TOO MUCH —Chronicles of Inequality [April 8, 2013]

Last year’s CEO pay average, by contrast, topped presidential pay 24 times over — and average worker pay by well over 300 times. On what planet can any of this possibly make sense? In this week’s Too Much, more on the nonsense around us — and the struggle against it.

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“We’re experiencing the burden of austerity economics and the continued scourge of widening inequality. Both are squeezing average Americans. Yet it’s impossible to have a buoyant and sustained recovery without a large and growing middle class.”
Robert Reich, former U.S. labor secretary, The Big Stall, April 5, 2013

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Among the world’s 34 major industrial nations, Denmark last year had the highest top marginal tax rate, 60.2 percent on income over $55,000. The top federal rate in the United States last year: 35 percent. Californians this year will pay the highest top combined state and federal rate: 47.6 percent on income over $400,000.

What to do? Some Democrats in Congress — the members of the Progressive Caucus — want to raise the nation’s top tax rate still higher, up to 49 percent on annual income over $1 billion.

But no big-time movers and shakers in Washington, from either party, support higher top rates. Republicans typically claim that higher rates would undermine the incentive to work, save, and invest. GOP hard-liners even balk at moves to shut tax loopholes. Any step that hikes tax bills, they hold, invites calamity.

Mainstream Democrats, for their part, generally consider higher tax rates and moves to close tax loopholes an either/or proposition. Instead of raising current top rates, they argue, we should keep top rates modest and apply these modest rates to the “broader tax base” that limiting loopholes would create.

Not all these lawmakers, of course, agree on what constitutes a loophole. More Wall Street-friendly Democrats, for instance, gag at the thought of ending the enormously lucrative tax break for capital gains, the profits from buying and selling stocks and other assets that flow overwhelmingly to America’s richest.

The bottom line? For an assortment of reasons, congressional majorities on both sides of the aisle have come to what amounts to a “bipartisan consensus” on increasing tax rates at the top. That consensus: don’t do it.

Few lawmakers dare to challenge this admonition. But this timidity makes no sense. The current consensus against higher top tax rates, as analyst Andrew Fieldhouse details in a just-released study for the Economic Policy Institute and the Century Foundation, rests on an amazingly shaky foundation.

Fieldhouse’s new paper, A review of the economic research on the effects of raising ordinary income tax rates, walks us through the last decade of top-notch research on top tax rates and, along the way, readily demolishes conservative claims that high taxes on high incomes will doom America to economic despair.

Tax rate reductions since the 1970s, the research shows, haven’t strengthened the economy. They’ve had “a statistically insignificant impact” on the factors that drive economic growth: labor supply, savings, investment, and gains in productivity.

What these rate cuts have done: They’ve “discernibly widened,” Fieldhouse relates, “structural budget deficits and exacerbated income inequality.”

Fieldhouse also shows — and this may be his paper’s most politically significant contribution — that efforts to broaden the tax base and efforts to raise top tax rates can and should go hand in hand. His explanation why revolves around the concept of taxable income “elasticity,” economist-speak for how the income taxpayers report may rise and fall with changes in tax rates.

This elasticity — how taxpayers behave at tax-reporting time — depends in large part on the loopholes the tax code offers.

If loopholes beckon at every turn — and efforts to enforce the tax code’s integrity remain lax — wealthy taxpayers just step up their tax-avoidance efforts when taxes rise. The IRS ends up collecting less revenue than the agency would have collected had the wealthy not stepped up their avoidance behaviors.

By contrast, if Congress seriously went after loopholes — and toughened up tax law enforcement — wealthy taxpayers would have fewer avoidance options. “Elasticities” would fall. The new tax revenue collected from higher tax rates would increase.

In sum, writes Fieldhouse, “base-broadening tax reform and higher marginal rates should be seen as complements, not substitutes.”

The payoff if we do both? Oh, not much: just more tax revenue to fund programs that help average American families, a stronger overall economy, and a meaningful pushback against growing inequality!

Recent economic research, Andrew Fieldhouse goes on to add, puts the optimal top tax rate for maximizing revenue at just north of 66 percent, well above the current top rate.

Top tax rates in the United States used to flutter in that lofty vicinity. Moving back closer to those top rates, Fieldhouse’s new study helps us understand, would make wonderful sense economically.

Whether that move back to higher tax rates at the top comes to make sensepolitically to America’s lawmakers depends, of course, on the rest of us — and the political pressure we choose to bring to bear.

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Emily Schwartz Greco and William Collins, Under-Taxing the Rich Is Uncivilized, OtherWords, April 3, 2013. We all pay, the long run, when the wealthy pay less in taxes.

David Leigh, Leaks reveal secrets of the rich who hide cash offshore,Guardian, April 4, 2013. A massive leak from the British Virgin Islands has the world’s wealthiest no longer certain that their fortunes remain hidden.

Dean Baker, President Obama Proposes a Bigger Hit to Seniors than to the Rich, Beat the Press, April 5, 2013. The new White House budget plan to limit the Social Security cost-of-living adjustment will cost seniors more than the fiscal cliff deal costs the $500,000-per-year set.

Sheila Krumholz, Rich Candidates Are Not the Solution, New York Times, April 3, 2013. The Center for Responsive Politics director takes on those who claim that rich candidates can’t be corrupted.

The introduction chapter
to Too Much editor Sam Pizzigati’s new book now ready to read online.

No one can really answer these questions, in any sort of serious fashion, without looking at all the taxes Americans pay, not just taxes at the federal level, and without taking into account all the income Americans are making, not just the income that gets counted in federal adjusted gross income figures.

This new Citizens for Tax Justice report takes both these steps — and finds that America’s rich and America’s poor each shoulder a share of the nation’s tax burden that roughly equals their current share of the nation’s annual income.

America’s top 1 percent, the report calculates, will collect 21.9 percent of the nation’s income this year. These same top 1 percenters will pay 24 percent of their $1,462,000 average incomes in combined local, state, and federal taxes.

The bottom 1 percent — Americans making less than $21,000 — will pull in 3.3 percent of the nation’s income and bear 2.1 percent of the total tax burden.

What impact is the fiscal cliff tax deal having? The deal, notes this new Citizens for Tax Justice study, has resulted in a tax system “modestly more progressive” than the system we would have had “if Congress had simply extended all of the tax laws in effect in 2012.”

The top 1 percent, if 2012 tax laws had been extended into 2013, would be bearing 23.1 percent of the nation’s total tax burden, a tiny blip down from the 24 percent share America’s deepest pockets will pay under the fiscal cliff deal.

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