Commentary
Why Aren't Politicians Talking about the Tax Cut Bias Problem?
And Why This Could Trigger an Economic Disaster
1,067 Words
By David Demers
There’s a time-honored rule in science.
To solve a problem, identify its main causes, and then take action.
As logical as that seems, policymakers and journalists have failed to heed this maxim when it comes to the problem of wealth and income gaps.
A good example is the five-part series published three years ago in the Washington Post (“Sharing the Wealth ... Examining the Growing Wealth Gap in America — and How to Fix It”). The series mentioned tax cuts several times but failed to identify it as the single most important cause of wealth and income gaps. Instead, the Post attributed the main cause to globalization, which “exerted downward pressure on wages and deregulated financial innovation increased opportunities for capital gains.”
Globalization may have played some role in expanding wealth gaps. But dozens of nonprofit foundations and scholarly think tanks that conduct scientific research on economic equality have found that tax cuts are the major reason why the wealth gap in the United States is five times greater today than in 1980.
The wealth gap grew rapidly after President Ronald Reagan took office in 1981 and promoted a bill that slashed the maximum tax rate on earned income from 70 percent to 50 percent and then to 28 percent. (The rate has hovered in the upper 30s since then.) Reagan also reduced the long-term capital gains tax from 28 percent to 20 percent. This really benefited the wealthy, because most of their income comes from capital gains (e.g., sales of stocks, investment property, bonds). Estate taxes (half of all wealth is inherited) and corporate taxes also were dramatically cut in the decades that followed.
Figure 2.1 visually shows the impact of Reagan’s tax cuts as well as those enacted during the George W. Bush (2001 to 2008) and Donald Trump (2016-2020) presidencies. Wealth gaps were stable from 1960 to 1980. Then they begin to expand. Today taxpayers in the top 1 percent have about 1,316 times more wealth on average than the bottom 50 percent ($17.6 million vs. $13,374).
As taxes on the wealthy dropped, tax rates on the working and middle classes remained roughly the same and so have tax revenues, which have not kept pace with the increasing debt. The debt is now $34 trillion, which reflects and annualized inflation-adjusted growth rate of 5.4 percent since 1980. And just to be clear, the massive debt increase stems not from too much federal spending, because it has only grown at an annualized inflation-adjusted rate of 2.3 percent since 1980. The debt mostly stems from a failure to raise enough tax revenues from the wealthy. In other words, the national debt is funding the tax cuts for the wealthy.
Most Americans believe the wealthy should pay more taxes and that they obtained their wealth because “they have had more advantages in life than most other people,” according to Pew Center polls.
So why aren’t politicians and journalists addressing the tax cut bias issue?
Because politics works top-down, not bottom-up, especially just before an election.
The wealthy don’t like to donate to political candidates who say they are going to raise their taxes, so politicians keep their mouths shut. And when they shut up, the news media, which depend upon politicians for the news, don't cover the story.
So instead of talking about the tax cut bias and proposing tax increases at election time, most political candidates offer plans for tax cuts, which are almost always warmly received by voters, even though these cuts usually boost the national debt and do little to help the working and middle classes (the bottom 90%).
Kamala Harris, for example, is offering a $1,500 tax credit for taxpayers without children, a one-year $2,400 additional tax credit for parents of newborns, and some tax relief for people who earn most of their income through tips (details not known as of this writing). But these cuts will do little to eliminate wealth gaps, because they are narrowly targeted and likely short-term.
She also wants to lower monthly payments for people who are insured through the Affordable Care Act, crack down on price-gouging by businesses, and increase the capital gains tax from 20 percent to 28 percent and the corporate tax from 21 to 28 percent. Lowering health care costs will help the poor and working classes but won’t do much for the middle class. Forcing companies to lower prices after over-charging consumers is a great idea, but how does one prove that a company price-gouged?
Raising the capital gains and corporate taxes is the best plan for reducing wealth gaps, but only if federal taxes on the working and middle classes are cut and the taxes collected from the wealthy are high enough to pay for these cuts as well as bring down the national debt. Harris has not offered any specific plan to cut the earned income tax rates.
Donald Trump’s proposal to eliminate the federal income tax on social security disproportionately benefits wealthier households, because most wage earners in the bottom 50 percent don’t earn enough to qualify for this tax cut. Trump is also proposing a 10 percent tariff on all imported goods and a 60 percent tariff on Chinese imports. Economists widely agree that these cuts will make goods more expensive for working- and middle-class buyers. And Trump is proposing another major tax cut for corporations that could add $5 trillion to the national debt. In short, his plans likely will increase wealth gaps and financially hurt the bottom 90 percent.
The absolute best solution to close wealth gaps is to reduce federal income taxes on the working and middle classes (60 percent of whom are struggling to make ends meet) and increase taxes progressively on the wealthy. The capital gains rate needs to be increased at least to 28 percent, and the maximum earned income tax bracket should be increased to 60 percent. That’s still lower than it was in 1980.
But none of this can happen if politicians and the press don’t start talking about how tax cuts have helped the wealthy and made the national debt soar. And if they refuse to talk about them and the economy stays on its current course, the national debt will double in 10 years, to about $70 trillion, according to my estimate. This amount will be twice as high as the gross national product, a ratio that the Wharton School at the University of Pennsylvania says likely will trigger a recession or depression.
Demers is author of two dozen books, including Falling Behind: Why Wealth Gaps Are Preventing You and Half of Americans from Getting Ahead, a work in progress. A draft of about 10 chapters is available under the Falling Behind tab above. He is also author of The Ivory Tower of Babel: Why the Social Sciences Are Failing to Live Up to Their Promises, and worked as a professor of communication and media sociology at Washington State University before retiring to spend more time writing books. He teaches an introductory sociology course at Glendale Community College in Arizona. He lives in Phoenix and can be reached at [email protected]
Why Aren't Politicians Talking about the Tax Cut Bias Problem?
And Why This Could Trigger an Economic Disaster
1,067 Words
By David Demers
There’s a time-honored rule in science.
To solve a problem, identify its main causes, and then take action.
As logical as that seems, policymakers and journalists have failed to heed this maxim when it comes to the problem of wealth and income gaps.
A good example is the five-part series published three years ago in the Washington Post (“Sharing the Wealth ... Examining the Growing Wealth Gap in America — and How to Fix It”). The series mentioned tax cuts several times but failed to identify it as the single most important cause of wealth and income gaps. Instead, the Post attributed the main cause to globalization, which “exerted downward pressure on wages and deregulated financial innovation increased opportunities for capital gains.”
Globalization may have played some role in expanding wealth gaps. But dozens of nonprofit foundations and scholarly think tanks that conduct scientific research on economic equality have found that tax cuts are the major reason why the wealth gap in the United States is five times greater today than in 1980.
The wealth gap grew rapidly after President Ronald Reagan took office in 1981 and promoted a bill that slashed the maximum tax rate on earned income from 70 percent to 50 percent and then to 28 percent. (The rate has hovered in the upper 30s since then.) Reagan also reduced the long-term capital gains tax from 28 percent to 20 percent. This really benefited the wealthy, because most of their income comes from capital gains (e.g., sales of stocks, investment property, bonds). Estate taxes (half of all wealth is inherited) and corporate taxes also were dramatically cut in the decades that followed.
Figure 2.1 visually shows the impact of Reagan’s tax cuts as well as those enacted during the George W. Bush (2001 to 2008) and Donald Trump (2016-2020) presidencies. Wealth gaps were stable from 1960 to 1980. Then they begin to expand. Today taxpayers in the top 1 percent have about 1,316 times more wealth on average than the bottom 50 percent ($17.6 million vs. $13,374).
As taxes on the wealthy dropped, tax rates on the working and middle classes remained roughly the same and so have tax revenues, which have not kept pace with the increasing debt. The debt is now $34 trillion, which reflects and annualized inflation-adjusted growth rate of 5.4 percent since 1980. And just to be clear, the massive debt increase stems not from too much federal spending, because it has only grown at an annualized inflation-adjusted rate of 2.3 percent since 1980. The debt mostly stems from a failure to raise enough tax revenues from the wealthy. In other words, the national debt is funding the tax cuts for the wealthy.
Most Americans believe the wealthy should pay more taxes and that they obtained their wealth because “they have had more advantages in life than most other people,” according to Pew Center polls.
So why aren’t politicians and journalists addressing the tax cut bias issue?
Because politics works top-down, not bottom-up, especially just before an election.
The wealthy don’t like to donate to political candidates who say they are going to raise their taxes, so politicians keep their mouths shut. And when they shut up, the news media, which depend upon politicians for the news, don't cover the story.
So instead of talking about the tax cut bias and proposing tax increases at election time, most political candidates offer plans for tax cuts, which are almost always warmly received by voters, even though these cuts usually boost the national debt and do little to help the working and middle classes (the bottom 90%).
Kamala Harris, for example, is offering a $1,500 tax credit for taxpayers without children, a one-year $2,400 additional tax credit for parents of newborns, and some tax relief for people who earn most of their income through tips (details not known as of this writing). But these cuts will do little to eliminate wealth gaps, because they are narrowly targeted and likely short-term.
She also wants to lower monthly payments for people who are insured through the Affordable Care Act, crack down on price-gouging by businesses, and increase the capital gains tax from 20 percent to 28 percent and the corporate tax from 21 to 28 percent. Lowering health care costs will help the poor and working classes but won’t do much for the middle class. Forcing companies to lower prices after over-charging consumers is a great idea, but how does one prove that a company price-gouged?
Raising the capital gains and corporate taxes is the best plan for reducing wealth gaps, but only if federal taxes on the working and middle classes are cut and the taxes collected from the wealthy are high enough to pay for these cuts as well as bring down the national debt. Harris has not offered any specific plan to cut the earned income tax rates.
Donald Trump’s proposal to eliminate the federal income tax on social security disproportionately benefits wealthier households, because most wage earners in the bottom 50 percent don’t earn enough to qualify for this tax cut. Trump is also proposing a 10 percent tariff on all imported goods and a 60 percent tariff on Chinese imports. Economists widely agree that these cuts will make goods more expensive for working- and middle-class buyers. And Trump is proposing another major tax cut for corporations that could add $5 trillion to the national debt. In short, his plans likely will increase wealth gaps and financially hurt the bottom 90 percent.
The absolute best solution to close wealth gaps is to reduce federal income taxes on the working and middle classes (60 percent of whom are struggling to make ends meet) and increase taxes progressively on the wealthy. The capital gains rate needs to be increased at least to 28 percent, and the maximum earned income tax bracket should be increased to 60 percent. That’s still lower than it was in 1980.
But none of this can happen if politicians and the press don’t start talking about how tax cuts have helped the wealthy and made the national debt soar. And if they refuse to talk about them and the economy stays on its current course, the national debt will double in 10 years, to about $70 trillion, according to my estimate. This amount will be twice as high as the gross national product, a ratio that the Wharton School at the University of Pennsylvania says likely will trigger a recession or depression.
Demers is author of two dozen books, including Falling Behind: Why Wealth Gaps Are Preventing You and Half of Americans from Getting Ahead, a work in progress. A draft of about 10 chapters is available under the Falling Behind tab above. He is also author of The Ivory Tower of Babel: Why the Social Sciences Are Failing to Live Up to Their Promises, and worked as a professor of communication and media sociology at Washington State University before retiring to spend more time writing books. He teaches an introductory sociology course at Glendale Community College in Arizona. He lives in Phoenix and can be reached at [email protected]