Funding America
The 4th of July has always been among my favorite holidays. Uniquely American in every respect, Independence Day not only commemorates the birth of our nation but celebrates the heart of summer with family, friends, and fireworks (except in drought-stricken California, of course).
I’ve also always found the 4th of July to be a chance to reflect on the state of our nation. Last year, we were in a pretty dark place — in the throes of a global pandemic, a failed administration, and mass protests that threatened to escalate into widespread violence. A year later, there are many reasons for optimism, including the foreseeable end of COVID, the seeds of social reconciliation, and the resurgent economy.
Despite these near-term wins, however, the long-term health of our nation still feels uncertain. Not just for the obvious reasons we all see, in our polarized society, dysfunctional politics, and stratified economic classes. But with something more fundamental: our ongoing ability to fund our country.
Obviously, any discussion of budgets involves two sides: how you get the money, and what you spend the money on. For the sake of brevity, I’m going to ignore the expense side (potentially taking that up in a future post), and focus on the sources of proceeds to fund our expenditures. The U.S. government, like any government, has two ways to pay for expenses — the collection of taxes and the issuing of debt. But, unless you plan to default on that debt, it needs to be repaid. So, really, there’s just one source of money: taxes.
Over the last fifty years, tax rates have been dramatically reduced, particularly for the wealthy. The maximum federal income tax rate for the wealthiest Americans was slashed from 70% in 1980 (with historical levels as high as 90%) to its current level of 37%.
The maximum long-term capital gains tax rate was reduced from around 35% in the late 70s to 20% today.
And the maximum federal corporate tax rate (which primarily impacts the wealthy who own the vast majority of both private and public corporations) fell from over 45% in the early 80s to 21% the last four years.
As you can see in these charts, Reagan’s lasting legacy was massive tax cuts for the highest earners that have only modestly leveled up.
The astonishing revelation last month in an article by ProPublica that explained how Jeff Bezos, Elon Musk, Michael Bloomberg, Carl Icahn, George Soros and other prominent billionaires pay zero in federal income tax really hit home how inequitable our taxation system has become. How the tax breaks of the last 50 years have exacerbated wealth disparity and culminated in a country that can no longer fund itself.
Nobody relishes paying taxes. I’ll be the first to admit my hypocrisy on this point. Like most families of our income level, we hire financial advisors and tax accountants to minimize our tax burden. But, collectively, macroeconomically, this unwillingness by the rich to fund the federal government is creating an impending crisis. In order to sustain the historically low tax rates we enjoy today, we have increasingly relied on debt — AKA the deferral of taxes to future generations and the transfer of wealth from our children and grandchildren to ourselves.
As shown in the chart below, U.S. debt as a percentage of GDP is now routinely above 100%, more than three times its level in 1980. Both Democrats and Republicans are to blame for this predicament. Democrats have pushed for spending increases without commensurate increases in tax proceeds. Republicans have cut taxes without enacting reductions in expenditures. The result is an unsustainable shit show that may ultimately threaten our entire economy — particularly when spending spikes, as it did after the 2008 financial crisis and during COVID. The fiscal reliability of the federal government has been the bedrock foundation upon which our economy is built. Even the threat of default would drive up interest rates, trigger inflation, crush the stock market, and potentially devalue the dollar.
Almost everyone agrees our federal debt burden is a looming disaster, but what has been notably absent in the public discourse from these billionaires, many of whom claim to be progressives, is what to do about it. We hear plenty, in full-throated, sky-is-falling invective, about what can’t possibly be done — the unintended consequences of estate taxes, the gross infeasibility of a wealth tax on largely illiquid assets, the untold ways in which “regular people” would supposedly be the inadvertent bearers of any attempt to increase taxes on the rich. Maybe, maybe not.
I’m not an economist and certainly not a tax expert, but here are three potential ideas for how the wealthiest Americans could pay a fairer share and help close our tax shortfall.
- Eliminate deductions at higher wealth levels — the creative use of deductions, for everything from mortgage payments to capital losses to charitable giving, provides wealthy people too many levers to decrease “income” and avoid paying federal taxes, sometimes entirely. The intent of these deductions was to encourage home ownership and business investment, mechanisms which have historically helped low- and middle-income people climb the economic ladder, not as tax shelters for billionaires to manipulate their income and hoard their wealth.
- Curtail the ability to create income by borrowing against wealth — the other reality revealed by the ProPublica article is that, unlike regular people who rely on their paycheck to fund their costs of living, billionaires have ample opportunities for cash flow, even if their income is zero. In fact, zero income is the goal. The simple way to avoid paying income tax is to not have any income. In addition to deductions, one of the main levers to minimize income is to borrow money at historically low interest rates (along with a nice write off of the interest) to pay for your lifestyle — a tactic described as “ Buy, Borrow, Die.” This practice should be recognized for what it is — tax avoidance — and not be allowed.
- Impose minimum tax rates on the wealthy — everyone agrees a billionaire’s tax rate shouldn’t be lower than a secretary’s. This anecdote was offered by none other than Warren Buffet himself a decade ago when he advocated for what became known as the “ Buffett Rule” which called for a minimum income tax rate of 30% on individuals making more than one million dollars a year. Let’s do that. Although without eliminating levers of income manipulation, the income tax rate is irrelevant — it could be 99% and the wealthy would still avoid paying a dime in federal tax if they can write everything off.
Many other ideas for increasing our tax proceeds from the wealthy could be viable, including increasing the tax rate on capital gains, eliminating the carried interest loophole that allows private equity partners to treat profits as capital gains rather than income, and cracking down on the use of offshore shell companies to hide income and assets to avoid taxes.
Some of these may be bad ideas, other ideas might be better, but it’s high time we solve this problem. If we are going to increase our tax proceeds and properly fund our nation, it has to come from the wealthy. The circular argument by billionaires like Warren Buffet, who give lip service to more progressive taxes but actually only pay a true tax rate of 0.1% and dismiss any tax increase as only “slightly reducing an ever-increasing U.S. debt,” is untenable. Debt taken on because billionaires don’t pay taxes can’t be turned around and used as the rationale not to pay taxes.
Those at the top can no longer shirk our moral obligation to pay our fair share. We can’t rail against “entitlement spending” or stimulus payments, while deducting failed investments or mortgage payments for a second or third home. We don’t think of tax breaks for the rich as an “expense,” but that’s exactly what they are. A dollar not collected from millionaires has the same value as a dollar spent on food, housing, healthcare, defense, or infrastructure. There is a reason 8 out of the 10 richest people in the world are American. They have all benefited astronomically from America’s favorable business climate. It’s time for them and all of us in the top earning brackets, to do our part to fund America.
Originally published at https://www.miketrigg.com on July 1, 2021.
