When it comes to taxing the super rich, there’s no need to reinvent the wheel | US income inequality

In this new age of angry oligarchs, nothing might seem more satisfying than taxing Elon Musk’s new trillion-dollar fortune. What bothers Americans most about federal taxes is billionaires’ don’t pay their fair share. As the race to develop artificial intelligence produces more billionaires, the temptation for policymakers to directly tax their staggering wealth is becoming unbearable.

The first state to leave the bloc is California, where voters will decide in November whether to impose a one-time 5% tax on wealth worth more than $1 billion. Considering the ease plutocrats avoid payment income taxesThe case for such a direct tax on their stashes seems uncontroversial.

US government he needs money For all kinds of reasons, starting from the necessity of restoring one of the greatest places in the rich world inadequate social safety nets and do more to reduce America’s mushrooming income inequality. The increasing demands of an aging population for a safety net will require much more money. And the possibility of an AI-powered economy with little human income to tax supports efforts to find other sources of income.

But introducing a newly invented wealth tax that has been largely abandoned in the world’s industrialized countries would jeopardize the United States’ prospects of building the more capable state it needs and deplete political capital that could best be used to remake much of the taxes it currently uses.

Consider that in 2024, the richest 1 percent of Americans pay an average of 31.5 percent of their income. federal taxes and about 7.2% state and local taxes. That’s eight percentage points less than what they paid at the beginning of the century. Given that the top 1 percent reports total adjusted gross income of over $3 trillion, those eight percentage points could generate nearly $300 billion in additional tax revenue annually.

Raising more money isn’t that technically complicated. Rather than taxing wealth or raising income tax rates too high, this could be done by closing the elaborate series of loopholes opened up in the existing tax schedule by offering preferential tax treatment to certain types of income, reducing the plutocracy’s tax liability at each step.

recently Analysis from the Yale Budget lab found that the tax rate on the top 1 percent could range from 45 percent to 3 percent, depending on how they make their living. A simple way to increase tax revenues is to restore fairness in a system that allows large differences in the taxation of different types of income.

In 2024, only three of the Organization for Economic Co-operation and Development (OECD) advanced economies (Norway, Spain and Switzerland) generated any revenue from recurring wealth taxes. This is down from 12 countries in 1990. And none of the four raise much money. Only Switzerland collected more than 1% of GDP in 2024.

There are practical issues with wealth taxes, starting with how to value certain types of wealth, such as a privately owned business, and how to tax owners who do not have liquid assets to meet their obligations. Wealth taxes have been found to encourage capital flight and discourage entrepreneurship. They tend to penalize people with lower-yielding, safer investments.

One OECD research “From both efficiency and equity perspectives, there is limited argument for having a net wealth tax in addition to broad-based personal capital income taxes and well-designed inheritance and gift taxes,” he concluded. Moreover, taxing wealth is politically dangerous, raising the objection that this amounts to double taxation: a tax already levied on savings derived from income.

But there are better tested ways to tax capital; starting from the property tax, which has been gutted with numerous “reforms” in the last 25 years. In 1972, 6.5% of decedents paid property taxes. Share until 2021 fell below 0.1 percent. Despite the large accumulation of inherited wealth over the period, its income fell from 0.4% to 0.08% of GDP.

property tax can be improved simply by reforming tax rates and reducing exemptions to turn-of-the-century levels. The U.S. may also reduce tax deductions on some assets, such as life insurance, and on transfers to close relatives. Critically, this could negate the step-up basis under which unrealized capital gains reset upon the death of their owners, allowing dynastic wealth to grow tax-free across generations.

Turning the estate tax into an inheritance tax levied on heirs, as is the case in most OECD countries, would address criticism of double taxation and provide an incentive to divide large estates among heirs to avoid the highest marginal tax rates.

There are other fixes available as well. Capital gains taxes, currently as high as 20 percent, should be brought closer to the 37 percent top rate on labor income, reducing the incentive for high earners to reclassify wages as investment returns. The corporate tax rate also needs to be brought closer to where it was before Donald Trump’s Tax Cuts and Jobs Act cut it from 35% to 21%. And large corporations should be taxed as corporations, rather than allowing them to be taxed. playing with their situation To reduce tax liabilities.

Finally, the government can ensure that all taxes due are paid. a study Based on data from the Internal Revenue Service, eliminating the “tax gap” in uncollected tax revenues is estimated to yield a total return of $7.5 trillion over the decade from 2020 to 2029.

Of course, these changes will be difficult to achieve in the American political system, where one of the two major parties is defined by the imperative to reduce taxes, while the other has lost faith in an activist government that advocates redistribution, once committed to a strong welfare state.

Other things need to be done too; It’s necessary to start with something like the deal put together by the Biden administration but abandoned by Trump to ensure that multinational companies pay minimum taxes on their profits no matter which tax haven they choose to reside in.

The broader point is that it is possible to change the tax system by: earn more income relatively efficiently, consistent with standard beliefs about fairness, without reinventing the wheel. Indeed, ambitious proposals to sharply increase marginal income tax rates, exemptions, loopholes, etc. It won’t raise much money unless it is taken care of.

It might not feel as satisfying as going after Musk’s stash. But closing loopholes and rolling back many taxes to broaden the tax base tax deductions And reforms It could raise needed money over the years and reduce many of the preferences, exemptions and deductions that the wealthy use to accumulate their wealth.