In the 1966 movie Harper starring Paul Newman, there is a line that my memory ranks as one of the top 10 or so all-time best—”You’ve got a way of starting conversation that ends conversation!”
That’s what it frequently feels like when I try to talk to someone (other than tax wonks) about taxes. I imagine the subject scares people off because taxes and tax policy seem too complicated, and for at least the last forty years, Republicans have done a great job of putting taxes in the same category as the plague.
I love taxes! Eight years ago, our foundation sponsored a conference co-hosted by the Economic Policy Institute and Inequality.Org titled “Tax the Ultra Rich, Find the Cure for Excessive Wealth Disorder.”. We handed out pens that read “We Love Taxes, Tax the Ultra-Rich Now!”
Everyone should love taxes because as is oft quoted, “taxes are the price we pay for a civilized society” (U.S. Supreme Court Justice Oliver Wendell Holmes Jr., 1927). The problem, of course, is that the ultra-rich have perfected the art of avoiding taxes, leaving everyone else holding the bag. This can be reversed (go to our website for policy proposals). There are only three essential things you need to understand about tax policy, the most important of which is that there should be no new taxes on anyone other than the ultra-rich. But let’s begin with some tax policy basics.
First, wealth and income are related, but different. An income tax is based on the amount of money one receives over a certain period, usually measured annually. For most people, most of their income comes from their salaries, along with some interest and dividends. For wealthy people, most of the income comes from profits on the sale of assets, e.g. stocks. However, for income tax purposes, as things stand now, the unrealized gains, those gains on assets which have not yet been sold, are not included as income.
A wealth tax, on the other hand, is on the total amount of assets, including investments, accumulated at a given point in time, and it does include the unrealized gains, which for the ultra-rich is a large part of their wealth. When you hear that so-and-so is worth $100 billion, that’s wealth; the amount their wealth increased during the year is income.
The second thing to understand is the distinction between marginal and effective tax rates. Our income tax system uses marginal rates, which is intended to (but does not due to manipulation by the ultra-rich) create a progressive tax–a tax that increases as one’s ability to pay increases. A simplified example: you’ve been given a bag of 100 jellybeans (lucky you), your income, which you want to last for five days, so you put the jellybeans in five piles of 20 each. You eat 5 jellybeans on the first day (25%,), 10 on day 2 (50%), 15 on day 3 (75%) and all 20 on day 4 (100%). In taxspeak, those percentages are marginal rates, with the top rate being 100%. In total you’ve eaten 50 of the 100 jellybeans, or 50%, that is the effective rate, and is much lower than the top marginal rate. What really matters is the effective rate – that is what describes, in taxspeak, how much of your income you pay your favorite Uncle.
The Five and Dime Wealth Tax we’re proposing also involves marginal rates: 5% over $50 million, and 10% over $250 million of wealth. The first $50 million would be exempt from tax (0% marginal rate), so with $250 million of wealth, the total tax would be $10 million ($200 million x 5%), or 4% of total wealth (whereas the marginal rate is 5%). For every dollar over $250 million, the marginal rate would be 10%.
The third–and most important–thing to understand about taxes is to heed the admonition in All the President’s Men: follow the money.
If you would agree that $50 million in wealth is an extraordinary amount of money–enough for any one household to get by on–then you, too, should love taxes, as long as any new taxes are only on those with wealth greater than $50 million (as a rule of thumb, this works out to be the same households with $3 million of income).
And that is where the money is. You may be surprised, if not shocked, to learn that in the U.S., there are 300,000 households, representing 0.2% of all households (that’s one in 500), that have more than $50 million. Three hundred thousand households! And the combined wealth of those households is a staggering $40 trillion (40,000,000,000,000)! That is more than our national debt. And more than enough excessive wealth to help pay the price for civilized society. There is absolutely no reason to increase taxes on anyone else.
Taxing excessive wealth is important to fund public priorities like healthcare, education and childcare. Too often overlooked however is how important it is to tax the ultra-wealthy to reduce the harmful effects that extreme wealth has on our society, from environmental damage to anti-democratic policies to an affordability crisis.
Hoarding is not an Olympic sport, but the ultra-rich, particularly billionaires, have been on steroids for the last 40 years, setting new records for wealth accumulation. It is time we take their gold medals back. It can’t be done with only an income tax–the effective rate would have to exceed 100% (and include unrealized gains). Only a wealth tax–alongside an income tax–can effectively make the ultra-rich less rich and powerful.