The already-contentious dispute over tax policy promises to be even more polarized this year, with growing evidence of aggressive corporate tax avoidance, rising concern over our national debt and deficit, and the devastating impact of budget cuts at the federal, state, and local levels.
Everyone agrees we should reform the federal tax code, but there are widely divergent visions as to how.
The Business Roundtable, a private organization comprised of major corporate CEOs, advocates reducing the already loophole-ridden corporate income tax. Rep. Jan Schakowsky of Illinois calls for $144 billion in new taxes on the wealthy to trim down the deficit and reduce glaring economic inequalities.
Most lawmakers agree that our revenue system should be simple and fair and raise adequate revenue. Yet there is also recognition that the rules of our tax system should reflect deeper values and serve the larger common good. Just as “budgets are moral documents” — reflecting our most deeply held beliefs and priorities — so are tax policies. There is no such thing as a “value neutral” tax system.
Our present tax code values income from wealth, such as capital gains, over income from work and wages. It gives preferential treatment to the investment income of a hedge fund investor and taxes that income at a lower capital gains level of 15 percent. But we tax the earned wages of a doctor or a scientist at a top income tax rate of 35 percent.
Our present tax system gives advantages to global corporations over domestic businesses and small enterprises. Local businesses must compete on an uneven playing field with global companies that game the system, move income overseas, and pay little corporate income tax toward the public infrastructure, education system, and other public investments that we all depend upon. Our tax code offers larger incentives to mature extractive industries such as oil and natural gas than for activities that conserve resources, care for the earth, and catalyze new green enterprises. Our present tax rules do not reflect the widely held values of our society. Rather, they reflect the designs and worldview of powerful global corporations and wealthy individuals.
A tax code skewed to benefit the powerful is a huge impediment to progress. Our present tax rules freeze us into the economy of the past, rather than help us make a transition to a new economy rooted in ecological sustainability, good jobs, and greater social equality.
Conventional tax wisdom asserts that we should “tax the bads,” by putting a higher price on harmful activities. Hence the notion of “sin taxes” levied on liquor, tobacco, and now, with increasing ferocity, junk food. Taxing these items raises revenue to offset negative societal costs such as alcoholism, cancer, obesity, and poor health. But sin taxes, like any sales tax, are regressive, requiring lower-income households to pay a higher percentage of their income than do the wealthy.
What are the new “bads” of today? What behaviors should we discourage and encourage in the tax system of the future? There are three “bads” that our tax code should be redesigned to address, and in doing so support our transition to a more healthy and sustainable economy: 1) Extreme concentrations of income, wealth, and power that undermine social cohesion and a healthy democracy; 2) Financial speculation, such as the activities that destabilized our economy in 2008, and profligate consumption and waste; and 3) Pollution and the depletion of our ecosystems.
Creating a “Virtuous” Tax Policy
Any discussion of revenue must move in tandem with thoughtful reductions in unnecessary spending, including Pentagon spending that has little to do with our real security. The following proposals are aimed at taxing the “bads” and encouraging a more rapid transition to a new sustainable economy.
1. Taxing dangerous concentrations of income and wealth. A century ago, Theodore Roosevelt advocated for progressive estate and income taxes as a way to reduce the corrosive impact of concentrated wealth and power on our society. Today, extreme levels of inequality are undermining our public health, social mobility, and economic growth. Historically, tax policies have been one of the most important interventions to reduce inequality.
• Levy a progressive estate tax on large fortunes. At the end of 2010, Congress reinstated the estate tax on estates over $5 million ($10 million for a couple) at a 35 percent rate. Congress could close loopholes and raise additional revenue from those with the greatest capacity to pay. The Responsible Estate Tax Act establishes graduated tax rates, with no tax on estates worth under $3.5 million, or $7 million for a couple, and including a 10 percent surtax on the value of an estate above $500 million, or $1 billion for a couple. Estimated annual revenue: $25 billion.
• Institute a wealth tax. A “net worth tax” could be levied on individual or household assets including real estate, cash, investment funds, savings in insurance and pension plans, and personal trusts and can be structured to tax wealth only above a certain threshold. For example, France’s solidarity tax on wealth is for those who have assets in excess of $1.1 million.
• Create additional tax brackets for higher incomes. Under our current rate structure, households with incomes over $350,000 pay the same top income tax rate as households with incomes over $10 million. In the 1950s, there were 16 additional top rates over the highest tax rate (35 percent) that we have today. A 50 percent rate on incomes over $2 million would generate an additional $60 billion a year.
2. Taxing financial speculation. The economic meltdown of 2008 has had huge human costs in the form of unemployment, home foreclosures, and the destruction of private savings. The driving engine of the financial collapse, as recently articulated by the Financial Crisis Inquiry Commission, was a bloated “shadow banking” system that encouraged speculative practices and risk-taking. Monies generated by these proposed taxes could fund proper oversight of the financial sector and consumer protection.
• Speculative trading now accounts for up to 70 percent of the trades in some markets. Commodity speculation unnecessarily bids up the cost of food, gasoline, and other basic necessities. A modest federal tax on every transaction that involves the buying and selling of stocks and other financial products would both generate substantial revenue and dampen speculation. Small investors could be exempted. Estimated revenue: $150 billion a year.
• Another distortion that encourages speculation is the advantaged taxation of income from wealth. Current law subjects most dividend and capital gains income — the income that flows overwhelmingly to wealthier Americans — to a 15 percent tax rate. The tax on wage and salary income, by contrast, can run up to 35 percent. With carefully structured rate reform, we can end this preferential treatment for capital gains and dividends and at the same time encourage average families to engage in long-term investing. Estimated revenue: $88 billion per year.
• End corporate tax dodging through overseas tax havens. Aggressive corporate and individual tax avoidance deprives our nation of revenue needed to maintain and modernize the infrastructure and services underpinning a strong economy. Responsible businesses and banks are hurt when other firms use tax havens to avoid paying their fair share of taxes. In using tax havens, companies such as General Electric and Citigroup, for example, shift their responsibility for taxes to the local appliance store or community bank. Estimated revenue: $37 billion per year.
3. Taxing the destruction of nature. Several tax interventions could have a positive impact on reducing the pace of environment destruction and could spawn new industries that are essential for our transition to the new economy. Instead of taxpayers paying indirectly for the huge social costs associated with climate change, pollution, and irresponsible consumption, these taxes would build some of the real costs of destroying nature into purchases.
• Perhaps the most critical tax intervention to slow climate change would be to put a price on dumping carbon into the atmosphere, from our transportation, energy, and other sectors. A gradually phased-in tax on carbon would create huge incentives to invest in energy conservation and regional green infrastructure. Proposals include a straight carbon tax or a “cap and dividend” proposal that would rebate 50 percent revenue to consumers to offset increased costs of some products and still generate $52 billion per year. We could also explore taxes on other pollutants, such as nitrates that are destroying our water supplies.
• Consumption of unnecessary stuff is filling our landfills and destroying our environment. A tax on certain nonessential goods, such as expensive jewelry and techno-gadgets, can be modeled after the European “Value Added Tax” and charged as a percentage of the price of the good. It could apply only to purchases that exceed a certain amount, such as cars that cost more than $100,000. Some states currently charge a luxury tax on high-end real estate transactions.
Objections to these proposals will be strong, along with howls of “class warfare” and “job killing.” Some will argue that government shouldn’t be in the business of “picking winners” in the economy. But the reality is, our current tax policy is picking winners every day. The tax rules are rigged to benefit the wealthy and global corporations at the expense of everyone else.
For several generations after the introduction of a federal income tax at the end of the 19th century, our progressive federal tax system was moderately effective in reducing concentrations of wealth. For example, during the 1950s, wealthy individuals paid significantly more taxes than they do today. Since 1980, however, we’ve lived through a “great tax shift,” as lawmakers moved tax obligations off the wealthy and onto low- and middle-income taxpayers, off corporations and onto individuals, and off today’s taxpayers onto our children and grandchildren.
There is a role for everyone in reversing these backward tax policies. Around the world, coalitions are coming together to push for financial speculation taxes, carbon taxation, and uniform rules to crack down on corporate tax dodging. Important business leaders and small business owners, workers, and consumers are advocating for greater fairness in the tax system. Together, we can press for real changes in the tax code that will help us make the fundamental shift required in the coming decade.
Chuck Collins is co-founder of Wealth for the Common Good, a network of business and civic leaders, wealthy individuals, and partners that promotes fair taxation to support public investment in a healthy economy. Check out the “listening project” at wealthforcommongood.org.
Taxes and the Common Good. By Chuck Collins. Sojourners Magazine, April 2011 (Vol. 40, No. 4, pp. 28)