Taxes and Wealth Inequality

Bottom Line Up Front: Americans making $2.5 Million or more a year can afford higher tax rates, just as they did during the county’s greatest growth periods.  Let’s return to a plan that worked for everyone, not just the ultra rich.

In order to understand the above statement, we need to take a short walk down memory lane and compare tax rates to national prosperity.

In order to finance World War I, Congress passed the 1916 Revenue Act which raised taxes on the wealthiest Americans highest bracket (about 2.5 Million in today’s dollars) from 7% to 77%.  Wars are expensive, but the economy recovered because wealthier Americans paid their fair share. 

In 1925, taxes dropped down to 25% for the highest tax bracket, and a few years later (in 1929) we found ourselves in the Great Depression.  Income taxes were raised to 63% for the wealthiest citizens and the economy recovered.

World War II came along, and taxes were raised again.  This time, the tax rate was 94% for those making $2.5 Million or more in today’s dollars.  

Through the 50, 60s and 70s, the top earners never paid less than 70% in taxes.

Then, the Economic Recovery Tax Act of the 1980s cut to the tax rate to 50%. Five years later it dropped to 28%.  The idea was that the wealthy to keep more of their money, they would build more businesses and promote economic growth if they were allowed to keep more of their money in the form of tax reductions.  If that ever worked at all, it did not last for long. Shortly after those tax breaks went into effect, the wealthy simply accumulated more wealth rather than investing in broader economic growth.  Keep in mind, when we are talking about income, we mean the income *not* reinvested in people.  When there is an incentive to provide pensions, raise wages, provide benefits, businesses do.  But in the current plan, there is no incentive to do so, so they don’t.

From 1991 to the present, the tax rate has fluctuated between 31% and 39% for the wealthiest Americans.  Today, we are in a situation where .01% of the population has as much wealth as the bottom 90% combined, and where 99% of income goes to 1% of the population.  To make matters worse, the tax forms  (originally 4 pages long) are now  181 pages long and primarily benefit the very wealthy by allowing for tax free investments and shelters.  This process effectively reduces the tax rate of the very wealthy to near 0%.  This does not seem reasonable or sustainable.   

In addition to the recent tax breaks, we’re still paying for wars. When we started up our last war, we failed to tax the rich to offset the expense – we had the middle class pick up the burden instead.  We have been at war for over 15 years, and we are feeling the financial squeeze.

Today, there is no reasonable economist in any party that endorses the ‘trickle down theory’ that the top earners invest their tax savings in the economy by making investments that help others.  Why would anyone advocate that we ‘give’ something to A in hopes that it would trickle down to B?  Why not just give it to B directly, and eliminate the middleman completely?

It has only been relatively recently that the ultra rich have been taxed at such a low rate, and not surprisingly, over the same time period wealth inequality has risen in the United States. We have a growing group of people in the US who work two jobs and still can’t make ends meet.   Those making $2.5 Million or more on the labors of the working  poor should step up and help pay for the economy from which they profit.

Progressive taxes have worked in the past, and going back to that structure will benefit the middle class by reducing the tax load on the 99% while requiring the wealthy to pay their fair share of governmental services.

Right now, the economy seems to be doing fine, but we still have the problem of wealth inequality. Wealth inequality prevents most people from taking advantage of the growing economy.  Further, our inability to bring in tax dollars like we used to means our national debt continues to increase.  Let’s return to a plan that worked.  One where wealth not reinvested in people is taxed on a progressive scale.