The Rich Just Keep Getting Richer And Its Happening Through Tax Policies
“I’ve been rich and I’ve been poor. Believe me, rich is better.” This famous quote has always been true, but never as true as today. After decades of dominance by the right, here’s the 2019 version:
“I’ve been rich and I’ve been poor. Believe me, rich is insanely better.”
The insanity stems from tax policies. Marginal income tax rates plunged starting in the 1980s, hitting their modern-day lows under President George W. Bush. After rising modestly during the Obama Administration, they fell again under President Trump.
Rate cuts generate only part of the current bonanza. Tax breaks passed by various Congresses account for the rest, hugely increasing the billions that flow to the haves.
So, insanely, taxes really are making the rich richer. With inequality soaring, they’re widening the income gap instead of making it smaller.
All taxpayers get at least modest breaks, but the big money goes to those who need it the least: income is redistributed upward, with disproportionate shares going to the top percentiles.
The most blatant example literally “wills” capital gains (and capital gains taxes) away. With the stroke of a pen, when assets such as real estate and equities are passed along to heirs, all unrealized capital gains are wiped out. The assets are revalued and given a new basis price, their worth at the time of transfer.
It’s called a step-up in basis, and it can happen again and again. As a result, wealth can pass untaxed from one generation to the next. (Retirement accounts get no such break, but non-retirement holdings do-and guess who has those.)
In another fiscal favor to the rich, income from wealth is taxed at a lower marginal rate than income from work. The federal rate on long-term capital gains and dividends is 20 percent, well under the 37 percent top rate on income from wages and salaries. The highest earners do pay an Obama-era surcharge of 3.8 percent on investment income; even so, they still save more than a third compared to the tax on income from labor.
This break in particular acts as rocket fuel for income inequality. With income from capital becoming an ever-greater share of total income, a lower rate drives up the fortunes of wealthy Americans and leaves middle America farther and farther behind.
Tax expert David Cay Johnston ran the Internal Revenue Service numbers. From 1961 through 2013 (the latest year for which data is available), the 400 richest Americans saw their federal income taxes drop from 42.4 cents on the dollar to 22.9 cents. For 2013, adjusted for inflation, that gave the top 400 an average $195.4 million in extra after-tax income. The vast majority of Americans took home more dollars too: an average of $6,812.
It’s the ratio, Johnston wrote, “that may take your breath away.” After more than 50 years of deliberate tax policy choices, here it is: “For each dollar of increased after-tax income enjoyed by the vast majority in 2013, the top 400 enjoyed $28,684 more. That’s $28,684 to $1.”
The ratio can always go higher and probably already has; it came before the Trump tax cut, which delivered its own special breaks to the rich.
One of those more than doubled the estate tax exemption, raising it from $5.5 million to $11.4 million for an unmarried person. A couple can shield twice that amount, or $22.8 million.
It was a major anti-estate tax victory, but only the latest in a streak going back to 2001: the exemption back then topped out at $675,000, or $1.35 million for a couple. Legislation passed in that year gradually raised the totals to $3.5 million/$7 million by 2009. Congress later upped those exemptions as well, and the 2017 law has raised them to new highs.
According to “death tax” propaganda, estate taxes amount to double taxation of a lifetime’s hard-earned income. According to the facts, “unrealized capital gains account for almost half of the fair market value of estates.” Under the stepped-up basis (see paragraphs 7 and 8), those gains will never be taxed, period.
Let’s end with an exclamation point. From 2014-2023, two tax breaks alone will put the haves up by an estimated $1.984 trillion.
Just from lower taxes on capital gains and the stepped-up basis, those who need nothing will be up by nearly $2 trillion.
That $2 trillion should be going to the common good, not to the well-off. Congress can make it happen by ending tax breaks that do little more than make the rich richer.
Gerald E. Scorse is a former Post-Journal staffer. This article first appeared in the online New York Daily News.