Let’s face it, the United States has one of the most unfair systems of taxation in the developed world. Start with the fact that the United States has the highest level of income inequality in that developed world. The wealth gap is equally reflective of this disparity. According to the Federal Reserve, the bottom 50% of Americans only controlled roughly 16 times less than those in the top 1%. Wealth in the United States is completely out of whack, and the system is designed to shift the tax burden on earnings and not asset growth (except on sale or death). A rich person can borrow dramatically huge sums secured by their growing wealth, deduct the interest, roll over the debt every few years, and never pay taxes on the loan amount. Most Americans work for a living and pay taxes on their salaries and wages. Hmmm.
To understand income inequality, economists have created a mathematical tool to provide a precise metric. The “Gini coefficient,” also known as the Gini index is the statistical measure which is used to measure the distribution of the income among a population, simply, income inequality. “The U.S. has the highest Gini coefficient among the G7 nations. The top 1% of earners in the United States earn about 40 times more than the bottom 90% of earners. About 33 million U.S. workers earn less than $10 per hour, placing a family of four below the poverty line.” World Population Review (2022). While President Biden has raised the minimum wage to $15/hour for federal employees and many states have made the same or larger commitment in general, the federal minimum wage is $7.25, set and unchanged since 2009.
The explosion of income inequity in the United States, according to a Pew Research Center report (1/9/20) “is found to have increased by about 20% from 1980 to 2016 (The Gini coefficient ranges from 0 to 1, or from perfect equality to complete inequality). Findings from other researchers show the same general rise in inequality over this period regardless of accounting for in-kind transfers…
“The growth in income in recent decades has tilted to upper-income households. At the same time, the U.S. middle class, which once comprised the clear majority of Americans, is shrinking. Thus, a greater share of the nation’s aggregate income is now going to upper-income households and the share going to middle- and lower-income households is falling.” The gap only widened during the pandemic, as companies were able to shed excess numbers of employees to be replaced with growing AI-driven automation, ultimately increasing efficiencies while maintaining revenues. A few companies – notably those that relied on an in-person mass attendance – suffered; most did not.
A paper released by the Federal Reserve Bank in St Louis (10/16/17), applying the Gini index, noted: “When we analyze countries… separately, interesting patterns emerge. For instance, income inequality in the U.S. is large, despite the U.S. having one of the highest levels of income per capita in our sample. Specifically, the Gini coefficient of the U.S. was 40.46 in 2010, very close to the average Gini coefficient of African countries in our sample… In contrast, Nordic countries in Europe—such as Finland and Sweden—have a similar income per capita as that in the U.S., but much lower Gini coefficients.
“The lower inequality in these countries could be explained by a tax system that redistributes income across countries and includes generous transfers like social security, health insurance and unemployment benefits. In fact, poorly designed tax systems, tax evasion and tax avoidance are part of the reason why Latin American countries have the largest Gini coefficients.” In short, the United States parallels banana republics when it comes to income inequality… by statutory determination. Why? It starts with our already unfair tax code, one further heavily lobbied by corporate America when their ability to fund political campaign issues was unleashed and uncapped by the US Supreme Court in its 2010 Citizens United vs FEC decision. Hence the 2017 massive corporate tax cut, cutting rates from 35% to 21%.
It is also driven by one of the most basic planks in Republican economic policy: the completely disproven (i.e., it has never worked anywhere on earth) concept of supply-side economics (aka trickledown, incent the job-creators Reaganomics – even Ronald Reagan had to raise taxes because of the resulting shortfalls). The theory goes that if you cut taxes for the mega-rich, they will immediately go out and create high paying jobs by the boatload. Think about that. Assume you are a billionaire with a mega-tax cut. Do you instantly go out, without some fundamental determination of a sound business plan that will make profits, and hire people? Of course not. You didn’t get rich by being knee-jerk stupid. As reflected in the stock buyback frenzy that followed the above noted 2017 slash of our corporate tax rate, there was no significant increase in those good jobs.
These facts reflect why there has been a rise in “take me back to the good old days” populism. Politicians, unwilling to address the fundamental reality of an unfair tax code and a stock market designed to enhance growth of big-investor portfolios (how much of your income is determined by stock ownership?), have embraced a policy of blame, laced with the false promises of supply-side economics, to perpetuate a flawed system the benefits their contributors. That does not seem to dissuade populist voters from keeping these “protectors of the rich” in office. They buy the rhetoric without questioning the substance. Mega-rich corporations often pay zero taxes.
“[In 2020, for example, a]nalysts determined that the 55 companies, all part of the S&P 500 or Fortune 500, would have paid a combined total of $8.5 billion last year if they had paid at a 21% rate (the statutory federal corporate tax rate) on their profits… Not only did they avoid paying any taxes on their profits, but these companies also received $3.5 billion in tax rebates, according to ITEP [Institute on Taxation and Economic Policy], a left-leaning, non-profit research group that analyzed each firm’s annual financial reports.” Forbes.com, April 2, 2021. Big names like Nike and AmEx.
If we taxed massive wealth at a federal level – primarily in stock ownership and real estate – we might begin to level the playing field. But experts argue that would disincentivize investors from taking big entrepreneurial risks, thus stymying the economy. They point to failed attempts in some European countries at applying such taxes, but none of those efforts focused on mega-wealth. If we established a small tax on accumulated wealth above $5 billion, it would begin to right an egregious wrong. Likewise, implementing a minimum tax, applied before the loopholes kick in, to corporations and mega-wealthy individuals, income inequality might also be tempered. Of course, tackling those loopholes – a fight against Citizen United campaign dollars – would go a much longer way to right the ship.
I’m Peter Dekom, and whatever else is said and done, the United States has one of the least equitable systems of taxation on wealth and high income on earth… at the expense of most of us.
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