP KOTLER
A major problem in American capitalism is the growing level of income and wealth inequality. America continues to have persons suffering from poverty, homelessness and hunger while eight billionaires own half of the nation’s wealth. Working class real wages remain where they were in the 1980s, while the rich who own 80% of U.S. shares in the stock market continue to grow richer every year.
With the country in the hands of a new president, Joe Biden, a Democrat, the country has an opportunity to address this problem. There is an available toolbox of twelve measures that can be used to reduce the income and wealth gap. Each measure is controversial and could carry beneficial effects and some harmful effects. The big question is how the different measures will affect long term economic growth. It is the job of Congress, think tanks and the public to discuss these measures.
12 Tools to Reduce Income and Wealth Inequality
1. Raise wages and other benefits
2. Make the income tax system more progressive
3. Cap the ratio of top executive pay to worker’s pay
4. Raise the tax on carried interest.
5. Remove or reduce home mortgage interest deduction
6. Strengthen the earned income tax credit or establish a universal basic income program
7. Close offshore tax havens
8. Pass a tax on financial transactions
9. Pass a tax on high value luxury goods
10. Establish a wealth tax
11. Raise the estate tax
The hope is that some of these measures would produce more income equality and not substantially hurt economic growth. This needs to be considered in discussing each measure.
1. Raise Wages and Other Benefits
The lives of the working class can be improved by raising the minimum wage. There is mounting pressure to raise the national minimum wage that had stayed too long at $7.25. A large number of states have already raised their state’s minimum wage. The Democratic Party advocated raising the hourly minimum wage to $10.10 and thereafter indexing the minimum wage to inflation. This has already happened in other countries. Germany and Britain raised their minimum wage to $11.30 an hour. Denmark is at $20.30 an hour. Switzerland wanted to reset it at $25 an hour but it was voted down. All of this makes the current U.S. minimum wage a disgrace.
Those opposed cite two possible undesirable consequences. First, some small businesses that hardly make a profit paying $7.25 are likely to close shop at a higher minimum wage. Second, employers will search for other ways to replace labor with capital. Labor saving devices would have the effect of reducing the number of jobs but paying more to those who are still employed.
Many companies have freely chosen to raise worker wages above the minimum wage in their city or state. Some companies are sincere in wanting to improve their workers’ lives. The wage rise might also be due to needing to attract workers during labor shortages resulting from full employment.
The real problem is that GNP has continued to grow but labor wages have not grown much. About 90 percent of the income in the GDP growth has gone to the wealthy class. This highlights how weak labor’s voice is in the economy. American labor unions have shrunk in size as a result of conservatives doing their best to handicap workers’ unions. Conservatives passed the “right to work” laws so that workers could get a job without having to join a union. Until unions get their strength back, labor will continue to share less in GDP growth and the wealthy will continue to draw the lion’s share of income.
2. Make the Income Tax System More Progressive
We hear new cries for increasing taxes on the rich. Bill de Blasio, New York City’s mayor, said “We will ask the very wealthy to pay a little more in taxes so that we can offer full-day, universal pre-K and after-school programs…Those earning between $500,000 and $1 million…would see their taxes increase by an average of $973 a year. That’s less than three bucks a day — about the cost of a small soy latte at your local Starbucks.” [1]
This leads to the larger idea of a progressive tax system that would establish higher tax rates for higher income brackets. The U.S. tax system does this. Here were the tax rates in 2013:
· 10% on taxable income from $0 to $17,850, plus
· 15% on taxable income over $17,850 to $72,500, plus
· 25% on taxable income over $72,500 to $146,400, plus
· 28% on taxable income over $146,400 to $223,050, plus
· 33% on taxable income over $223,050 to $398,350, plus
· 35% on taxable income over $398,350 to $450,000, plus
· 39.6% on taxable income over $450,000.
The question: Was the maximum tax rate of 39.6% a high enough tax on the rich, given the growing level of income inequality? Consider that in 1939, the U.S. top tax rate was a whopping 75%. It rose to 91% during WWII for incomes over $200,000 that was a high income at that time. In 1964, the highest tax rate was lowered to 70%. Starting in 1981, President Reagan managed to lower the maximum rate from 70% to 50% and subsequently down to 38.5%. Reagan has been praised by the right as a tax cutting President but he actually raised taxes eleven times. In President Clinton’s term 1993–2001, the top marginal rate was raised to 39.6%. Under President George W. Bush, the maximum tax rate was lowered to 35% and his deep tax cuts were scheduled to expire at the end of 2010 but they became permanent. Many believe that the full Bush-era tax cuts were the single biggest contributor to the deficit in the subsequent decade, reducing revenues by about $1.8 trillion between 2002 and 2009. During the 2008–2011 fiscal disaster, the top tax rate was raised back to 39.6%.
In 2018, the Republican-dominated Congress managed to pass the first strong tax reform in 20 years. They could have kept a top tax rate of 39.6% on the rich, and lower substantially the taxes on the middle and lower income class. Instead, they lowered the top tax rate on the rich to 37%, saving rich persons billions of dollars while ekeing out small tax reduced rates to the middle and lower class. The lower top tax rate led to a redistribution of money from the poor to the rich! They accomplished this “trickle up” transfer of wealth by adding $1.5 trillion to our deficit. The federal government will have to borrow and pay a growing interest rate on $1.5 trillion instead of getting this as tax money. Conspiracy minded thinkers suggest a Republican strategy of starving the budget so severely that the Republicans will make it up by cutting Social Security and Medicare.
What we need now is a more progressive income tax system. At what income level does the middle class end and the rich class begin? Bryce Covert claimed that the middle class ends at $206,568. This is the income that defines the start of the top 5% of income earners. The top 5% is the rich class whose incomes grew substantially during this period. The middle and working class had falling real incomes since 1973.
Let’s consider setting the rich class as beginning at an annual income of $200,000. We will acknowledge that earning $200,000 a year in smaller cities or rural areas is a rich class income while in New York City or San Francisco is a middle-class income. But we need some number to start with.
The real question is how to distribute the tax burden between the rich and very rich. This calls for establishing a set of rising brackets where the marginal tax rate rises in each bracket. This is the essence of a progressive tax system. For example, the brackets and marginal tax rates can be:
40% on taxable income from $200,000-$500,000, plus
42% on taxable income from $500,000-$1,000,000, plus
44% on taxable income from $1,000,000-$5,000,000, plus
46% on taxable income from $5,000,000-$10,000,000, plus
50% on taxable income Over $10,000,000
Note that all these rates are for the rich and superrich and start at 40%, not 37%. The other point is that the rich who (say) pay 50% are not paying 50% on their income. They are paying 50% on the last bracket of their income. A rich person may end up paying about 35% in income tax, although the marginal rate was 50%. Many left-leaning Democrats would like to raise the marginal rate to 70%, knowing that the actual tax will be substantially less than 70%.
Conservatives will raise the following objections:
1. The government is practicing class warfare and this will change the economic behavior of the rich, leading them to work less hard, invest less and move their capital abroad. (But the rich did not object when redistribution flowed from the workers to the rich.)
2. The rich will increase their drive to replace labor with capital and this will seriously reduce the number of jobs. (There is little that can stop the continuing advances in technology).
The spirit behind these higher taxes on the rich is captured in the remark of Oliver Wendell Holmes, Jr., “I like to pay taxes. With them, I buy civilization.”
An entirely different tax philosophy operates in Scandinavian countries where the maximum tax rate is 70% in Sweden and 72% in Denmark. The Scandinavian countries take care of their citizens’ education and health from birth to death. There is little chance of a medical calamity bankrupting a Scandinavian family. And families don’t have to save as much for their future retirement. It is not surprising that Scandinavian countries rank higher in happiness and well-being measures than the U.S.
In 2014, France’s President Francois Hollande established the highest marginal tax rate of 75% on individuals earning an income of over one million Euros. The implication is that one million Euros a year is a sufficient salary for any person and above that, the State should take 75%. Of course, this has led to outcries from the business community and even France’s soccer teams have threatened to leave France. The measure didn’t pass. I would add two optional features that might have increased the acceptance of this 75% level. One, the tax money collected would be put into a separate government fund to help improve the education of poor students. Or two, the money could go into a non-profit foundation that supports a variety of social causes and each family can even specify which category of causes they want their money to support.
The International Monetary Fund (IMF) has taken aim at income inequality. Christine Lagarde, head of the IMF, considers income inequality in deciding on financing programs for member states. A recent IMF staff paper said “Income inequality can be of macroeconomic concern for country authorities, and the fund should accordingly seek to understand the macroeconomic effects of inequality.”[2]
What would a higher tax rate on the rich do to their incentive to work and earn income? Conservatives warn that talented CEOs, financiers, athletes, and movie stars would work less and the U.S. would suffer from a lower level of talent and output in these sectors. Their claim is that if high earners work less, and start fewer businesses, the number of jobs would decrease, unemployment would increase, and average incomes will fall. They add that needed philanthropy would decline and long term investment in infrastructure would dry up. They rail against “class warfare” that would “make everyone poorer.” So why would we put any higher taxes on the rich that 39.6%?
Of course, there is no evidence of this. In earlier times, when the U.S. government charged quite high marginal tax rates on the rich, we often had high employment and high incomes. There were more periods of prosperity in the United States under the left leaning Democratic Party than under the right leaning Republican Party. We can’t assume all high income earners behave and react in the same way. I remember meeting a CEO of a large cereal company confiding to me that he was having so much fun running the company that he would have gladly managed his company for $1 a year. Mayor Michael Bloomberg, who over a 12 year period brought New York City to a high level of prosperity, insisted on taking only $1 a year salary because he had all the money that he needed to be satisfied.
I believe that both corporate executives and entrepreneurs are motivated primarily by three things: power; independence; and creativity. I do not believe that increases in the marginal tax rate would have a major downward impact on GDP, but this can be debated. Economic theory suggests one view on this subject. The law of diminishing returns says that further increments of income tend to produce diminishing returns or satisfaction. The law of diminishing returns suggests that making an extra $10,000 will improve the well-being of a worker more than losing $10,000 would reduce the well-being of a millionaire. One study indicates that well-being increases as incomes approach $75,000 a year but beyond that it does not consistently produce higher levels of personal happiness.[3] We are saying that it is easier for a rich person to give up the last $10,000 than a poor person.
Yet raising the tax rate on the rich may be an almost impossible task when we consider that it would have to be passed by Congress. Politicians get in office by being able to raise money. A newly elected Republican official must raise $500,000 a year just to give to the Republican Party, aside from what he or she must raise to run his or her own campaign. Most of the money comes from those who are wealthy rather than from small contributions from the working and middle class. Politicians have little choice but to curry the rich and vote for what the wealthy want. And the wealthy by and large do not want to pay higher taxes. Given that the very rich are getting a growing share of the GDP, this means that less money is available for the poor and even the working class.
The lack of purchasing power in the hands of the average citizen slows down economic growth and leads to further immiserating of the poor. This is partly what led to Occupy Wall Street. The Occupy movement went from some 75 people demonstrating in a small Manhattan park to tens of thousands demonstrating in hundreds of cities in 80 countries, all in one month. One can expect more protest movements and political clashes in the future. In the past the protestors were labeled “socialists” or “communists” and the wealthy managed to have them hounded or imprisoned. I do not see how substantially higher taxes can be passed politically on the rich without evoking another period of Red scare and the Republican charge of the Democrats starting “class warfare.”
3. Cap the Ratio of Top Executive Pay to Worker Pay
In 2010, Congress passed a rule requiring public companies to disclose the ratio of the CEO’s pay to the median compensation at the company. The objective was to help shareholders, companies and the public to compare pay practices across companies. It wasn’t implemented.
President Obama offered a specific proposal for holding down the high pay of executives. He held that executive pay should be related to the minimum federal wage. At the time, his $400,000 salary was 27 times the minimum federal wage of $7.25. If the minimum wage rose to $10.10, his salary would be 20 times the minimum wage. He suggested that top-paid federal executives of companies that do business with the federal government should not have their top executives paid in excess of 20 to 1. This would mean stopping doing business with Oracle (1,284 to 1), General Electric (491 to 1), and AT&T (339 to 1). Although this was currently impractical, it captures the seed of an idea for limiting excessively high pay in the federal and private sector.[4] The state of Rhode Island is considering not buying from companies that pay the CEO more than 32 times the lowest paid worker.
The European Commission is actively encouraging member countries to consider pay cap policies. Each public company is advised to take into account the ratio of top executive pay to average employee earnings. Companies should consider the impact of high executive pay on the long-run sustainability of the company. The EU is considering banning banker bonuses of more than twice the level of fixed pay, especially after seeing the hefty bonuses recently given by some of the major European banks.[5]
4. Raise the Capital Gains Tax Rate
A person who invests in a security for more than one year and then sells the security was formerly taxed at 15 percent rather than at their normal income tax rate. The capital gains tax rate was recently raised to 20 percent plus another 3.8% temporary, or 23.8%. The purpose of the lower tax rate on long term capital gains is to encourage investors to stay longer in securities that they believe in. Most wealthy people put their money into securities that they hold for over a year and therefore their effective tax rate on capital gains is 20–23.8 percent. Ironically, wage earners are taxed on their income anywhere up to 35 percent. During Romney’s run for President in 2012, it came out that he had earned $13.7 million but his tax rate was only 14.1 percent of his income. And finance expert Warren Buffett said that he was embarrassed to only pay a 15 percent tax on his income that is substantially lower than his secretary’s tax on her income.[6] This loophole is estimated to have cost the U.S. Treasury $457 billion between 2011 and 2015.
5. Raise the Tax on Carried Interest.
There is also an effort to end capital gains treatment for “carried interest.” Carried interest is a share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund’s performance. Traditionally, the amount of carried interest comes to around 20% of the fund’s annual profit. While all funds tend to have a small management fee, the management fee is meant to only cover the costs of managing the fund, with the exception of compensating the fund manager. Carried interest is meant to serve as the primary source of income for the general partner.[7]
The criticism is that putting a capital gains tax of only 15 or 20 percent on carried interest is another example of a preferential income tax treatment mostly going to the very rich. The general partner of a hedge fund should pay an ordinary tax on this income because it is a reward for his labor in managing the fund, not for his capital.
6. Remove or Reduce Home Mortgage Interest Deduction
Persons buying a home with a mortgage are allowed to deduct the mortgage interest payment from their tax bill. The purpose of this deduction is to encourage more home ownership on the notion that people owning homes (instead of renting) will be more rooted in their communities and care more for their communities. Most other industrialized nations do not offer this deduction and people still buy homes. This is estimated to have cost the U.S. Treasury $464 billion during the period 2011–2015. It amounts to non-home owners (i.e., renters) subsidizing home owners. Homeowners with an income exceeding $200,000 get an annual tax benefit of more than $2,200. They get another mortgage tax benefit if they own a second home, which primarily benefits wealthy people who are the most likely to own a second home. Furthermore, most of these high income homes are in California and the Northeast, thereby giving a benefit that is geographically disproportionate.
7. Strengthen the Earned Income Tax Credit or Establish a Universal Basic Income Program.
The U.S. runs a large cash-transfer program to help the poor that cost $61 billion dollars in 2010. It provides up to $3,305 a year to low-income working families with one child and up to $6,143 for those with three or more children. The program has not been extended to help childless people who have very low incomes. Broadening the tax credit might make it possible to do away with food stamps and a miscellaneous set of other props aiming at providing a decent living for all.
Related to the earned income tax credit is a much broader idea, that of the Universal Basic Income (UBI). In the 16th century, Thomas More proposed it in his work Utopia. President Nixon even considered it for a short time. In 1967, Martin Luther King, Jr. wrote, “I am now convinced that the simplest approach will prove to be the most effective — the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.” The celebrated economist, John Kenneth Galbraith, agreed, ‘Everybody should be guaranteed a decent basic income. A rich country…can well afford to keep everybody out of poverty.’ This payment given equally to all citizens would prevent any citizen from ending up with less money.
Universal Basic Income (UBI) would be a fixed, monthly cash grant, given directly to all adult citizens individually, to cover basic living expenses, with no strings attached. Imagine it as a payment of $1,000 a month to all adult citizens. The cost would be $12,000 a year for say 300 million adult citizens, or over $4.2 trillion. This would be a huge transfer payment. The amount could be reduced if limited on only those earning under $200,000 or a lower amount. If we limited it as a payment to only the poor, the cost would be more affordable and pretty much the same as the earned net income tax credit idea.
How would the money be raised for UBI? Many welfare programs will be eliminated. The money spent on these programs will be transferred to the UBI funds. A second source of money can come from raising taxes on the wealthy on the grounds that it will not affect their material living. A third source can be a special tax on companies. Companies destroy jobs by moving abroad and by introducing automation. This company tax will pay those who lost their jobs. A fourth source can be raising consumption taxes (VAT). A fifth source can be a tax on financial transactions. A sixth source might be transferring money from the bloated defense budget to help more people live a better life.
A guaranteed basic income would free people to decide whether they want to work in a permanent job or work part-time or not at all. Today Americans work closer to 50 hours rather than 40 hours a week for 50 of the 52 weeks. Many of them are bored with their jobs and would leave them if they had a choice. Many will be exploited by their boss and will want to do something else with their lives and earn money along the ways doing short gigs. Americans work too hard and too long without time to enjoy other aspects of their lives.
Some version of UBI may be necessary in the future, given the speed of automation and the possibility of eliminating many jobs for humans. The U.S. would have to find some way of distributing basic income to the growing ranks of the unemployed.
Versions of UBI have been proposed elsewhere. In 2016, Swiss citizens voted in a referendum on whether to hand out a guaranteed $33,000 to every citizen, regardless of wealth. It was defeated. The Finnish government planned giving each of its 5.4 million citizens $876 tax-free every month ($10,512 a year). In return, it would do away with welfare benefits, unemployment lines, and the other bureaucracy of its extensive social safety net. Denmark gives its poorest citizens roughly $1,800 a month, enough to pull the destitute over the poverty threshold.
Objections are many. People would be paid to be “lazy.” Not having a job means that there would be no building of character or discipline. Many people would not have an incentive to study harder subjects or study much at all. Many will abuse their free time in just watching TV or gambling or turning to drink or drugs when they are no long career-oriented and associating with other career-driven people.
8. Close Offshore Tax Havens
Profits earned by U.S. companies were subject to a 35 percent tax rate. This led U.S. companies to keep their foreign earnings abroad rather than bringing them home and paying a 35 percent tax. Companies like Apple, General Electric and many others kept so much money abroad that could otherwise have been invested in the U.S.
Clearly U.S. companies want to reduce their taxes if possible. There are three approaches.
The first is to set up a U.S. company subsidiary in Bermuda, Cayman Islands or Ireland. A U.S. company making a printing machine costing $10,000 in Chicago might sell it to a Miami printing company for $12,000. The U.S. company would have to pay a 35 percent tax on the $2,000 of profit, namely $700. Instead, it could send the printing machine to its own subsidiary in Bermuda. Then its Bermuda subsidiary can sell it to the Miami printing company for $12,000, making a $2,000 profit in Bermuda. But Bermuda doesn’t tax profits (or taxes substantially less than the U.S.). In this way, the U.S. government lost $700 in taxes on this transaction alone. It is estimated that 362 of the Fortune 500 companies operate tax haven subsidiaries. The U.S. government is losing a great amount of corporate tax revenue, requiring either the American public to pay higher taxes or face reducing social welfare, education and health benefits.
The second tax avoidance scheme is called “Inversion.” If an American company can show that some percentage of its shares are owned by another company abroad, it doesn’t have to pay U.S. taxes on this amount. For example, the drugstore Walgreens might buy an Irish drugstore chain and pay for it by issuing more shares of its stock. Ireland would have to pay taxes to Ireland but Ireland’s taxes are considerably lower than U.S. taxes. This is called inversion.
The U.S. government needs to worry about a third possibility where a U.S. corporation starts thinking about moving its headquarters out of the country. The consulting firm Accenture began as a U.S. company, then moved to the Cayman Islands, went public in 2002 and then moved to Ireland and its lower taxes.[8] Eaton Corporation moved its headquarters from Cleveland to Dublin, saving $160 million a year in taxes. So far, some 60 U.S. companies were “never here” or have been using inversion to avoid U.S. taxes. Not only do these companies substantially reduce their taxes but in addition they are less burdened by the endless growth in U.S. government regulations that now cover 169,301 pages.[9]
Gabriel Zucman, an economics professor at the London School of Economics, and a protégé of Thomas Piketty, wrote a short book on tax evasion called The Missing Wealth of Nations, in which he estimated that $7.6 trillion, or 8 percent of the world’s personal financial wealth, rests in tax havens as hidden money.[10] If this money could be taxed, more than $200 billion a year could be added to tax revenues.
Zucman estimated that 20 percent of all U.S. corporate profits are shifted offshore, with the result that these corporations manage to pay a corporate tax rate of 15 percent rather than the officially correct rate of 35 percent. U.S. corporations have accumulated $1.95 trillion outside of the U.S.[11]U.S. companies don’t pay U.S. taxes on profits earned abroad as long as that money remains abroad, often in Bermuda, Ireland, Luxembourg, the Netherlands and Switzerland. In 2013, Apple held abroad $54.4 billion, IBM $52.3 billion, and Microsoft, $76.4 billion. Proposals have been forthcoming to either lower corporate taxes from 35 to 25 percent or less or to change the tax code requiring that these profits be invested in U.S.-located banks.
Zucman recommended that the U.S. and other nations prepare a global registry of personal and corporate wealth (just like there is a global registry of real estate holdings) and go after the banks to disclose their holdings. The U.S. passed the 2010 Foreign Account Tax Compliance Act to enable the Internal Revenue Service to put pressure on foreign banks to disclose accounts held by American residents and corporations. The U.S., in 2012, imposed a $1.9 billion fine on HSBC, a British bank, for poor controls on money laundering. Fines have been set on Barclays, ING and Standard Chartered.
The Tax Reform Bill of 2018 finally lowered the corporate tax rate on foreign earnings from 35 percent to 21percent. Some money came back into the U.S. although not much led to building new factories and equipment. Some money went into company stock buybacks, higher bonuses for top officers, and higher dividends for investors. Stock buybacks, management bonuses and investor pay are at an all-time high. Economic disparity is at an all-time high.
9. Pass a tax on Financial Transactions
A great amount of money is spent every weekday on buying and selling stock. The mass of securities traded in the United States is in the hundreds of trillions of dollars. The aim of traders is to make a profit through betting on the rise or fall in the price of specific stocks or in the stock market as a whole. At best, this is a form of gambling rather than creating new value. It is a game indulged in largely by persons who have discretionary income. Fifty three percent of Americans have no money in the stock market. Most stock traders have good income or wealth.
Senator Bernie Sanders of Vermont proposed placing a tax on financial transactions.[12] He proposed a small excise tax, typically a few hundredths of a percent, on trades of stocks, bonds, derivatives and other securities. A one-basis-point tax on $1,000 worth of stock would cost the stock trader 10 cents. A $100,000 trade would generate a tax of only $10. The nonpartisan Tax Policy Center estimated that a 0.01 percent tax would raise $185 billion over 10 years. That amount could finance an ambitious expansion of prekindergarten programs for 3- and 4-year-olds and restore funding of college assistance for low-income students.
This tax on financial transactions would reduce the amount of high-frequency trading, much of which is automated and used to make windfall profits through taking advantage of small differences in price in milliseconds. This type of trading accounts for over 50 percent of the trades in some exchanges. This kind of trading does nothing for ordinary investors and can destabilize financial markets. If anything, this type of trading may increase the market’s volatility.
The tax would be highly progressive in its impact. The Tax Policy Center estimates that 75 percent of the tax would fall on the top fifth of taxpayers, and 40 percent on the top 1 percent. The tax would fall more heavily on high-volume traders than on long-term investors. The proceeds could be used to reduce inequality and increase mobility.
Transaction taxes of one type or another have been in place in countries with thriving financial markets, including Britain, Hong Kong, Singapore and many others. Eleven countries of the European Union agreed to implement such a tax, in 2013, though pressure from opponents caused the introduction to be postponed. So it simply can’t be the case that they’re unworkable.
10. Pass a tax on high-value luxury goods
Most goods and services carry a sales tax or a value-added tax. There is a question whether to add a surtax on luxury goods and services. Luxury goods would include expensive cars, mansions, private airplanes, private boats and yachts, swimming pools, furs and expensive jewelry and clothing. Understand that buyers of these goods already pay more dollars. If the sales tax is 10 percent, then a $100 watch would be taxed at $10 and a $1,000 dollar watch would be taxed at $100. The question is whether to put an additional luxury tax on watches costing $1,000 or more.
The purpose of a luxury tax is to gain revenue from people who have the means and whose life style would not be diminished by that tax. The net result would be to reduce the resources consumed in making luxurious goods and increase the money available to make more affordable housing, city swimming pools, and other socially useful goods. The measure aims at redistribution from the rich to the poor.
In the early nineteen nineties in the United States, a 10% luxury tax was levied on fur, expensive jewelries, airplanes and cars worth $30,000 and above. In the case of cars, the biggest opposition came from European car manufacturers that made some of the most expensive cars in the world. The U.S. motivation was to protect lower price American cars from the competition. But even General Motors and Ford, producing the Cadillac and Lincoln, respectively, objected. Meanwhile European countries themselves were one of the leaders charging luxury taxes on cars. The 10% luxury tax led to a sharp decline in sales of expensive cars and these other items. This caused problems for producers of these items and their retailers, so much so that the law enacting the luxury tax had to be repealed.
In 2014, the Nigerian Government, suffering from declining oil revenues, planned on setting the following luxury goods taxes:
· 10% import surcharge on new private jets;
· 39% import surcharge on luxury yachts;
· 5% import surcharge on luxury cars;
· 3% luxury surcharge on champagnes, wines and spirits; and a
· 1% mansion tax on residential properties valued above a certain level.
These rates were implemented by enforcement faced stiff resistance and was eventually abandoned.[13]
The major question is “What are the specific goods and services that will constitute luxury goods and services?” The answer differs in countries with quite different economic levels and even within these countries. In the UK, chocolate covered biscuits are considered luxury yet somehow biscuits and cakes are considered necessities. In Norway, cars and chocolates are considered luxury items and are liable to luxury taxes. The term “luxury tax” is sometimes mistaken with so-called “sinful items” such as sugary drinks, tobacco and alcohol. Hence the concept of “sin tax”. This could have adverse effects on the affected businesses and by extension, the economy.
The idea, however, remains to get the wealthy to contribute more towards easing the deprivations that ordinary families experience.
11. Establish a Wealth Tax
The U.S. has never had a wealth tax. It has a personal income tax, a corporate income tax, sales taxes, property taxes, capital gains taxes, and dozens of other taxes. Actually a property tax is like a wealth tax except that it only covers one type of wealth.
A wealth tax would call for estimating the total wealth of a person or family. It would include the value of their property, their stocks and bonds, their fixed assets such as homes, cars and appliances, and anything else having market value. The government would pass a bill requiring an annual payment of some percentage of the person’s or family’s wealth.
Senator Elizabeth Warren proposed a detailed wealth tax plan. She called for households to pay an annual 2% tax on all assets — net worth — above $50 million, and a 3% tax on every dollar of net worth above $1 billion. She recently added possibly raising the billionaire wealth tax rate to 6 percent instead of 3 percent to help pay for “Medicare for all” without needed to tax the middle class. (For more discussion, see “Why a Wealth Tax is Warranted” in this book.)
12. Raise the Estate Tax
Wealth concentration can be attacked by raising estate taxes. Wealthy persons need a plan describing how their wealth should be divided upon their death. They cannot avoid paying the estate tax on their wealth. For high-net-worth individuals, a temporary change in the tax code doubled the inheritance tax exemption to $11.18 million for 2018, up $5.6 million. Married couples can combine exemptions to have $22.36 million in exemptions. This increased exemption is scheduled to fall back to $5.6 million in 2026. The current tax on the remaining wealth after exemption is 40 percent.
Those favoring higher estate taxes to reduce wealth concentration have two courses. One is to reduce the estate tax exemption rate back to $5.6 million sooner, not wait until 2026. The second is to raise the tax rate on the remaining amount considerably higher than 40 percent.
The Republicans have been clever in opposing the Estate Tax by labeling it a “Death Tax.” They favor eliminating estate taxes as unjust. Yet the Estate tax goes back a hundred years and purports to prevent the concentration of wealth from worsening. The estate tax exempts assets of $5 million for an individual and $10 million for a couple from the estate tax, which should provide enough for the heirs to continue to live comfortably, especially considering that the heirs are still left with 60% of the estate.
The estate tax only affects a small number of people each year. In 2015, over 2.7 million Americans died, and yet only 12,000 estate tax returns were filed. More than half of those reported no tax due. Estate tax provisions allow transfers to spouses, charity, and other eligible purposes without any estate tax due. About 90% of collected taxes came from estates worth more than $10 million. The majority of those affected by the estate tax are high-net-worth individuals with extensive holdings of liquid financial assets. Their lives and children’s lives do not undergo any substantial disruption.
Republicans argue that a tax of (say) 40 percent on an estate puts a terrible burden on some farm families and small family owned businesses, leading some to closing their businesses and putting their workers out of work. Some of this does happen although most families normally have enough wealth to pay the estate taxes. The government can offer generous financial terms for paying the taxes due in a reasonable time period.
If the current estate tax is eliminated, this will be a terrific windfall for the rich and put a big hole in tax revenue and prevent reducing the tax rates as much for working and middle class families. “This bill is about giving $270 billion in tax benefits (over 10 years) to the richest of the rich,” according to Democratic Representative Rick Nolan, “and the rest of the country is going to have to pay for it.”
I would argue that the government should increase the estate tax rate in a further effort to reduce the growing concentration of wealth in the U.S. Yet Republicans argue that higher estate taxes will lead to more avoidance and also lead talented people to work less hard or threaten to leave the country. I would counter-argue that there are a great many civic-minded talented people waiting to move up the wealth ladder and take their place. The issue is partly what will be done with the redistributed wealth gained from a higher estate tax? Will it be used by government to increase wages and jobs? Or will it go into more defense spending and more bureaucracies?
Conclusion
We examined twelve measures of possible legislation that could reduce income and wealth inequality. We see strong benefits with each measure as well as some possible costs. We believe that some mix of these measures would improve the lives of more Americans in terms of happiness and well-being. The need is to carry out more informed discussion among interested parties.
[1] Joe Klein, “The Populist Mirage,” Time, January 20, 2014.
[2] Eduardo Porter, “In New Tack, IMF Aims at Income Inequality,” New York Times, April 9, 2014, p. B1.
[3] Belinda Luscombe, “Do We Need $75,000 a Year to be Happy,” Time, September 6, 2010.
[4] Douglas K. Smith, “A New Way to Rein in Fat Cats,” New York Times, February 3, 2014, p. A19.
[5] “EU proposes new shareholder powers over executive pay,” April 9, 2014 (see on BBC).
[6] Chris Isidore, “Buffett says he’s still paying lower tax rate than his secretary,” CNN Money, March 4, 2013.
[7] Definition found in http://www.investopedia.com/terms/c/carriedinterest.asp
[8] Allan Sloan, “Positively Un-American: Bigtime Companies are Moving Their ‘Headquarters’ Overseas to Dodge Billions in Taxes…That Means the Rest of US Pay Their Share,” Fortune.com, p.62–70.
[10] Jacques Leslie, “A Piketty Protege’s Theory of Tax Havens,” New York Times, June 15, 2014.
[11] “Companies Keep Piling Up Cash Overseas,” Bloomberg Business Week, 2014, pp. 51–52.
[12] Jared Bernstein, “The Case for a Tax on Financial Transactions,” New York Times, July 22, 2015.
[13] Bitrus Baba, “Luxury Tax: To Be or Not to Be?”