Can we solve our country’s problems by taxing the rich?
President Biden is well known for his political talking point that the rich should “pay their fair share” of taxes. This is interesting because wealthy elitists comprise a sizable portion of Biden’s political base. The mystery as to why this base would enthusiastically support a man who claims that he wishes to raise taxes on them is part of an interesting answer to the question of whether taxing the rich is the key to solving the fiscal problems of the United States.
Let’s start with a quick background on taxes, specifically taxes on people in the upper income brackets. When Ronald Reagan took office in 1981, inflation was nearly 10%, taxes were high, and the economy was struggling. Reagan led the effort for a tax cut that brought the top tax rate down from 70% to 50%. Additionally, inflation was tamed during Reagan’s first term, and the combination of the tax cuts and lower inflation led to a thriving economy by 1984. Some people credit the Federal Reserve action on interest rates at that time for the booming economy, and certainly lower interest rates played a role; however, a June 2022 CATO Institute article makes a solid case that Reagan policies, including the tax cuts, were the main reason the economy took off.
It is important to understand, as the St. Louis Fed (SLF) points out, that the bulk of taxes in the U.S. are based on earned income - meaning money that is earned from a job or self-employment. In a 2019 report, the SLF outlined that the government took in $3.5 trillion that year, noting that the main sources of this revenue were from payroll taxes on income.
The taxation on earned income brings us to why Joe Biden’s super rich supporters do not seem to be worried when he talks about raising their income taxes. Since taxes are usually based on income, rather than assets, the super-wealthy often get paid in ways other than taxable income. For example, Apple CEO Tim Cook had a salary of $3 million last year. His overall compensation package was about $63 million, and the bulk of this came by way of Apple stock.
Why take stock as pay instead of cash? One answer is to save on taxes. As a 2024 Vox article points out, “Stocks aren’t taxed until they’re sold - and even then, what’s taxed is the profit on the sale, called a capital gains tax. Billionaires (usually) don’t sell valuable stock. So how do they afford the daily expenses of life, whether it’s a new pleasure boat or a social media company? They borrow against their stock. This revolving door of credit allows them to buy what they want without incurring a capital gains tax.” The article goes on to state that the wealthy have ways of getting very good interest rates on such loans, even in today’s inflationary environment.
The above example is just one of many ways in which the wealthy avoid paying taxes. It also illustrates the point that they have accountants and lawyers who are very adept at finding ways to help them legally minimize what they pay in taxes. Interestingly, even if this were not so, the Committee for a Responsible Federal Budget concluded several years ago that taxing the super-wealthy would not provide enough money to solve the U.S. debt problem.
In December 2023, the Peterson Foundation highlighted a study by Brian Riedl of the Manhattan Institute. This study asserted that taxes on the wealthy would not solve U.S. debt problems, but it could be part of a solution that looks at “every tool in the toolbox.” Riedl took into account behavior changes that could occur with tax increases and how these would impact the economy. He concluded the key is to avoid raising taxes too much, or in such a way that resulting behavior changes lead to a decrease in economic growth. “Riedl contends that the point is not that tax rates should never rise; however, the broader economic implications of each tax must be weighed and traded off with federal spending goals.” The Peterson Foundation labels tax policy that takes into account real world reactions, as Riedl suggests, “smart tax policy.”
The problem with implementing “smart tax policy” is that this will have to be accomplished by Congress, and most people doubt their ability to take on and solve tough problems. In a Gallup survey in late 2023, the approval rating of Congress had fallen to just 13%. The voters don’t seem to have much faith in President Biden either. His latest approval rating is less than 39%.
This lack of trust in our politicians is why I have joined David M. Walker, former Comptroller General of the United States, and others in drafting the Contract from the American People. A part of the contract calls for an independent Fiscal Commission to examine our nation’s finances and make recommendations. This group would make such recommendations with significant public input and do so in a way that would require Congress to take action. Our debt is a ticking bomb and failure to take action will jeopardize the future prosperity of every American.
Please visit JoeFromTexas.com to read the contract and learn more about how you can join us in this effort.