Wealth tax: It's not about screwing Scrooge
Like the fair tax, it’s about creating a more equitable taxation system to sustain society
Larry Yando is Ebenezer Scrooge in the annual production of “A Christmas Carol” at the Goodman Theater in Chicago. (GoodmanTheater/Liz Lauren)
By Ted Cox and Ameya Pawar
It’s time for a wealth tax to step out of academic journals and into the political mainstream.
With income inequality getting worse and causing considerable political anxiety, some are suggesting the time has come for the United States to adopt a wealth tax. Two of the leading proponents are Democratic presidential candidates Sens. Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont.
National Public Radio ran a story last week on their competing plans. Basically, according to NPR, Sanders’s plan would apply to those who’ve amassed $32 million in wealth, about 182,000 Americans, Warren’s to those with more than $50 million, about 70,000 people. Warren’s plan would create two tax brackets: 2 percent and then a 6 percent tax on billionaires (recently bumped up to help pay for her health-care proposal for Medicare for All). Sanders’s plan would create eight tax brackets, starting at 1 percent and rising to 8 percent for those with over $10 billion in assets.
U.S. Sen. Bernie Sanders is one of the leading proponents of a wealth tax. (One Illinois/Ted Cox)
It’s important to step back here and emphasize that a wealth tax is not a progressive or graduated income tax. The latter is based on annual income, while a wealth tax is meant to address accumulated wealth — not just income, but stocks, bonds, and investments, including, say, artworks or owning a piece of a major sports franchise.
As NPR pointed out, our current property-tax system is in effect a wealth tax, placing an annual tax on what is the main investment for most homeowners. Warren pitches her plan on the campaign trail as basically an expansion of the property tax — to all property. As such, it’s kept relatively low, unlike a once-in-a-lifetime (at the very end) estate tax.
It’s actually a bipartisan proposal, endorsed by some Republicans as well as Democrats. NPR pointed out that, 20 years ago, Donald Trump backed a one-time 14.5 percent wealth tax on those worth $10 million or more.
It’s needed because income inequality is worsening. As the U.S. Census Bureau reported in September, the Gini index — measuring income inequality on a scale of 0 to 1, with 0 being a totally equal society and 1 being a society where all wealth is owned by one person — is at a record high since the bureau began compiling it in 1967. It was 0.397 then, it’s at 0.485 now. No European country has a Gini index higher than 0.38.
It’s widely recognized that income inequality is a social ill that puts stability at risk. Former U.S. Labor Secretary Robert Reich said in 2013, in the wake of the Great Recession, that our society was at a “tipping point,” adding, “History is filled with tipping points in terms of social movements. I think we are moving toward one in regards to inequality of income, wealth, and opportunity. I cannot tell you exactly what will tip the tipping point." Things have only gotten worse since, and New York magazine suggested after the latest U.S. Gini index was released in September that “America’s Income Inequality Is Reaching a Tipping Point,” a point where a majority of people feel the system is rigged or chronically inequitable, resulting in a push for cataclysmic change.
Unbridled capitalism doesn’t address income inequality, it creates it. As French economist Thomas Piketty wrote in his book “Capital in the Twenty-First Century”: “The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion.”
Piketty argues that most societies already have a progressive income tax and estate tax. A wealth tax is necessary because it taxes accumulated wealth among what we might call the “idle rich” — a stereotype far more real than the “idle poor,” as demonized by Ronald Reagan in his attacks on mythical “Welfare Queens.” They make money on stocks and other investments, typically taxed at much lower rates than the income tax for earnings. Piketty says of those three progressive taxes — income, estate, and wealth — “Each is an essential pillar of an ideal tax system.”
What is an ideal tax system? As Ralph Martire, executive director of the Center for Tax and Budget Accountability, put it in a tax debate just last month: “You have to raise revenue from where the economy is growing, not declining.” Martire said the state’s flat tax rate was “missing where all of the growth in the economy is occurring.” Similarly, a society without a wealth tax is missing where all the wealth has accumulated, where it’s there to be drawn on in a way that doesn’t overly burden the taxpayer.
Martire heartily endorsed a progressive income tax, saying, “We need this tool in the kit.” We’d argue that we need a wealth tax in the revenue kit as well, although we’d be the first to grant it should be a national tax and not a state tax, in order to avoid causing the flight of the very rich to neighboring states.
There’s income inequality on the global, national, and state level. Illinois is already taking concrete steps to address that locally through Gov. Pritkzer’s “fair tax” proposal, creating a graduated income tax in which the vast majority of state taxpayers will pay the same or lower rates, and only the top 3 percent of earners pay more.
As we argued just last month, that isn’t about soaking the rich. It’s about creating a more equitable tax system than the flat tax mandated by the state constitution. The time has come, Martire suggested, to abandon that old regressive tax code and draw instead from areas where the money is abundant and flowing. We’d argue that a wealth tax does the same, extending taxes to where the money is.
It’s not about hobbling capitalism, it’s about keeping capitalism vital. Piketty has suggested a wealth tax could replace property taxes as we know them. He’s gone on to say: “A progressive tax levy on individual wealth would reassert control over capitalism in the name of the general interest while relying on the forces of private property and competition.”
Again, it’s not about screwing misers like Ebenezer Scrooge, who might earn relatively small amounts of income annually while sitting on an amassed fortune. It is, however, about the Scrooges recognizing that such a tax serves a common good to address a variety of economic ailments.
We all pay taxes individually, but we pay them to serve the larger society, of which we are all a part. Life expectancy is down for the first first time perhaps ever in this nation (making allowances for wartime). Birth rates are down. Climate change is threatening farmers across the state as well as mansion owners along the shores of Lake Michigan. This demographic data, we should all remember, is derived from real people living real lives.
Millennials still paying off burdensome student loans are delaying marriage, children, and homeownership — something that in the end will also affect Baby Boomers who are going to have to find someone to buy the houses they’ve invested so much of their time, money, and selves into if they’re to see any return on that investment to pay for retirement.
The watchdog group Good Jobs First did a study a year ago showing how government business subsidies actually rob funding for education. It makes a solid case. When land or property or even an idled factory is granted to a business at no cost in taxes, it deprives the local school district of property taxes and potentially other forms of revenue, which in turn places the burden for collecting those taxes on local homeowners, who can only pay so much. Education suffers as a result.
We are all in this together. Is it such a big deal, then, to expect the well off to pay their fair share?
Perhaps it is, politically — or at least it has been. The Washington Post just ran a story Monday drawing on the findings of another French economist, self-proclaimed “wealth detective” Gabriel Zucman. He’s traced not only how income has risen for the top earners in recent decades, while it’s stagnated for much of the middle class and low-wage workers, but also how the rich have succeeded in passing changes to the tax code to their benefit, as with the Trump tax cuts passed by Congress two years ago. As the Post puts it: “The effective tax rate (federal, state, local and other taxes) paid by top earners has steadily declined since the 1950s and 1960s, when the tax code really was quite progressive, to a point where the highest income groups pay barely more, percentagewise, than the bottom.”
The political pendulum seems to be swinging back, however, with Warren and Sanders guiding the way. We’re in agreement. Our entire society and economic system are at risk if we don’t take steps to address income inequality. Can we grow our state and national economy in an equitable way that benefits everyone? Can we address climate change, infrastructure, education — all the issues government needs to confront — without placing the tax burden overly much on various segments of the population, not even the very rich?
We think we can, by everyone recognizing their common interest in sustaining the common good. Give a little, potentially get back a lot in return in the form of a better, more equitable society for all.