Saturday, October 17, 2015

How Tax Policies In The US Contribute To Rising Income Inequality And What Can Be Done

The US tax system used to be much more progressive.  That is, the tax rate increased in relation to income. The tax system has been made less progressive over the last 45 years.  It began with Ronald Reagan, and  George W Bush made the tax system even less progressive.  All of the Republican candidates for the GOP presidential nomination have proposed plans that would make the tax system even less progressive.  A major cause of rising inequality in the US is a consequence of Republican tax policies that have made the tax system less progressive.  This article describes many of the changes that have made the tax system less progressive.  At the top of the list is a reduction in the top tax rate on income but other gifts to the very rich have also lowered their tax burden.  For example, capital gains made by selling investments used to be taxed as ordinary income.  Similarly dividend payouts were also taxed as ordinary income.  These taxes on capital gains and dividends were cut substantially by Ronald Reagan and by George W Bush. These cuts on capital income taxes is one of the reasons why top corporate executives have changed their compensation packages.  They receive most of the compensation in the form of stock options and dividends which are taxed at a much lower rate than ordinary income.

This article describes some of the tax changes that would restore some of the lost progressiveness to the tax system.  It also shows what might be done with the additional revenues.  For example, it would be possible to make all of the public colleges in the US free of cost by a modest change in the tax code.

It has taken the Republican Party several decades to redistribute income and wealth to the richest segment of our society by making the tax system less progressive.  It will not be easy to reverse the changes that were made in the tax system over the last 45 years.  If the Republican Party has its way the tax system will be made even less progressive and inequality will continue to accelerate.  Republicans manage to get elected to office because they have been able to confuse the public on tax policy.  The tax system is very complex and that makes it easier for the public to be fooled.  I have listed a few of the ideas below which might make it  easier for the public to better understand the issues.

* Nobody likes to pay taxes.  Consequently, those who want to cut taxes for the rich throw a few bones to ordinary citizens.  Most of the proposals made by GOP candidates during the current campaign provide modest tax cuts to those in lower tax brackets.  That makes them more likely to support the much larger tax cuts to the wealthy.

*  The government needs tax revenues to provide important services.  Consequently, the GOP uses several tactics to sell their tax policies.  They tell the public that cutting taxes will stimulate the economy and increase the tax base.  Economic growth may actually increase tax revenues.  That false claim began with Reagan and it continues to be used today.  Most economists reject this claim.

*  Many government programs provide benefits to minorities.  Many citizens like the idea of cutting these government programs even if they benefit from them.  Therefore, it is easy to convince some people to oppose government spending in general.  Its OK if tax cuts reduce government spending.

*  The Reagan tax cuts and the Bush tax cuts failed to pay for themselves.  Government spending was not reduced and the federal government had large budget deficits as a result.  The government borrowed money to fund the deficits which resulted from the tax cuts.  The rich would rather pay for government services by borrowing instead of paying taxes.  The GOP only gets upset when budget deficits occur when Democrats are in office.  That gives them an opportunity to tell the public that out of control federal spending produced the budget deficits.  The tax cuts that they managed to legislate are never responsible for budget deficits.  The Republican Party wants to be seen as the fiscally responsible party.  They have done a good job, with help from the media, of selling this image to the public.

*  A more progressive tax system would shift the tax burden to high income households.  This is a form of income redistribution if the government uses the tax revenue to fund programs that benefit the less well off.  The GOP calls income redistribution a form of socialism.  The public does not understand socialism but they don't like it.  Therefore, many programs that the GOP does not like can be criticized as a form of socialism.  Republicans argued against the development of the public school system by calling it a form of socialism.  More importantly, however, we should not forget that the GOP has been engaged in income redistribution for 45 years.  Cutting taxes for the rich, along with other things, has redistributed income and wealth upwards.  They totally approve of upwards income redistribution.  A More progressive tax system would simply reverse some of the redistribution that has been engineered, primarily by the GOP, over the last 45 years.

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