On June 1, 2021, Paul Krugman wrote a column entitled “Can the Rich Pay for a Better America?” He pointed out that President Biden said that the $5 trillion in new spending on the next decade would be paid for by old and new revenue streams. Biden would rely on getting higher receipts from corporations and high-income individuals. Biden promised that he would not raise taxes on households making less than $400,000 a year. He would not raise taxes on the middle class.
The question is whether enough new receipts could come from corporations and individuals. Under former President Trump’s administration, the Republicans passed the Tax Cuts and Jobs Act (TCJA) on December 22,2017. This tax reform favored the rich. TCJA cut the corporate tax from 35 to 21 percent. Biden now wants to raise the corporate tax from 21 percent to 28 percent. The Republicans also cut the top individual tax rate from 39.6 percent to 37 percent. Biden would now raise the top individual tax rate back to 39.6 percent. Biden would go further. He would raise additional money by closing loopholes and eliminating perceived inequities. Biden would increase the resources of the Internal Revenue Service (IRS) to spot wealthy tax cheats. He would raise capital gains to be taxed as ordinary income. He would eliminate some of the major avenues for corporate tax avoidance.
What if there is still a Shortfall?
Biden doesn’t want a shortfall because that we leave him two choices: 1. Break the promise and raise taxes on the middle class, or 2. Spend less than the planned $5 trillion by eliminating some important infrastructure programs.
Instead, let’s find some other ways to raise the full $5 trillion. Here are the six major possibilities.
1. Raise the top income tax rate to 45 percent instead of only to 39.6%.
2. Raise the top corporate tax to 32 percent instead of only to 28 percent.
3. Pass a wealth tax along the suggested lines proposed by Elizabeth Warren.
4. Raise the estate tax.
5. Transfer necessary funds from the Defense department to the IRS.
6. Install new tax measures, particularly a tax on security buying and
1. Raise the top income tax rate to 45 percent.
Biden proposed raising the top income tax rate from 37 percent to 39.6 percent for those earning more than $450,000. Why 39.6 percent? Just because that was the former rate before the Trump administration cut it to 37 percent. How about raising the top rate to 45 percent? After all, the Nordic countries that offer nearly free colleges and health care to their citizens pay a top tax rate of 70 percent. The rate of 45 percent isn’t very high by comparison. And the rich don’t have to panic. That way the federal government will raise enough money to launch both the hard infrastructure plan and the soft infrastructure plan.
2. Raise the top corporate tax rate to 32 percent.
Biden might prefer to raise the needed additional money from corporations rather than from rich families. Corporationsgot along with paying 38 percent before Trump drastically reduced their rate from 38 to 21 percent! Corporations can handle a higher tax rate perhaps better than rich persons who might decide to leave the country.
3. Pay a Wealth Tax
Senator Elizabeth Warren had the courage to propose a wealth tax on the rich, believing that this was the best way to reduce the growing wealth gap between the rich and everyone else. She agreed with the deep conviction of the French economist Thomas Piketty who wrote Capital in the Twenty First Century and advocated a wealth tax. Here is Elizabeth Warren’s proposal:
- Add a 2% tax on fortunes over $50 million
- Add a 3% tax on fortunes over $1 billion
- Then use the money (around $2.75 trillion) to pay for education, universal childcare, and universal Pre‑K!!
This would have several advantages. First, this tax will not fall on the middle class or the poor. Second, this tax will not force the wealthy to reduce their standard of living. The superrich already own three homes and have their own yacht and airplane. Thirdly, there are so few of the superrich compared to the huge number of Americans. Fourthly, many family members of the superrich inherited the money without contributing much or anything to warrant it except the accident of birth. By applying this wealth tax year after year, there is a real possibility of reducing the glaring gap between the superrich and everyone else.
Many members of the superrich will use every possible means to fight this tax. They will accuse the supporters of being communists or socialists. They will say they earned the money justly as if CEOs deserve to be paid 320 times the average worker’s salary. They will say they will stop working and innovating. They will warn that super gifted persons such as Bill Gates, Jeff Bezos and Elon Musk will leave the country and change their citizenship to a lower tax country. Biden will have to shape up answers to these objections and show that they don’t amount to much in the end.
4. Raise the Estate Tax
Wealth concentration can also be attacked by raising estate taxes. Wealthy persons develop a will describing how their wealth should be distributed upon their death. They cannot avoid paying an estate tax on their wealth. The estate tax for a deceased individual would only apply if the individual’s estate is higher than $11.18 million. For a married couple, their estate is exempt for the first $22.36 million. The current tax on the remaining wealth after exemption is 40 percent. It should be noted that these generous exemption levels were passed by the Republicans in 2017. In 2026, the individual exemption will fall back to $5.6 million and $11.2 million for a married couple.
Those favoring higher estate taxes to reduce wealth concentration have two courses. One is to reduce the estate tax exemption rate back to $5.6 million sooner, not wait until 2026. The second is to raise the tax rate on the remaining amount considerably higher than 40 percent.
The Republicans have been clever in opposing the Estate Tax by labeling it a “Death Tax.” They favor eliminating estate taxes as unjust. Yet the Estate tax goes back a hundred years and purports to prevent the concentration of wealth from worsening. The estate tax exempts assets of $5.6 million for an individual and $11.2 million for a couple from the estate tax, which should provide enough for the heirs to continue to live comfortably, especially considering that the heirs are still left with 60% of the estate.
Republicans argue that a tax of (say) 40 percent on an estate puts a terrible burden on some farm families and small family owned businesses, leading some to closing their businesses and putting their workers out of work. Some of this does happen although most families normally have enough wealth to pay the estate taxes. The government can offer generous financial terms for paying the taxes due in a reasonable time period.
5. Transfer needed funds from the Defense department to IRS.
Biden needs to review whether the federal government is spending too much money in other areas of the federal budget. One area that can be questioned is the huge Defense budget. Remember that Trump decided to raise the Defense budget by more than the generals were requesting. And Trump diverted some military money to pay for a wall that he wanted to build.
6. Install some new taxes to raise needed funds
For years, many tax experts have suggested that a small tax placed on stock transactions could raise a very large amount of money. Just consider collecting a 1 percent tax on the dollar amount of every purchase and sale of stock.
Trillions of dollars of stock are traded every day. Traders aim to make a profit through betting on the rise or fall in the price of specific stocks or in the stock market as a whole. This is a form of gambling played mainly by persons who have discretionary income. Fifty three percent of Americans have no money in the stock market. Most stock traders have good income or wealth.
Senator Bernie Sanders of Vermont proposed placing a tax on financial transactions. He proposed a small excise tax, typically a few hundredths of a percent, on trades of stocks, bonds, derivatives and other securities. A one-basis-point tax on $1,000 worth of stock would cost the stock trader 10 cents. A $100,000 trade would generate a tax of only $10. The nonpartisan Tax Policy Center estimated that a 0.01 percent tax would raise $185 billion over 10 years. That amount could finance an ambitious expansion of prekindergarten programs for 3- and 4-year-olds and restore funding of college assistance for low-income students.
This tax on financial transactions might reduce the amount of high-frequency trading, much of which is automated and used to make windfall profits through taking advantage of small differences in price in milliseconds. The tax would be highly progressive in its impact. The Tax Policy Center estimates that 75 percent of the tax would fall on the top fifth of taxpayers, and 40 percent on the top 1 percent. The tax would fall more heavily on high-volume traders than on long-term investors. The proceeds could be used to reduce inequality and increase mobility.
Biden’s administration would have the task of deciding which mix of tax strategies would be feasible and effective in restoring the needed funds to finance the $5 trillion budget.
The Basic Problem. The Rich Need Better Assurance that their Tax Money Will be Used Effectively
The American public has recently read an avalanche of stories on how the rich pay substantially lower income taxes than the average American. The 25 richest Americans paid relatively little — and sometimes nothing — in federal income taxes between 2014 and 2018. From 2014 to 2018, the 25 wealthiest Americans paid an average of 15.8 percent in personal federal income taxes. Jeff Bezos’s wealth grew by an estimated $99 billion between 2014 and 2018 but he reported in that period only $4.22 billion in taxable income. Warren Buffett amassed $24.3 billion in new wealth over those years, reported $125 million in taxable income.
These rich taxpayers are not doing anything illegal. Their estates consists of assets that are typically growing in value. As long as they don’t sell these assets, they owe no tax. Many rich taxpayers turn over these assets to their children who don’t sell them. Eventually taxes will be paid when these assets are sold but it can take a very long time.
No one likes to pay higher taxes. Many tax payers see governments as spending their tax money wastefully or carelessly. Resistance to paying higher taxes is inevitable.
Two groups of super wealthy persons can be distinguished. One group of wealthy persons are largely indifferent to the plights of suffering Americans. They know that more than half of Americans have problems paying their bills without borrowing more money. They assume that there will always be poor people and that neither government nor the rich can do anything about this problem. Members of this group spend their time thinking of ways to increase their wealth. They live a life of pleasure within a rarified circle of friends and acquaintances. They will find ways to preserve their wealth and defer, minimize, or even avoid taxes.
The other group of super wealthy persons are very conscious of the hardships of many Americans. They adopt certain charities and often respond to new fundraising drives. They wish that living conditions would be better in the U.S. They want the U.S. to fulfil more of its promise of the American Dream. Some members of the super rich sign the Giving Pledge started by Bill Gates and Warren Buffett where they promise to give away half their wealth to good causes. Warren Buffett and some other billionaires publically favor paying higher taxes. Many are moved by Oliver Wendell Holmes observation that “taxes are the price we pay for civilization.”
I believe that there are enough superrich individuals and families that really care about the poor. They would not object to paying higher taxes if they believed that the money would go to improving the lives of a substantial number of Americans. The rich think in terms of the “return on an investment.” Will paying higher taxes result in a good return on the money invested? They don’t want the higher tax revenue to go to more Defense spending or get lost in scores of other national accounts.
I think that I have an answer. The Biden administration needs to set up a new account called the Social Improvement Fund (SIF). The Social Improvement Fund lays out a whole plan on how higher tax money would go to the SIF to improve education and the American health system. The SIF is comparable to the Biden’s Infrastructure plan that aims to improve roads, bridges, ports, airports and other infrastructure. Likewise,SIF lays out how the higher taxes will be spent on improving education and health. Members of the superrich will participate in planning the money allocation of the SIF. They will have a voice in shaping the plans for the new taxes on the superrich.
Hopefully, those members of the superrich who want to improve the lives of average Americans would defend the higher taxes and answer the objections of other superrich individuals and families who try to block SIF from coming into being or operating. Hopefully, there would be enough billionaires who want to invest in a better America.