Taxes and Inequality

Anyone who hasn’t seen this little “talking chart” video about wealth inequality in the U.S. that’s been circulating recently should take six and a half minutes of their time to check it out. It’s not news—at least it shouldn’t be—just concise exploration of basic truths that are becoming more and more self-evident.

Once we understand how stark the contrast is between what would be a fair or healthy distribution of wealth for our country and how things actually stand these days, we can’t help but wonder how it got this way and what can be done to at least stop the disease from worsening.

Americans have always appreciated hard work and enterprising behaviors. We’ve never wanted to “kill jobs,” as today’s parlance has it, or dampen the spirits of entrepreneurial risk takers. But by the same token we’ve generally seen fair taxation as a means to achieve national economic goals.

And in the 100 years since the Sixteenth Amendment brought us graduated taxation of individual and corporate incomes, we have tried a variety of approaches to setting rates and brackets that kept prosperity and necessity in balance. The earliest top rate (in 1913) was 7%. In the middle of the Great Depression (1936) we had 31 income brackets and marginal rates ranging from 4% to 79%. In 1939, the top rate was 75%, applied to incomes above $5,000,000 ($75 million 2007 dollars), and during 1944 and 1945, the top rate was its all-time high at 94% and applied to income above $200,000.

Following the Korean War (1952 and ’53), the top marginal rate was 92%. By the time our last Baby Boomers were born (1964) tax rates ranged from 16% to 77% on incomes of $400,000 and up ($2.85 million in 2011 dollars).

In the past 30 years, though, we’ve never ask anywhere near those rates from wealthy Americans. The recently bargained tax increase on individuals earning over $400,000—the limit that Republicans now refuse to move beyond, even by closing admitted “loopholes”—is 39.6%. And that was achieved only after threats to tank the whole economy and drag the nation into default on its pre-existing debts.

Quite the contrary to working out tax policy appropriate to our economic situation (does the term Great Recession sound familiar?), we’ve perpetuated all the tax breaks ever imagined to protect corporations from paying in proportion to their profits. The New York Times so far this month has been focusing attention on the ironies of our economic lives. The headline “Recovery in U.S. Is Lifting Profits, but Not Adding Jobs” says it all. Corporations and their executives are sucking up all the juice from the illusory “recovery,” and the rest of us are left with the crumbs.

Wonder how it’s done? Well, it’s the tax code, stupid! For instance, Facebook is reporting profits of over $1.1 billion in 2012, and expects to pay no federal or state income taxes at all. In fact, Facebook will probably receive refunds totaling $429 million, because tax deductions for executive stock options can be written off as salary deductions. The Citizens for Tax Justice web site has the story.

The day after the NYT pointed out the fact that the rising tide is not, in fact, floating your boat, they detailed one of the main reasons: “A Stealth Tax Subsidy for Business Faces New Scrutiny” explains how corporate giants like Chevron, Goldman Sachs, Barclays and Bank of America are building their respective empires—office towers in Manhattan and sports arenas in Brooklyn, for instance—using tax-exempt bonds just like old-fashioned “muni” bonds that cities and states issue to pay for roads, bridges and schools. Serving the public good is no longer the only reason that someone is allowed to attract investors with tax-free earnings. Serving shareholders is now sufficient reason to avoid taxation.

So when Republicans and Democrats—both in a state of needless panic­—go toe-to-toe over where to find the cash to reduce an annual budget deficit or pay down long-term debt, let’s give some thought to where the money is hiding. Does it really need to come out of Social Security checks? Or from the quality of healthcare we provide children or the elderly? Or from services we provide for people living in poverty?

Or is there somewhere else to look for a compromise?

Charles Clouse,

President, Democratic Service Club

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