April 15: The Issue Is Fairness, Not Taxes

Tax day is coming, and people are sad.

But the problem isn’t taxes. The problem is fairness. Who pays taxes, and who gets the benefits.

Today the Institute for America's Future publishes a new report [2]that documents what we already know. The tax code is unfair, tilted in favor of the rich, powerful and represented. Billionaire hedge fund managers pay taxes at lower rates than their receptionists. Corporations get tax breaks for moving jobs overseas. Oil companies with the largest profits in corporate history receive annual tax breaks worth $14 billion, twice the budget of the EPA.

While rich people reap tax breaks, working people struggle just to keep even. Adjusted for inflation, weekly wages were lower in 2007 than they were in 1979.

Our report features a nice X chart [2]. Top-end taxes have declined over the past 30 years. Inequality has risen.

To be precise: Income inequality rose 144 percent — measured by the ratio of after-tax income of the top one percent to after-tax income of the middle sixty percent. Top end taxes dropped 15 percent — measured as the average effective tax rate at the top one percent.

The tax code is one obvious tool that can level the playing field. Progressive taxation has a long and honored history, dating back to Adam Smith, even.

Adam Smith,
The Wealth of Nations [3] (1776)

“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess …. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

The Institute for Policy Studies has taken the lead in showing how the federal tax code can be made more progressive [4]. Close the hedge fund manager loophole, for example. The Progressive States Network helpfully highlights state efforts to raise top brackets [5].

But the problem may be more than unfairness. Low taxes may be bad for the economy, as well.

When tax rates were steep, executives had more incentive to leave money in the company — investing for future growth, sharing with staff or hiring more people. Money they paid to themselves was wasted. They had to send it to the government.

Nowadays, with taxes so low, CEOs have more incentive simply to pay themselves. They get to keep the money. It’s virtually an act of charity [2] to keep the money in the business or share it with the staff. That’s a recipe for greed, not growth.