Taxes in America Are Unfair to Most Americans

For decades, time and again, America’s tax code has been twisted and tweaked to give tax breaks to the top and crumbs (or nothing) to the tens of millions on the bottom and in the middle. Levels of wealth and inequality have become so gross that experts are clamoring for change, painting unflattering portraits of the country those laws have created.

In the latest example, Senators Manchin and Sinema joined Republicans to throw 5.1 million children into poverty. Of course, nobody knew the exact number, but they knew exactly what would happen when they blocked the renewal of a more generous Child Tax Credit.

Now let’s get to the inequities, along with some proposals for balancing the scales.

The modern income tax  began in 1943, and from the start we’ve had “two income tax systems, separate and unequal. One burdens most people. The other makes the rich much richer.” The first is an information system for wage and salary workers; the second is an honor system for business owners and high-income professionals.

Workers have their taxes withheld and their incomes reported to the Internal Revenue Service by employers. The privileged self-report: the IRS gets their work income figures only from them.

Ordinary workers have a near-perfect tax compliance record. Self-reporters underpay by the hundreds of billions, a level of tax evasion that law professors Joshua Blank and Ari Glogower believe could be (and should be) sharply reduced. They lay out their ideas in the Iowa Law Review’s just-published “The Tax Information Gap at the Top”.

The Biden Administration wanted banks to report to the IRS all transactions of $10,000 or more. Instead, the authors suggest, focus on taxpayers with incomes and net worth above certain thresholds—say, $2 million and $10 million. These same taxpayers would have to report their incomes and assets annually, both to their banks and the IRS. More targeted audits and stiffer penalties round out the recommendation, a hybrid of information gathered from first parties and third parties alike.

The most affluent Americans get far less of their income from work, and far more from capital gains, than the rest of us. On most capital gains income, they also pay lower taxes than the rest of us. Tax rates on long-term capital gains are lower than those on work: they’re only 15 percent on income up to $492,300, and only 20 percent after that. A married couple getting all their income from work would pay a marginal rate of 22% starting at $95,375 and a top rate of 37 percent starting at $518,125.

For more examples of the many ways that taxes favor the rich, read the Tax Policy Center’s “The Difference In How The Wealthy Make Money—And Pay Taxes,” by William Gale and Semra Vignaux. They suggest four reforms, strangely omitting the most obvious of all: tax capital gains income the same as work income, as President Reagan did in 1986. (Reagan’s surprise move was soon reversed in fiscal horse trades by the Bush I and Clinton Administrations.)

Repealing the stepped-up basis is the No. 1 priority for Gale and Semra. And no wonder: it allows the wealthy to avoid capital gains taxes simply by leaving their assets (e.g., stock holdings and real estate) to their heirs. Any unrealized gains simply vanish; for the beneficiaries, their basis price is the market value when the assets pass. They can then do likewise for their heirs, passing wealth from generation to generation without ever paying taxes on the gains. Democrats (including Biden) have tried for years to end this giveaway, but the GOP has always resisted.

Amy Hanauercan’t ignore the anger of someone working for ‘bullshit’ pay who is pissed off at the power that rich men have in our political system and in our tax code.” She’s the director of the Institute on Taxation and Economic Policy. If it were her call, she’d have states replace their sales taxes with new income tax brackets for earnings over $150,000, $250,000, and $1 million. Sales taxes fall heaviest on the poor and working families, and states shouldn’t be leaning on them for revenue.

Instead they should be focusing on the rich, “from those who derive the most benefit from capitalism.”

In the end let’s go back to the beginning, Congress’s refusal to extend the programs (including the expanded Child Tax Credit) that had taken the nation’s overall poverty rate to an all-time low. It happened in large part because their renewal “would have been paid for by fairly taxing corporations and the very wealthy.”

And so we see, vividly, how poverty in America “is a political choice, not a personal one”.

• This piece originally appeared in the New York Daily News

Gerald E. Scorse helped pass a bill that tightens the rules for reporting capital gains. He usually writes on taxes. Gerald can be reached at: Read other articles by Gerald.