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In part 1 of "Hunting the Elephant in the Room," I discussed the emerging  critical mass in inequality studies and how that might be harnessed to the public's unheralded egalitarian values. However, coming to the  realization that "policy can reduce inequality" is not the same thing as knowing what kind of policy to push for.

The first thing to  understand is that there are many different ways for reducing  inequality. Broadly speaking, policy approaches to inequality can be categorized by when in the economic process they take place - pre-tax interventions into the socio-economic order, the tax system, and then post-tax transfers.

Today, I'll discuss how our tax system can be turned into an engine for equality.

Before I get into the specific details of public policy, I want  to address the question of general philosophic approach. One of the most  influential approaches within inequality policy has tended to be a kind  of quasi-Rawlsian insistence on targeting either the very top or the very bottom. While focusing on the ultra-wealthy does have a certain logic - especially given the increasing hyper-concentration of wealth  within the top 10%, 5%, 1%, .1% and so on - I don't agree that focusing  our efforts solely on the very poorest is a good approach. I've written in the past that structuring public policy to synch with popular  psychology is vital to success, and the same is true here. As the Fabian Society's research demonstrates, highly-targeted programs tend  to backfire: they sap public support for redistribution, they empower an  us/them politics in which beneficiaries are transformed into an "Other," and this leads to social stigma that then acts as a vicious  cycle which results in underfunded and inadequate efforts.

By contrast, redistribution within universal systems has the opposite effect. On the level of  policy, universal systems allow us to tackle inequality all the way up  and all the way down the income scale; this ensures that we don't waste  effort pushing poor people up into a working class in decline, or waiting until working class families fall into poverty before we act. On the level of politics, universal systems increase support for redistribution (because more people feel that they will gain from redistribution), create a solidaristic politics in which people from poorer families are seen as "just like me," and prevent stigma from forming.


Using the tax system to reduce inequality is actually the most common and least controversial proposal; it avoids direct intervention in the labor market (which tends to annoy economists), it doesn't require the reconstruction of the economic order, and it has the virtue of familiarity. And in fact, the U.S actually has one of the more progressive tax systems of the advanced economies - one of the remaining legacies of the New Deal:

If you look at the white circles on the left, you can see that the U.S tax system is actually more progressive than those of many European nations celebrated for their egalitarian policies - Sweden, Denmark, and Norway (which make up for it with progressive transfers, more on that later). A lot of this has to do with the composition of our taxation systems; European nations rely heavily on VAT taxes, while the U.S leans more heavily on income taxes.

At the same time, we could certainly stand to make our tax system more progressive than it is now. The U.S tax system was much more progressive in the past than it is today:

We have become much more of a flat-taxing nation de facto, due to a combination of higher payroll taxes, a modest reduction of upper-class income taxes, and much sharper decreases in corporate, estate, and capital gains taxes. When this is added to an existing trend towards higher incomes at the top of the income scale and stagnant and declining incomes for the majority, the tax system begins to lose its progressive character.

Taxing the Wealthy:

Three changes would dramatically reduce the capacity of the wealthy to escape their tax burdens:

1. Reforming Top Rates: the top income, capital gains, and corporate income taxes are well-below not merely Clinton-era but also Reagan-era tax rates. Returning them to their Reagan-era levels would take a significant bite out of top incomes, as well as provide $297 billion a year in revenues that can be spent on programs that benefit the majority.

2. Reforming Tax Allowances: almost as significant as the drop in rates has been the expansion in income tax deductions, credits, and allowances. Because 66% of households owe more in payroll taxes than they do in income taxes, the majority of these benefits (even benefits that are theoretically benign, like the Child Tax Credits) accrue to those with large income tax bills and many lower-income households do not benefit at all (more on this later). Capping income tax deductions as Obama proposed to do in his 2009 budget (or eliminating them altogether) would close this escape routes for the wealthiest.

3. Taxing the Financial Sector: this is probably the most politically difficult measure, given the wealth of the financial sector and its skill at influencing the government through donations, lobbying, and the hiring of prominent ex-public officials. However, the reality is that we cannot put a major dent in inequality when 40% of corporate profits flow into one industry, an industry which has won preferable tax rates, and in which executives can determine their own incomes unilaterally, dominating within the top 1%. Both in terms of individual inequality of incomes, inequality between sectors, and inequality between workers and management, we need to "bend the curve" on the size of the financial sector:

Equalize Capital Gains to Income Tax Rates, Close the Hedge Fund Gap: as I've discussed in part 1, one of the major sources of inequality at the top is access to capital, in part because capital has been growing as a percentage of GDP (so there's more to go around), but also because capital is taxed much lower than wages in the U.S. Increasing capital gains taxes from the current rate of 15% to the current rate of income tax (35% at the top) would be a major step in spiking the stock-option-driven increase in top incomes, but it would also serve as a moral statement that wealth should not be given preference over work. Even within the top 1%, closing the loophole that allows hedge fund managers and other financiers the ability to declare their commissions as capital gains instead of as income would not only close one more escape route for the wealthy, but would also reduce the "brain drain" into the financial sector.

Restore the Estate Tax: after being greatly reduced (and even temporarily eliminated) by the Bush tax cuts, the estate tax now exempts all estates below $5 million in value, and has a maximum rate of 35%. This has several negative consequences: on an practical level, it allows people to become multi-millionaires tax-free, which greatly increases inequality; in terms of social mobility, it raises the stakes for anyone who would try to climb the ladder and gives those at the top an unfair advantage in competition; and as a moral statement, it suggests that unearned wealth should be treated equally with wage labor. Returning to the Clinton-era estate tax rate of a top rate of 55% on estates over $833,000 would both restore tax fairness and reduce a major barrier to social mobility.

Bank Taxes: finally, we can tax the banks themselves, which both redistributes between corporations and workers and shrinks this "too big to fail" sector of the economy, freeing up resources for genuinely productive uses. The proposed Robin Hood tax (also known as a Tobin Tax) on financial transactions, proposed taxes on runaway bonuses, or differential tax rates on financial sector corporate income and capital gains taxes are all ways of recovering the income that the financial sector has gobbled up, and provide a systemic incentive for shifting investment and employment to sectors that actually create value.

Taxing Everyone Else:

Overall, the Federal system is still fairly progressive on the lower end of the economy, especially when it comes to the Earned Income Tax Credit essentially acting as a negative income tax for working poor families with children. However, as I've discussed before, the payroll tax is a glaring departure from an otherwise admirable setup. Making the payroll tax progressive would dramatically increase the incomes of 66% of American households, countering the effects of wage stagnation and decline. Accompanied by lifting the cap on payroll taxes, it would also reverse the current inequality-increasing situation where a person making $10,000 and $100,000 a year pay the same payroll tax rate, whereas someone making $200,000 a year pays half, and increasingly less as you go up the income scale.

In addition, it would create a number of pre-tax feedback effects: progressivizing the payroll tax would have the same effect as a payroll tax holiday on employment, only permanent, lowering unemployment rates and providing the leverage for workers to negotiate more equitable wages. Similarly, it would create a disincentive for corporations to allow top pay to increase out of control - whereas the current situation allows a company to save on taxes by distributing $100,000 as a bonus to one executive versus creating two $50,000 jobs or providing 100 workers with a $1000 raise, a progressive payroll tax would provide a tax incentive for corporations to invest in better wages and a larger workforce and penalize corporations that remained on the path of runaway executive compensation.

Finally, one of the major sources of regressive taxation in America is actually on the state level. States, especially in the South and increasingly in the West, rely heavily on sales taxes, even including groceries as part of their sales taxes. As Katherine Newman and Rourke O'Brien show in their book, Taxing the Poor, this has a dramatic impact on low-income families, both reducing their take-home pay and contributing to poor health, early mortality, and other social ills. Preserving and expanding state-level EITCs, making them fully refundable against state taxes, reducing states' reliance on sales taxes, and creating an income exemption for sales taxes would prevent the good that is done at the Federal level from being undone by the states.


In the end, taxation occupies a Janus-like role in American public policy. It is a profound shaper of the economic order, and never let free-market zealots convince you that "the Federal government can't affect the economy." At the same time, it is also a moral statement about what we consider to be fair and just. In the last forty years, conservatives have advanced an ideological case that equal rates for people with unequal incomes is fair, that taxing those who have become wealthy is unfair, that reducing taxation on the wealthy is always right, but that reducing taxes for the poor is socialism.

Progressives cannot win this debate through a technocratic defense of the status quo. We have to make the case aggressively that taxing people according to their ability to pay is the only fair way to tax, that our tax system can and should be used to prevent the emergence of "malefactors of great wealth" and maintain a republic of citizens with a "rough equality of means," and that a more equal society is a more just society.

Originally posted to Income Inequality Kos on Sat Apr 09, 2011 at 10:25 AM PDT.

Also republished by Community Spotlight.

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Comment Preferences

    •  Looks like an excellent diary. Thanks (5+ / 0-)

      I'm just hopping in and out and will need to read it (and previous ones) later.

      Thought you also might be interested in a perspective on how not only income has shifted up but effective tax rates have also become unbalanced, increasing on a state and local level much faster for the middle and upper middle than for the rich.

      I agree with the premise that a basic understanding of what's been done to the middle class is needed before the politicians can be forced to respond, but most folks concentrate only on the shift in income and wealth - or concentrate on the federal income tax to the exclusion of all else.  

      Thanks for the work.  I'll comment again once I've had the chance to go into it more deeply.

      We'd rather dream the American Dream than fight to live it or to give it to our kids. What a shame. What an awful, awful shame.

      by Into The Woods on Sat Apr 09, 2011 at 11:24:12 AM PDT

      [ Parent ]

  •  2 problems with your analysis (4+ / 0-)

    1.  The link that you say shows that the U.S. system used to be more progressive has no credibility.  That's because it uses top marginal rates alone.  Top marginal rates are meaningless -- MEANINGLESS -- without consideration of (1) the income levels on which they were imposed; and (2) the deductions/exemptions/shelters that allow certain income NOT to be taxed at those rates.   During the pre-Reagan years, there were so many deductions/exemptions/shelters that almost nobody with any sense -- and a tax accountant -- actually paid those top marginal rates on much of their income.  Instead, the CBO keeps EFFECTIVE federal individual income tax rates -- see the second chart here.    As the CBO numbers show, the top 1% paid MORE under Clinton than they did when the top marginal rate was 70%, prior to Reagan.  That's at least in large part because of the Tax Reform  Act of 1986, which significantly changed exemptions/deductions/shelters and the parameters of Adjusted Gross Income.  Eliminating the Bush Tax Cuts on 2 income families over $250,000 would be a return to the highest taxes EVER on that group.  And it raises only $70 billion a year.  Bernie Sanders' proposed surcharge on millionaires and billionaires, on top of that, raises only at MOST another $50 billion a year, according to Sanders' own website.  I have no idea where that $297 billion comes from, unless it is some kind of calculation using top marginal rates alone, in which case it is completely unreliable.  

    2.  Social Security taxes, at least, are not SUPPOSED to be "progressive."  It is supposed to be a "you get what you paid for" insurance system.  A person making $106,000 insures the same amount of wages, pays the same in "insurance premiums" (SS taxes), and, most importantly, gets exactly the same retirement benefit as a person making $250,000 or $1 million.  It was designed specifically NOT to be a system whether the wealthy subsidized the not as wealthy.  FDR was perceptive enough to realize that it had to be that way or it would be too easily killed as "welfare."  And it has played out that way.  Ask any senior why they are entitled to SS, and they will tell you that they "want what they paid for."  That was the genius of the system.  The system is slightly progressive in that those making, say, $50,000 a year get more in retirement benefits per dollar than those making $106,000, but a person who pays taxes on $50,000 gets exactly the same retirement benefit as every other person paying taxes on $50,000, even if that person has a huge inheritance, for example.  A person paying taxes on $106,000 gets exactly the same retirement benefit as a person making $200,000 and paying taxes on $106,000, because that's precisely how the system was supposed to be designed, so it couldn't be attacked, and killed, as welfare.  

    •  There you go again, (4+ / 0-)
      Recommended by:
      DvCM, trashablanca, Zinman, alain2112

      yet another disingenuous defense of the status quo. Did you even go to the link to see where the $297B comes from ? It is not from adjustments to top marginal rates alone. Look, we get it, you like things the way they are and would have us believe that reform is unwise or futile. Give it a break, and don't come back with a screen length reply to me, that would be a threadjack.

      ¡Viva Baja Libre!

      by Azazello on Sat Apr 09, 2011 at 11:54:12 AM PDT

      [ Parent ]

    •  Well... (4+ / 0-)
      Recommended by:
      Azazello, DvCM, trashablanca, alain2112

      1. "Total Federal Taxes" != income taxes; Saez does do effective rates. And if you read my linked post, I'm talking about effective rates to get to $297 billion.
      2. Social Security taxes should be progressive; FYI, FDR and the New Dealers also wanted to supplement the payroll tax with general taxation and never saw payments as having to equal up to benefits, which it doesn't for most people. The question is one of values - should we expect someone making $10k to shoulder the same burden as someone making $100k, and is it right that millionaires pay an effective rate of 1.3%?

  •  This Is Wrong... (0+ / 0-)
    States, especially in the South and increasingly in the West, rely heavily on sales taxes, even including groceries as part of their sales taxes

    I was raised in St. Louis in the 60's and we had a sales tax that included food.  I have lived in Texas for 35 years and never have paid sales tax on food.  Now we do pay sales tax on snacks such as chips and soda, but those are not true foods like sugar,meat, and milk.

  •  Excellent discussion and well-conceived (4+ / 0-)
    Recommended by:
    Azazello, DvCM, isabelle hayes, Tookish

    your tax proposals are clear and move things in the correct direction. I strongly believe that a financial transaction tax is essential and will not only raise revenue, these aimed properly will primarily effect short-term speculative investments, reducing them and also bringing the value of assets in financial markets more in line with GDP.

    It is essential that shifting the tax base towards the wealthy and those with high incomes is the best direction to move taxes rather than the use of regressive sales taxes and VAT which certainly hits those with less income much harder than those with higher income.

    Diary tipped and rec'd, thank you!

    History always repeats itself, the first time as tragedy, and the second time as farce. Karl Marx, The Eighteenth Brumaire of Louis Bonaparte .

    by NY brit expat on Sat Apr 09, 2011 at 01:01:07 PM PDT

    •  Thanks! (2+ / 0-)
      Recommended by:
      DvCM, NY brit expat

      Glad you liked it.

    •  No transaction taxes! (1+ / 0-)
      Recommended by:

      The transaction tax is a horrible idea.

      Who would do their trading in New York if it can be done cheaper in Dubai or London? We would lose the trading volume, lose the income taxes we make traders pay, and we would lose regulatory control over the markets.

      Raising income, capital gains, VAT, and other taxes may be good ideas, but the Transaction Tax actually is a job-killer.

      Don't tax the trader's income instead.

      •  the transactions tax is something that could (0+ / 0-)

        already be done between Europe and the US and probably Japan. So, that leaves things with Dubai ... the point behind the transactions tax is three-fold, to reign in short-term speculative trading; this will bring the value of assets in line with GDP as they are wildly separate and also some stability in terms of rapid booms and busts in the market and also that the revenue gained can be used to sustain the social welfare state in the advanced capitalist countries as well as international transaction money being used to enable sustainable development in peripheral nations.

        Quite honestly, this would be very useful in regulating the financial markets; Dubai would be irrelevant and if/when it crashes, it will not be a problem. The vast majority of trading goes through Europe, the US and Asia.

        Honestly, just by trading overseas in Dubai the movement of money can be immediately taxed. sorry ...

        History always repeats itself, the first time as tragedy, and the second time as farce. Karl Marx, The Eighteenth Brumaire of Louis Bonaparte .

        by NY brit expat on Sun Apr 10, 2011 at 09:09:21 AM PDT

        [ Parent ]

      •  I don't buy this (0+ / 0-)

        Firstly, there's no reason why the Robin Hood/Tobin Tax can't be internationally coordinated. Note the website link is from the U.K, and the policy has support within the Labour Party. So I'm not so worried about London.

        As for Dubai, financial trading is never going to center in a country which still practices debt imprisonment.

  •  Two nitpicks: (1+ / 0-)
    Recommended by:
    capital is taxed much lower than wages

    Debt is a form of capital, too, and it's taxed like wages.
    stock-option-driven increase in top incomes,

    Stock options are wages, and are taxed as such.
    •  Well (2+ / 0-)
      Recommended by:
      Azazello, DvCM

      Capital income usually doesn't include dates.

      Stock options aren't always taxed as wages.

      •  A few more thoughts (0+ / 0-)

        The type of stock options awarded to executives, non-qualified options, are never eligible for capital gains treatment. They are always taxed as ordinary income when they are exercised and sold.

        Hedge fund managers do not earn commissions. Those in the financial services industry who do earn commissions pay ordinary income rates. Commissions are transaction based and do not qualify for capital gains treatment.

        I think the term you were looking for was "carried interest". burrow owl wrote a good diary on the subject (sorry I don' know how to link).  How the IRS treats carried interest has been in place for half a century and is applied to all investment partnerships.  Of all the investment partnership managers hedge fund managers are the least likely to have income at capital gains rates. The be eligible the partnership assets must be held long enough to qualify for long term capital gains treatment. Hedge fund managers frequently trade stocks making the gains ordinary income.

        You wrote about Reagan era tax rates without discussing the Tax Reform Act of 1986. Comparing pre 86 rates with post 86 rates is comparing apples to oranges and is meaningless. The TRA86 fundamentally changed the US tax code.

        "let's talk about that"

        by VClib on Sat Apr 09, 2011 at 10:38:32 PM PDT

        [ Parent ]

    •  Wrong on both counts. (2+ / 0-)
      Recommended by:
      DvCM, ManhattanMan

           According to the IRS,

      7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.

      Stock options are not wages and are not taxed as such. You can read about the different classes of stock options and how they are taxed here.

      ¡Viva Baja Libre!

      by Azazello on Sat Apr 09, 2011 at 02:00:10 PM PDT

      [ Parent ]

      •  The vast majority of public companies use (1+ / 0-)
        Recommended by:

        non-qualified stock options - which are taxed as wages - rather than incentive stock options.  It's great that you decided to try to research this area despite a lack of background in it, but you need to dig a bit deeper.

        I don't know why you reiterated that capital gains get preferential treatment, since my comment was about the treatment of debt.  Debt, as you may or may not know, pays interest which is taxable at the top marginal rate.

      •  Azazello - execs don't get ISOs (0+ / 0-)

        Because ISOs have an annual limit of $100,000, public companies don't award them to executives. They are frequently used in startups, or for non-executives in public companies, but for administrative ease they are just not used for executives in public companies. What that means is that all actual cash compensation that an executive generates by exercising options and selling the shares is always taxed as ordinary income.  

        "let's talk about that"

        by VClib on Sat Apr 09, 2011 at 10:49:59 PM PDT

        [ Parent ]

        •  VClib, screw you. (0+ / 0-)

          ¡Viva Baja Libre!

          by Azazello on Sat Apr 09, 2011 at 11:13:43 PM PDT

          [ Parent ]

          •  Azazello - WOW (0+ / 0-)

            One of the reasons that I blog here is that DKOS is fact based. Occasionally there are subjects where I have significant personal experience and knowledge and can provide some facts in a conversation. I know a lot about stock options, and how they are used in both new startups and in public companies, large and small. I made no value judgment about stock options, only that large companies use non-qualified stock options for executives. That is a fact. NQOs are taxed as ordinary income. That is a fact. My understanding is that facts are always welcomed here.

            "let's talk about that"

            by VClib on Sun Apr 10, 2011 at 05:59:24 AM PDT

            [ Parent ]

            •  Here's what you can do with your (0+ / 0-)

              significant personal experience, write a diary. Just one. You could do an in-depth defense of regressive taxation. You could explain to us why it's a bad idea to tax the job creators or you could demonstrate that tax cuts actually bring in increased revenue. But you don't. Every time someone writes a piece suggesting that top marginal rates be raised, the same people come out of the woodwork to attack the diary and crap up the thread with objections and obfuscation. It's tiresome.

              ¡Viva Baja Libre!

              by Azazello on Sun Apr 10, 2011 at 07:49:39 AM PDT

              [ Parent ]

              •  Azazello - you could view it that way (1+ / 0-)
                Recommended by:

                I favor higher marginal rates on high income earners. What I don't favor is trying to target specific groups. I think all high income earners, professional athletes, lawyers, physicians, entertainers, corporate executives, Wall Street traders, and any other high income earners should all pay more.

                The problem is that our tax code is very complex. Nearly all of the people at DKOS who write diaries regarding tax policy have very little understanding of the current code. When people write on changing specific provisions of the code they frequently make significant mistakes regarding their assumptions of current tax law. In my view people should write about favoring a fairer tax structure that includes higher tax revenue from high income earners and leave it there or really understand at least those provisions of the code they would like to change. Writing about higher marginal rates without really understanding the Tax Reform Act of 1986 is writing nonsense. One of the reasons I don't write diaries, although I am thinking of a few topics, is that it takes a lot of time to actually research the underlying assumptions and data needed to make them really informative.

                Those of us who comment on tax issues I believe bring an important element to our discussions here. Higher taxes on top earners are a part of what we need to fund the current level of government. It is not, however, going to solve the problem, even when combined with defense cuts. If we are trying to discuss and influence public policy, I would think that all facts would be welcomed at the table.  

                "let's talk about that"

                by VClib on Sun Apr 10, 2011 at 08:13:35 AM PDT

                [ Parent ]

  •  GOP belief: (1+ / 0-)
    Recommended by:

    "A government that tips the scales is fundamentally unjust and unfair."

    Thus, taxing the wealthy at a higher rate is unjust and interferes with the free market.  And when you do things unequally as a government (i.e., different tax rates, penalties or extra burdens on the rich), GOPers tend to think that's unfair.

    It's two different interpretations of equality and equal opportunity.

    Stop clapping. Stop screaming. Open your mind. Listen.

    by Benintn on Sat Apr 09, 2011 at 07:06:09 PM PDT

  •  Thank You. (0+ / 0-)

    Nothing makes sense for the quality of our public life except in light of progressive taxation that eliminates hereditary wealth.

    Distrust of authority should be the first civic duty. - Norman Douglas

    by Fossil on Sat Apr 09, 2011 at 07:35:13 PM PDT

  •  Compare European imigration law compared to the (0+ / 0-)


    When I cannot sing my heart. I can only speak my mind.

    by Unbozo on Sun Apr 10, 2011 at 12:16:37 AM PDT

    •  Meh. (0+ / 0-)

      Europe has pretty high immigration levels, due to the ex-colonial statuses and E.U laws on intra-EU immigration.

      I don't think this is as much a factor, and it certainly doesn't explain what's going on at the top.

      •  We'll I think it would be harder for me (0+ / 0-)

        to emigrate to say France (just as an example) than it would be for someone outside of the U.S. to emigrate here.

        My point is that in most European countries you have to have at least one parent born in the country that you plan emigrate to (this case France). The only exceptions are the ones you cited already. Also, unlike the U.S. you are expected to either be or become fluent in the language and the culture (at least that is my understanding). Please,correct me if I'm mistaken.

        When I cannot sing my heart. I can only speak my mind.

        by Unbozo on Sun Apr 10, 2011 at 01:44:28 PM PDT

        [ Parent ]

        •  It would be harder for you (0+ / 0-)

          But the point is that ex-French colonies plus EU adds up to a significant potential pool that has unrestricted rights of immigration. About 5% of the population of France is made up of immigrants, but that doesn't include ex-colonials.

  •  The best tax is a tax on the site value of land. (0+ / 0-)

    Most of us pay rent to wealthy landowners. Their investment increases in value and none of it comes back to us. The land should be socialized and then rented out. The economic rent collected would be the taxes to run the government. We eliminate the income tax which punishes productivity and we eliminate the property improvement tax which punishes people who improve their property. Noone will hang onto large chunks of natural resources for speculative purposes because any increase in value will go to the community. This dimishes the inflation factor caused by land specualtion and makes starting a small business easier and more affordable.

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