It’s a bit of a magic trick, an illusion. They want you to focus on the right hand over here so you don’t notice what the left hand is doing over there.
That is the complexity of U.S. tax policy, and it plays a role in current debates over a proposed capital gains tax in this state and the corporate tax rate at the federal level.
Consider a recent report from the Institute for Policy Studies, which finds that the wealthiest of the wealthiest Americans — the top 0.01 percent — pay far less in taxes than they did in 1953, when the highest marginal tax rate was 92 percent. From the mid-20th century to 2018, taxation on the richest Americans — as a percentage of wealth — fell by 83 percent.
“Since 1980,” the paper surmises, “American tax policy has increasingly favored wealth over work. … No other factor is as visibly and as directly connected to the concentration of wealth as tax policy.”
That includes strategies such as allowing the maximum tax on dividends to fall below the maximum tax on wages, incentivizing investment rather than production; increasing the exemption on the estate tax; and decreasing the tax rate on corporate income.
The Institute for Policy Studies is a self-described “progressive organization dedicated to building a more equitable, ecologically sustainable, and peaceful society.” So, you can view all this through your personal lens. And their study looks at the top 1 percent of the top 1 percent — or about 33,000 Americans; the odds are that it doesn’t apply to you.
But it is disingenuous to argue that wealth inequality has not ballooned in the U.S. since a time when many people believe America was great. And it is difficult to suggest that making America great again should not include a vast overhaul of tax policy.
Congress pretended to do that during the first year of the Trump administration. It slashed corporate tax rates and trimmed personal tax rates, ignoring sober analyses that suggested the changes exclusively benefited the wealthy.
Not being one of the wealthy, I can attest that my family’s tax as a percentage of income nearly doubled in the wake of those alleged tax breaks. You might want to compare your taxation rate now to what it was for the 2017 tax year. By the way, the individual tax breaks in the law are set to expire after 2025.
All of which plays into discussions about a capital gains tax in Washington. Democrats in Olympia have included the tax in their budget proposals, calling for a 7 percent tax on capital gains — i.e. the sale of stocks and bonds — of more than $250,000. So, if you make a profit of $264,285 on the sale of stocks, you would owe $1,000 in state capital gains tax on it.
Critics argue that would amount to an income tax, which is unconstitutional in Washington thanks to a specious state Supreme Court ruling in the 1930s.
The debate likely will land in front of the court, but it seems reasonable to place a tax on gains that come from investments rather than work. The lionization of the wealthy by policymakers has diminished the middle class in this country and has undermined our nation’s stability.
The issue also plays a role in President Joe Biden’s proposal to increase the corporate tax rate to help pay for infrastructure investment. Republicans in Congress say they will not consider any increase to the corporate tax rate, which was slashed from 35 percent to 21 percent under Trump.
Biden’s supposedly Draconian proposal: Raise the rate to 27 percent — still well below the pre-Trump rate. Of course, according to the Institute on Taxation and Economic Policy, “At least 55 of the largest corporations in America paid no federal corporate income taxes in their most recent fiscal year despite enjoying substantial pretax profits in the United States.”
Through tax breaks and deductions and sleight of hand, corporations often avoid paying any taxes. And 27 percent of $0 is still $0.
That is part of the grand illusion that is this nation’s tax policy. And we’re all being duped by it.
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