Analysis: Tax the Rich More to Redistribute Wealth to the Poor in America

“We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both,” said Supreme Court Justice Louis Brandeis in 1941.

From left: Elon Musk by U.S. D.O.D., Jeff Bezos by U.S. Air Force, Mark Zuckerberg by Anthony Quintano, Bill Gates by Steve Jurvetson | Background image by Tracy O. | Photo edited by Frank Faiola | All photos CC/PD

Billionaires in the United States are subject to a lower overall tax rate compared to the majority of teachers and retail workers. This is due to a tax code that prioritizes income derived from wealth rather than income earned from labor, alongside a multitude of strategies employed by the rich to evade taxes. As a result, the wealthiest individuals in our society contribute a smaller proportion of their earnings to the federal government in comparison to most working families.

According to a 2021 White House study, the most affluent 400 billionaire families in the United States had an average federal individual tax rate of merely 8.2 percent. In contrast, the typical American taxpayer that year had a tax rate of 13 percent. 

According to tax returns that were leaked and brought to attention by a ProPublica investigation, the 25 wealthiest individuals in America paid a total of $13.6 billion in taxes between the years 2014 and 2018. These 25 individuals collectively earned a staggering $401 billion during that specific time frame, suggesting that the actual tax rate they paid was a mere 3.4 percent.

Some argue it is unfair for wealthy individuals to pay higher tax rates; they view it as a punishment. That argument does not understand the whole picture.

Even Adam Smith, an economist and philosopher who was a pioneer in the field of political economy, acknowledged the need for ‘equal pain.’ In other words, the principles of taxation elucidated by Adam Smith do not represent precise tax policies, but rather embody ideals that serve to steer legislators in the determination of policy: Taxation should be proportionate with one’s income. Smith posits that each member of society should be obliged to remit an equal proportion of their overall income. Taxes should be predictable in nature.

A progressive tax is designed to collect a higher proportion of income from individuals in higher income brackets compared to those in lower income brackets. This type of tax is based on the principle that individuals with higher incomes have a greater ability to contribute financially.

In theory, America has a progressive federal income tax system, but this is misleading given capital gains are taxed at a lower rate and there are other regressive taxes. 

The term regressive tax pertains to a tax that is implemented equally regardless of one’s income. Unlike progressive taxes, regressive taxes extract a higher proportion of income from individuals with lower incomes compared to those with middle and high incomes. Consequently, the tax burden diminishes as income increases.

Over the past six decades, tax rates for the most affluent individuals in the United States have experienced a decrease of more than 40 percent, whereas tax rates for the typical American have stayed fairly stable.

Since the 1980's, deliberate governmental policies have resulted in a notable rise in income inequality in the United States. These policies were aimed at reducing tax rates on the wealthy and shrinking social safety net programs. As a result, the top 10 percent of earners now receive 50 percent of all household income in America, while the bottom 50 percent of earners only receive 13 percent. Additionally, the top 1 percent of households hold 31 percent of household wealth, while the bottom 50 percent of households only hold 2 percent.

These statistics might be unexpected for those who are concentrating on the share of federal taxes that affluent individuals pay, rather than the tax rates applied to such individuals. There is no question that the share of taxes paid by affluent individuals has risen. However, the reason why the share of taxes paid by the top 10 percent of earners has increased is due to the fact that their share of income has also increased.

In the third quarter of 2023, the top 10 percent of earners possessed 66.6 percent of the total wealth in the United States. While the lowest 50 percent of earners only held a mere 2.6 percent of the total wealth.

Despite the notion that the United States is a nation where diligent effort and self-reliance inevitably result in prosperity, this is frequently not the reality. In 2021, 8.3 percent of U.S. households had an annual income below $15,000. Considering that a minute proportion of individuals in America possess a significant majority of the nation’s wealth, the disparity between the rich and the poor in the United States remains readily apparent.

America has the second highest number of billionaires in the world, following closely behind The People’s Republic of China. In 2022, Elon Musk alone possessed approximately $219 billion. 

Russia is the only other developed country that has similar wealth and income inequality to the United States. 

During the last five decades, the ratio of compensation between CEOs and workers has experienced a significant increase, resulting in a widening gap between the wealthy and the poor. Some economists have put forth the theory that this gap is currently at its largest since the period just prior to the Great Depression.

In 2022, it is estimated that the ratio of CEO-to-worker compensation in the United States stood at 344.3. This means on average, CEOs were receiving more than 344 times the annual average salary of their workers.

To put that figure in context, in 1965, the average CEO-to-worker compensation was approximately 24.2 in America. 

There are many other ways the current U.S. tax code favors the rich. For instance, Americans who earn less than five-figure incomes have to pay a payroll tax rate of 14.1 percent, whereas individuals with seven-figure incomes or higher only pay a mere 1.9 percent.

There are two categories of income, namely long-term capital gains and qualified dividends, both of which fall under the umbrella of capital income. These two types of income are subject to lower federal income tax rates. For both types of income, the lowest marginal rate is 0 percent, the following rate is 15 percent, and the third and highest marginal rate is 20 percent.

The third rate is notably 17 percentage points lower than the highest marginal tax rate applied to other types of earnings. This enables affluent stockholders to reduce their taxes by nearly half.

Both dividends and long-term capital gains are disproportionately concentrated among the wealthy. In 2022, only 0.5 percent of taxpayers will earn $1 million or more, yet this select group will receive a staggering 70.2 percent of all long-term capital gains and 43.3 percent of all dividends. In contrast, individuals who earn less than $40,000, which accounts for 35.1 percent of taxpayers, only receive 0.4 percent of total long-term capital gains and a mere 1.2 percent of all dividends.

The deduction for state and local taxes is advantageous for 75.1 percent of individuals who earn $1 million or more each year, in contrast to less than 1 percent of those earning less than $30,000. It is not surprising that, on average, millionaires deduct $317 for every $1 deducted by the lowest-income Americans.

The mean deduction for mortgage interest is $13,061 for individuals earning at least a seven-figure income, $2,886 for those with a six-figure income, $274 for those with a five-figure income, and merely $33 for individuals making a four-figure income or less.

In short, the mortgage interest deduction lowers the taxable income for individuals at the higher end of the income spectrum by thousands of dollars, while individuals at the lower end experience a reduction of just a few dozen dollars.

Corporations have not even been mentioned at this point. 55 of the largest corporations in the United States paid no federal corporate income taxes in 2020, according to the Institute on Taxation and Economic Policy.

Campaign Finance 

Many experts argue that the significant increase in income inequality in the United States can be attributed to Supreme Court rulings regarding campaign finance, like Buckley v. Valeto and Citizens United v. FEC, which have favored the wealthiest members of society.

Buckley v. Valeo was a case decided by the Supreme Court in 1976. The case involved a challenge to certain provisions of the Federal Election Campaign Act (FECA) enacted in 1971. The majority of the justices held that restrictions on campaign spending are in violation of the Constitution. The decision clarified that while the government has the power to restrict individual contributions to political campaigns, it cannot impose limits on independent campaign expenditures.

Since 1980 — just four years after the Court ruled that individuals could spend unlimited amounts of money to influence the government — income and wealth inequality began to rise sharply.

The theory is that the wealthy have been able to lobby Congress to create an unfair tax system that leads to more wealth and income inequality in the United States.

Members of Congress tend to prioritize the desires of their donors over those of the average American, as there is substantial evidence to support this claim. The preferences of the average American have no correlation with the policies adopted by Congress. Conversely, there is a strong correlation between the policy desires of special interest groups and affluent Americans, and the policies adopted by Congress.

Less than 1 percent of Americans contribute more than $200 to political campaigns, whereas the maximum amount is given by no more than 0.05 percent of individuals.

Occasionally, lobbyists, who are individuals employed by donors to sway politicians, may even draft legislation directly for Congress. These lobbyists have the ability to conveniently include tax loopholes for wealthy individuals and other beneficial provisions.

Senator Bernie Sanders | Photo by Gage Skidmore | Flickr | CC-BY-SA 2.0

“Tragically, as I say this advisedly, we are well on our way to seeing our great country move toward an oligarchic form of government — where virtually all economic and political power rest with a handful of very wealthy families,” said Senator Bernie Sanders.

Political scientists have conducted extensive research and a significant number of them concur with the viewpoint of Senator Bernie Sanders that the United States can be perceived as an oligarchy. An oligarchy refers to a governmental framework where a select few individuals possess the majority of power. Within the United States, this exclusive group consists of a highly affluent subset of Americans known as the 0.05%.

The Future 

If Trump wins in 2024, taxes will likely decrease even more for the most affluent Americans, as they did in his first term. Which would increase wealth inequality in America to an even higher extent.  

Even if Democrats control the presidency and Congress, it is unclear how long it would take for these specific issues to be fully resolved given most Democratic lawmakers are also influenced by special interest groups and individual wealthy donors. 

Photo edited by Frank Faiola | From left: Rep. Nancy Pelosi by Archibald Sackey & Courage Ahiati | President Joe Biden by David Lienemann | Former President Barack Obama by White House | Vice President Kamala Harris by Senate Democrats | U.S. Flag Background by James Disher | All photos CC/PD