The Coming Era of Wealth Taxation
by Gar Alperovitz
Dollars and Sense magazine, July/August
Americans concerned with inequality commonly
point to huge disparities in the distribution of income, but the
ownership of wealth is far, far more concentrated. This fact is
certain to bring the question of wealth taxation to the top of
the nation's political agenda as the country's fiscal crisis deepens
and, with it, the deterioration of public institutions and the
pain of all those who rely on them.
Broadly, in any one year the top 20% garners
for itself roughly 50% of all income, while the bottom 80% must
make due with the rest. The top 1% regularly takes home more income
than the bottom 100 million Americans combined.
When it comes to wealth, these numbers
appear almost egalitarian. The richest 1% of households owns half
of all outstanding stock, financial securities, trust equity,
and business equity! A mere 5% at the very top owns more than
two-thirds of the wealth in America's gigantic corporate economy,
known as financial wealth-mainly stocks and bonds.
This is a medieval concentration of economic
power. The only real question is when its scale and implications
will surface as a powerful political issue. A wealth tax is "by
definition, the most progressive way to raise revenue, since it
hits only the very pinnacle of the income distribution,"
notes economist Robert Kuttner. But conventional wisdom says that
it is impossible to deal with wealth head-on. The battle over
repeal of the estate tax, in this view, demonstrated that even
the most traditional of "wealth taxes" are no longer
Perhaps. However, a longer perspective
reminds us that times can change-as, indeed, they often have when
economic circumstances demanded it.
EMERGING SIGNS OF CHANGE
Indeed, times are already beginning to
change. One sign: Although many Democrats were nervous about challenging
George W. Bush in the first year after he took office, by early
2004 all the Democrats running for president had come to demand
a repeal in some form of his tax giveaways to the elite.
It is instructive to trace the process
of change. At the outset, only a few liberals challenged the president.
The late Paul Welistone, for instance, proposed freezing future
income tax reductions for the top 1% and retaining the corporate
Alternative Minimum Tax (AMT), for an estimated $134 billion in
additional revenue over 10 years. Ted Kennedy proposed delaying
tax cuts for families with incomes over $130,000 and keeping the
estate tax (while gradually raising the value of exempted estates
from a then-current $1 million to $4 million by 2010). Kennedy
estimated this would generate $350 billion over 10 years.
By May 2002, even centrist Democrat Joseph
Lieberman urged postponing both the full repeal of the estate
tax and reductions in the top income-tax rates. Lieberman estimated
his plan would save a trillion dollars over 20 years. The Bush
tax cuts were simply unfair, he said, "giving the biggest
benefit to those who needed it the least."
The Democrats failed to stop Bush's 2001
and 2003 rounds of tax cuts. But there are reasons to believe
that politicians will ultimately come to accept the validity of
maintaining and raising taxes on the wealthiest Americans. Just
as many Democrats changed their stand on the Bush tax cuts, a
similar progression is likely with regard to wealth taxation more
generally over the next few years and for two very good reasons.
First, there is an extraordinary fiscal crisis brewing; and second,
wealth taxes-like taxes on very high-income recipients-put 95%
to 98% of the people on one side of the line and only 2% to 5%
or so on the other.
GO WHERE THE MONEY IS
The hard truth is that it is now all but
impossible to significantly raise taxes on the middle class. This
reality flows in part from the ongoing decline of organized labor's
political power, and in part from the Republicans' takeover of
the South-another long and unpleasant political story. At any
rate, it means that the only place to look for significant resources
is where the remaining real money is-in the holdings of corporations
and the elites who overwhelmingly own them. Put another way: Raising
taxes first on the income and ultimately on the wealth of the
very top groups is likely to become all but inevitable as, over
time, it becomes clear that there is no way to get much more in
taxes from the middleclass suburbs.
Moreover, as Democratic politicians have
come increasingly to realize, the "logic of small versus
large numbers" could potentially neutralize a good part of
the suburbs politically, painting conservatives into a corner
where they're forced to defend the very unreasonable privileges
of the very rich.
The knee-jerk reaction that taxing wealth
is impossible is based upon the kind of thinking about politics
that "remembers the future"-in other words, thinking
that assumes the future is likely to be just like the past, whether
accurately remembered or not. Since wealth has not been taxed,
it cannot be taxed now, goes the argument (or rather, assumption).
Of course, taxation of wealth has long
been central to the American tax system for the kind of wealth
most Americans own-their homes. Real estate taxes, moreover, are
based on the market value of the home-not the value of a homeowner's
equity: An owner of a $200,000 home will be taxed on the full
value of the asset, even if her actual ownership position, with
a mortgage debt of, say, $190,000, is only a small fraction of
this amount. A new, more equitable form of wealth taxation would
simply extend this very well established tradition and-at long
last!-bring the elites who own most of the nation's financial
wealth into the picture.
Many Americans once thought it impossible
to tax even income-until the 1913 passage, after long debate and
political agitation, of the 16th Amendment to the U.S. Constitution.
Note, however, that for many years, the amendment in practice
meant targeting elites: Significant income taxation was largely
restricted to roughly the top 2% to 4% until World War II.
Even more important is a rarely discussed
truth at the heart of the modern history of taxation. For a very
long time now the federal income tax has, in fact, targeted elites-even
in the Bush era, and even in a society preoccupied with terrorism
and war. In 2000, the top 1% of households paid 36.5% of federal
income taxes. The top 5% paid 56.2%. Although detailed calculations
are not yet available, the massive Bush tax cuts are not expected
to alter the order of magnitude of these figures. Estimates suggest
that, ultimately, the tax reductions may modify the figures by
no more than two or perhaps three percentage points.
In significant part this results from
the rapidly growing incomes of the wealthiest: even at lower rates,
they'll still be paying nearly the same share of total income
tax. The simple fact is, however, that the record demonstrates
it is not impossible to target elites. We need to take this political
point seriously and act on it aggressively in the coming period.
FISCAL CRUNCH AHEAD
What makes wealth taxes even more likely
in the coming period is the extraordinary dimension of the fiscal
crisis, which will force government at all levels to adopt new
strategies for producing additional resources. Projections for
the coming decade alone suggest a combined federal fiscal deficit
of more than $5 trillion-$7.S trillion if Social Security Trust
Fund reserves are left aside.
A worsening fiscal squeeze is coming-and
it is not likely to be reversed any time soon. Critically, spending
on Social Security benefits and Medicare will continue to rise
as the baby-boom generation retires. So will spending on Medicaid.
Recent studies project that by 2080 these three programs alone
will consume a larger share of GDP than all of the money the federal
government collects in taxes. And, of course, the ongoing occupation
of Iraq will continue to demand large-scale financial support.
Nor are the trends likely to be altered
without dramatic change: The truth is that the Bush tax and spending
strategies, though particularly egregious, are by no means unique.
Long before the Bush-era reductions, domestic discretionary spending
by the federal government was trending down from 4.7% of GDP a
quarter century ago to 3.5% now, a drop during this period alone
of roughly 25%.
A radically new context is thus taking
shape which will force very difficult choices. Either there will
be no solution to many of the nation's problems, or politicians
and the public will have to try something new. Suburban middle-class
voters, who rely on good schools, affordable health care, assistance
for elderly parents, and public infrastructure of all kinds, will
begin to feel the effects if the "beast" of government
is truly starved. This pain is likely to redirect their politics
back toward support for a strong public sector-one which is underwritten
by taxes on the wealthiest. Quite simply, it is the only place
TIME TO TAX WEALTH
Ideological conservatives like to argue
that all Americans want to get rich and so oppose higher taxes
on the upper-income groups they hope to join. In his recent history
of taxation, New York Times reporter Steven Weisman has shown
that this may or may not be so in normal times, but that when
social and economic pain increase, politicians and the public
have repeatedly moved to tax those who can afford it most. Bill
Clinton, for one, raised rates on the top groups when necessity
dictated. So did the current president's father! Now, several
states-including even conservative Virginia have seen pragmatic
Republicans take the lead in proposing new elite taxation as the
local fiscal crisis has deepened.
The likelihood of a political shift on
this issue is also suggested by the growing number of people who
have proposed direct wealth taxation. A large group of multimillionaires
has launched a campaign opposing elimination of taxes on inherited
wealth-paid only by the top 2%-as "bad for our democracy,
our economy, and our society." Yale law professors Bruce
Ackerman and Anne Alstott in their book The Stakeholder Society
have proposed an annual 2% wealth tax (after exempting the first
$80,000). Colgate economist Thomas Michl has urged a net-worth
tax, and Hofstra law professor Leon Friedman has proposed a 1%
tax on wealth owned by the top 1%. Even Donald Trump has proposed
a one time 14.25% net-worth tax on Americans with more than $10
million in assets.
Wealth taxation is common in Europe. Most
European wealth taxes have an exemption for low and moderate levels
of wealth (especially the value of pensions and annuities). Economist
Edward Wolff, who has studied these precedents carefully, suggests
that America might begin with a wealth tax based on the very modest
Swiss effort, with marginal rates between 0.05% and 0.3% after
exempting roughly the first $100,000 of assets for married couples.
He estimates that if this were done, only millionaires would pay
an additional 1% or more of their income in taxes.
Europe also offers examples of much more
aggressive approaches. Wealth taxation rates in 10 other European
countries are much higher than Switzerland's-between 1% and 3%
and would yield considerable revenues if applied here. Wolff calculated
that a 3% Swedish-style wealth tax in the United States would
have produced $545 billion in revenue in 1998. Although an updated
estimate is not available, nominal GDP increased about 19% between
1998 and 2002, and wealth taxes would likely produce revenues
that roughly tracked that increase.
Some writers have held that wealth taxes
are prohibited by the U.S. Constitution. There appear to be two
answers to this. The first is legal: Ackerman, a noted constitutional
expert, has argued at length in the Columbia Law Review that wealth
taxes are not only constitutional, but represent the heart of
both original and contemporary legal doctrine on taxation.
The second answer is political. We know
that courts have a way of bending to the winds of political-economic
reality over time. As the pain deepens, the courts are likely
one day to recognize the validity of the legal arguments in favor
of wealth taxation. Alternatively, political pressure may ultimately
mandate further constitutional change, just as it did in 1913
with regard to income taxation.
There is no way of knowing for sure. But
as with all important political change, the real answer will be
found only if and when pressure builds up both intellectually
and politically for a new course of action. The challenge, as
always, is not simply to propose, but to act.
Gar Alperovitz is professor of political
economy at the University of Maryland and president of the National
Center for Economic and Security Alternatives. He is the author
most recently of America Beyond Capitalism: Reclaiming Our Wealth,
Our Liberty, and Our Democracy (John Wiley & Sons, 2004).