Allen Jacobson: 5 truths about wealth inequality — and 5 ways to fix it

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Sen. Mitt Romney gave us a valuable reminder the day our U.S. Capitol was attacked when he told fellow senators the best way to show respect to Trump voters is to tell the truth.

So, out of respect for the wealthy:

This deregulated economy does not work for half of us. Over the past 30 years it funneled up over $5 million apiece for the 10% wealthiest households who now have a combined $81 trillion — three times our national debt. The rest of the top half gained a half-million dollars apiece, while the 65 million households in the bottom half struggled to each scrape up $25,000 — over 30 years! Capitalism does not work without effective regulation and competition and it’s gone from most of our economy. The playwright Richard Greenberg supposedly said, “Money doesn’t buy you happiness, but it does upgrade despair.” We have a lot of despair to upgrade and our democracy may depend on how fast we do it. It’s the truth.

Trickle down is a cruel myth. The Tax Cuts and Jobs Act passed into law in December 2017 gave large tax cuts to corporations and the wealthy. Did companies need these tax savings to hire more workers? The S&P 500 companies answered by upping their stock buybacks from $519 billion to $806 billion the next year. A December 2020 paper by Hope and Limberg (London School of Economics) studied 30 major tax cuts for the rich in 18 advanced countries over 50 years and found they only led to higher income inequality, not more economic growth.

Our economy is not being held back by a lack of investment dollars. There is less job growth because the bottom half is gutted. Affordable health care for everyone plus a $15 minimum wage will help millions feed their families, rent an apartment, and pay for the training to get a better job — and a car to get there. That creates jobs. It’s the truth.

We tax capital gains less than a minimum-wage paycheck. The 6.2% Social Security withholding tax is higher than our effective tax rate on capital gains. Wealth is largely generated by the appreciation of stocks and real estate, and much of these capital gains are never taxed. Donated to charity, they go untaxed directly to the nonprofit, and they also qualify as an itemized deduction. One dollar of capital gain charitably donated means two dollars go untaxed. Passed to heirs, the cost basis of an appreciated asset is “stepped up” to the market value and, voila, the capital gain income vanishes forever.

The IRS collected only $2.1 trillion in capital gains taxes over the 27 years from 1990-2016, while household wealth for the upper half grew by $69 trillion. Backing out $15 trillion of personal savings leaves roughly $54 trillion in estimated capital gains. This implies a tax rate of less than 4%. Some may object, saying taxes are paid after the capital gains occur. Granted, yet a similar calculation using taxes collected 10 years after the capital gains yielded a 5.8% effective tax rate. Other studies support these results. It’s the truth.

When it comes to taxes, wealth brings privilege, not progressivity. Many would cite reputable sources, such as the Tax Foundation, to show that the top 1% of all taxpayers pay 40% of federal income taxes yet report just 20% of adjusted gross income (AGI). But wait, the wealthiest 1% own 33% of all household wealth, and still they report only 20% of the AGI? Something must be missing, and it is — unreported capital gains. Include them and their share of income goes from 20% to 30% and their average tax rate drops from 27% to 17%, well down from the top rate of 37%. It’s the truth.

The average Fortune 500 CEO pays Social Security taxes on only one percent of their $13 million annual compensation. Social Security taxes are capped at $137,700 while their compensation is now 300 times that of their average employee, up from 30 times in the 1970s. Removing this cap would only affect the highest six percent of wage earners, put the Social Security Trust Fund back on solid footing, and require no benefit cuts. It’s the truth.

The fix is straightforward:

1. Restore regulation and antitrust enforcement comparable to the pre-Reagan era. Mergers should not get a green light solely for an expected short-term consumer benefit.

2. Require a 10% withholding tax on capital gains, as recently proposed by Saez, Yager and Zucman. 

3. Tax capital assets upon title transfer. Recognize the capital gain whenever the asset is sold, exchanged, donated, transferred or passed to heirs. Consider a $1 million lifetime exemption for combined capital gain and inheritance income as a small business incentive.

4. Tax all income like wages. Use one set of brackets and add together all wage, capital gain, dividend, interest, gambling and inheritance income. This would end a panorama of tax avoidance schemes and inheritance taxes.

5. Take the earnings cap off Social Security taxes.

Allen Jacobson, Ph.D. is a business economist and investment adviser, now retired and living in downtown Milwaukee. He enjoyed 40 years of his life’s work in Madison, where he co-founded Buttonwood Partners, Inc. and Jacobson & Schmitt Advisors, Inc. 

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