Should the US start taxing net “wealth”? Or should we start to jack up the income tax rates on high earners once their salary gets to a certain point? Much of this discussion (if not all of it) started to gain traction in the press a few years ago with Bernie Sanders when he ran for president.
However the trend on taxing wealth as well as increasing taxes on high income people really started even earlier, maybe as far back as the financial crisis in 2007-08 and groups such as Occupy Wall Street in 2011. It seems like each and every year (and every election cycle) there are more voices calling to tax the wealthy at even higher rates.
I am mixed on this entire topic. As we have blogged about, there is tremendous income and wealth disparity in this country, and it is concerning. Some of the poverty/low income/wealth gap is self-induced, such as those who just spend and never save/invest or people that refuse to gain new skills or those people who would rather not work and/or live on government aid.
But much of the income disparity is caused by other underlying issues in society. There are too many causes to list here and it is also complicated with multiple root causes. However, is the solution to income disparity so simple in that we should tax the successful even more than we do so today?
Lets look at a place like NYC, which data shows has the highest income disparity in the entire country. So the gap between the wealthy and “regular folks” as well as low income in NYC is greater than anywhere else. The Economic Policy Institute shows that the top 1% in NYC earn about 9 million per year, and the bottom 99% earn about 80K per year. So the higher earners make 113 times more money than “regular people”.
NYC has the most billionaires per capita. However at the other side of the spectrum is the tremendous poverty in NYC. About 19% of NYC residents live in poverty as compared to the national average of about 12.5%. So the poverty rates in NYC are over 50% higher than national averages. More billionaires and more poverty in NYC….that is the definition of income disparity.
Taxing the rich and high earners?
Income disparity is terrible, and is a big problem in the US. But people like Elizabeth Warren want to create an annual wealth tax on billionaires, which would charge them a certain percent of all their assets. Or Alexandria Ocasio-Cortez, who wants to increase income tax rates to as high as 70% on high income earners (maybe 10 million dollars+). But the exact proposals need to be worked out.
I do think we have a big problem with income disparity. But just taxing high earners or the wealthy, who already pay a disproportion amount of all taxes in the US, seems tough to swallow. Why in effect penalize entrepreneurs of small start up type businesses (like me and countless others) for giving it are all to be successful? I already pay outrageous amount of taxes and I am already paying more than my fair share as a small business.
In many ways that is socialism and anti-capitalism. As why would anyone take a chance investing or starting a business, or working hard, if more and more money goes to the government? Or why pay for an advanced degree, or learn new skills, or dream to be successful when the financial “rewards” go towards taxes. There must be another solution.
• Maybe a billionaire should be “encouraged” to donate more to charity? Maybe by giving them bigger deductions for charitable donations and if they do not donate, then slightly increase their taxes.
• Maybe instead of taxing a high earning entrepreneur who started their own business, you tax those executives who are hired into existing businesses and are being paid outrageous salaries. See CEO salaries.
• Maybe you invest more in the IRS (Internal Revenue Service), as that departments budget has been decimated over the years. There are 20%+ less auditors at the IRS. Let the IRS find the tax cheaters, whether high or low income families, and crack down. Experts in the IRS say the government could bring in about 400 billion more per year in tax revenue, and this is the official number they say is lost each year in missed taxes. It is known as the “tax gap”.
• Or to reduce income disparity, encourage or tweak the Earned Income Tax Credit. This program both encourages work and cash aid for those that are employed.
• Maybe do not penalize new or small businesses or individual entrepreneurs (like me!), and tax those huge companies, some of which pay zero taxes as we have reported. As those big companies have access to a huge number of tax breaks.
I don’t know the solution. Income disparity is a huge problem. But I am not a fan of just simply increasing tax rates or taxing wealth, or discouraging entrepreneurship and hard work. There should be more thought around finding a solution that involves more than just taxing success.
And maybe a part of the solution does involve slightly higher tax rates for higher incomes, but I do not think that is the only answer. I think tackling the problem from different angles, and maybe doing a little of everything (IRS audits, tax CEOs, etc.) and similar outcomes is the best solution. And there are a lot of smarter people than me out there, and get their opinions and ideas as well.
What do readers think would be some good ideas? Just tax success? Or something else?