This piece is the fourth in a six-part series on taxation, and a joint project by The American Prospect and its publishing partner, Demos.
The "Buffett Rule" proposed by President Obama and now being considered by the Senate would be an important symbolic step toward a fairer tax system. By instituting a minimum tax on very high earners, it would advance the principle of progressive taxation and reform the tax code in an overdue way.
By itself, though, the Buffett Rule does not go nearly far enough. It should be a small piece of a much larger agenda for restoring fairness to America's tax system. Some of this agenda is reflected in President Barack Obama's 2013 budget proposal, but other important ideas are not yet being seriously considered. Here are six such ideas that should be part of the national debate.
Create New Top Tax Brackets
The Obama budget plan would let the Bush tax cuts lapse at the end of this year for households making over $250,000, and the highest tax bracket-for those making over $388,351-would be 39.6 percent. While this is important, Congress should go further and enact the Fairness in Taxation Act, proposed last year by Representative Jan Schakowsky, It would add a new set of top tiers to the income tax code for those earning over a million dollars, and set the tax rate for the highest bracket at 49 percent. This proposal acknowledges vast disparities in earnings among the affluent and the fact that it isn't fair to tax a couple making $390,000 at the same rate as a billionaire. Prior to the Reagan tax cuts, the federal tax code did a better job at making such distinctions with more graduated tiers of brackets for higher earners.
Tax Capital Gains and Dividends as Regular Income
The current tax code is intrinsically unfair to the majority of Americans-the W-2 crowd-who work for a living and earn little money from capital gains or dividends. Nearly half of Americans own no stocks, for example. The Buffett Rule would only modestly reduce these inequities. Meanwhile, another element of President Obama's 2013 budget plan-raising capital gains tax rate to 20 percent for high earners-also doesn't go far enough since this rate would be about half that of the top income tax bracket. A fairer approach would be to tax all income from capital gains and dividends as ordinary income, with limited exemptions. This step would raise $1 trillion over the next decade, with most of that money being paid by affluent households.
A Financial Speculation Tax
A "financial speculation tax," which would tax all financial trades, would raise major revenue from one of the wealthiest and lowest-taxed sectors of society: Wall Street. Such a tax is now being discussed in Europe and could raise significant new revenues for the federal government if enacted here in the United States: It's been estimated that a financial-speculation tax could raise over $1.5 trillion over ten years. Most of the tax would be paid by firms and traders that engage in heavy trading and speculation, as opposed to being passed along to ordinary investors. This tax could also have the beneficial effect of reducing volatility in the stock market and excessive risk taking. The United Kingdom and 29 other countries have financial-speculation taxes, and the U.S. also taxed financial trades until 1966.
Tax Wealth
Another way to make the tax system fairer, and raise badly needed revenue, is to impose a new tax on wealth assets over a certain size. In one version of this proposal, put forth in the Congressional Progressive Caucus (CPC) budget, Congress would enact a 0.5 percent surcharge on all net worth exceeding $10 million for ten years, which the CPC estimates would yield $319 billion in revenue through 2022. Taxes on assets have been enacted at different points in a number of European countries and are not unprecedented in the United States-property taxes, after all, are a form of wealth taxation. But the federal government has never imposed a wealth tax of the form that the CPC recommends. A wealth tax, including possibly one on a larger scale, would raise significant revenues from households that have accumulated wealth in recent years thanks to historically low tax rates on the affluent that, in retrospect, the federal government could not afford given wartime spending and an illusory belief in continuing budget surpluses. In effect, a wealth tax would allow the government to recoup revenue lost to imprudent tax cuts that should never have been implemented-as opposed to passing the cost of these tax cuts on to less affluent households and future generations.
Restore the Estate Tax to 2001 Levels
Despite the growing concentration of wealth in U.S. society-long recognized as a threat to the American ideal of meritocracy-President Obama's 2013 budget proposal would permanently set the federal estate tax well below the 55 percent rate that existed before the Bush tax cuts. Under Obama's proposal, households with more than $3.5 million, or couples with $7 million, would pay 45 percent of taxable value over that threshold. If this proposal is enacted, instead of just allowing the Bush tax cuts to lapse at the end of 2012, the federal government will forgo $312 billion in revenue through 2021-a giant tax cut for the very wealthiest Americans. This is a mistake at a time of growing inequality and intense fiscal pressure. A better approach would be to simply let the Bush tax cuts lapse or, alternatively, enact the Responsible Estate Tax Act-Senate legislation co-sponsored by Bernie Sanders, Tom Harkin, and Sheldon Whitehouse. This legislation would also include a $3.5 million exemption (and $7 million for married couples), leaving 99.75 percent of all estates exempt, but subject estates that are taxed to a progressive tier of rates: a 45 percent rate up to $10 million; a 50 percent rate up to $50 million; a 55 percent rate up to $500 million; and a 65 percent rate on the portion of estates worth over $500 million.
Raise Taxes on the Middle Class, Too
Putting forth the above agenda for tax hikes on the rich would be sure to raise issues of fairness that the wealthy are being asked to shoulder too much of the burden for meeting U.S. revenue needs in coming years. These concerns may not have merit given the astronomical gains of the top 1 percent over recent decades, in comparison with other income groups, but there is a different validity to the critique that the burden of higher taxes should be shared more broadly. Ultimately, the United States will not meet its revenue needs in coming decades-amid an aging population and rising global competition-without a full repeal of the Bush tax cuts, which also lowered rates on middle class households. Indeed, over three-fourths of the revenue lost due to the Bush taxes is due to lower rates on non-high earners. These cuts were unaffordable at the time, based on rosy projections of budget surpluses. And even partially extending them now is even less affordable. Letting the Bush tax cuts lapse in their entirety at the end of 2012, would not only substantially reduce future deficits and debt, but also make clear that the majority of Americans are sharing the burden of higher taxes.
Read the rest
Part 1: Washington, We Have a Revenue Problem
Part 2: Making State and Local Taxes Fair Game
Part 3: Taxing Wall Street Speculation
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