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For a long time, there was a predictable response to any proposal for increasing taxes on the rich: It will wreck the economy. You don’t hear this response quite so often anymore, however, because it’s become so obviously false. If anything, the economy in recent decades has grown more quickly when Washington taxes the rich more, not less.
Instead, you often now hear a new argument: There’s no point in trying to tax rich people, because they’ll just figure out a way to avoid paying taxes.
The Washington Post ran a big news article recently making this case (and parts of the argument have appeared elsewhere too, including in The Times). The Post article claimed that Elizabeth Warren’s plan to introduce an annual wealth tax relies on a set of “assumptions that defy a long history of U.S. policymaking”: namely, “that the country’s wealthiest taxpayers won’t find ways to evade the targeted tax hike she proposes.”
But this claim is wrong, too. The long history of American policymaking actually shows that raising taxes on the wealthiest taxpayers is entirely possible.
Nonetheless, I expect you’ll hear the cynical “taxing the rich is impossible” case a lot in coming years, especially if a future president does try to enact a major tax increase on the wealthy. Lobbyists who represent the wealthy like the argument because it lets them claim that there’s no point in trying. And journalists find the argument alluring because it has a ring of tough skepticism, and we journalists love to present ourselves as tough skeptics.
In this case, though, it’s important to be skeptical about the skepticism.
Over the last few decades, the total federal tax rate paid by the very rich has tended to hover between 30 percent and 40 percent. It’s been closer to 30 percent after a Republican president has cut taxes and closer to 40 percent after a Democratic president has modestly raised them.
The chart above shows the longer version of this history: the average federal tax rate — spanning income taxes, estate taxes and more — for the top 0.01 percent of earners over the past century. (The data comes from Gabriel Zucman, an economist recently profiled in a cover story for Bloomberg Businessweek.)
And the long version of the history is crucial here. It shows that for much of the 20th century, total taxes on the very wealthy were much higher than they are now. Before World War II, the average rate hovered around 70 percent. From the mid-1940s through the mid-1970s, the average rate was above 50 percent.
It’s really no mystery why the rate has declined: The federal government has cut tax rates on the rich. The top marginal rate has plummeted. Taxes on stock holdings have declined, too. Perhaps nothing has mattered more than the erosion of the estate tax, through a combination of a lower rate and an increased threshold for paying the tax. These policy changes have helped turbocharge economic inequality.
Is it possible to tax the wealthy too heavily and damage the economy? Yes. I don’t think the top marginal tax rate should be 91 percent, as it was in the 1950s. But it’s a very, very long way from 91 percent today. It’s only 37 percent, which is too low. Taxes on stocks and most other financial investments are also too low.
Changing this situation is within the power of the federal government. History shows that when the government tries to collect more taxes from its richest citizens, it succeeds. So don’t give in to cynicism. Today’s radical levels of inequality are not inevitable. They’re a choice that our society has made.
For more …
The decline of the estate tax and an effective decline in the corporate tax rate are the main reasons that the wealthy pay so much less in tax, as the economists Thomas Piketty and Emmanuel Saez have explained. (If you want the brief version, click that link and check out the chart on page 12.)
Alexandra Thornton and Galen Hendricks of the Center for American Progress released a report yesterday outlining the various options for increasing top-end taxes, including a wealth tax, a higher estate tax and the elimination of various corporate and investment loopholes. The report is called, “Ending Special Tax Treatment for the Very Wealthy.” In addition to legislative changes, Thornton told me that “more funding for high-end tax enforcement is needed.”