A Framework for Income, Inheritance, and Wealth Tax in America amid Increasing Income Inequality when the Richest are Leaving even the Rich Far Behind

Abstract

Income inequality in America has run a full circle, and has now touched or even exceeded the dizzying heights of income recorded in 1928 before the Geat Depression of 1929.On the other hand, the middle class has beeon undergoing a relentless economic squeeze since 1974. The median family income has literally been stagnant for almost half a century.Stagnant incomes do not fully reflect the decline in the standard of living of most Americans. Facing job insecurity, rising health-care costs, the massive $1.75 trillion college loan debt, credit has become a palliative of the middle class to address the deeper anxieties of downward mobility.Many are unable to fulfill the “American Dream” because they cannot afford the middle class standard of living: having a good job, being able to retire in security, owning a home, having affordable health care, and a better future for their children.This inequality is now so vast that it is almost twice as high as in Europe.In 2017, an American CEO’s pay went up 361-times the median pay of a worker—by far the widest gap in the world.Because of an incentuous relationship between Washington and Wall Street, we have a tax code that has been hatched to reward wealthy individuals and corporations.Some of the world’s richest men paid just a tiny fraction of their income in federal tax in 2021. For the first time Trump’s tax cuts helped billionaires pay less than the working class.Many large U.S.-based multinational corporations employ accounting tricks to make profits made in America appear as if they were generated in offshore tax havens—with minimal or no taxes. Thus by using such a clever maneuver, multinationals are able to avoid paying an estimated $90 billion in federal income taxes each year,Encouraged by the Friedman doctrine, the 1970s represented a turning point when America took a sharp turn toward unfettered capitalism—and greed. American CEOs set themselves upon a journey toward maximizing shareholder value. And it is this radical ideology that has guided Ameican business over the last fifty years.This is a mind-set that encourages risk aversion and short-run behavior: an accountant’s short-cut to profits, with a focus on cost reduction, rather than long-term concerns about innovation, quality, and customer satisfaction. And it is this journey that has contributed so much to America’s industrial decline.A key development that has accelerated this decline is the financialization of America. In recent decades, the share of financial services has been about 7-8% of GDP. However, in sharp contrast, the sector accounts for 25-30% of all corporate profits. Yet, the sector has created only 4% of all jobs.In 1999 and 2000 America went through a massive deregulation of the financial markets, which proved to be disasterous, because it led--in 2008--to the worst stock-market crash in America since the Great Depression of 1929.Finance and its way of thinking have now come to permeate every facet of business, so much so that Wall Street is no longer supporting Main Street businesses that create jobs for the masses.As a result of this“cognitive capture,” while the policy decisions taken after 2008 crash resulted in huge gains for the financial industry, but losses for homeowners, small businesses, workers, and consumers. One of most depressing aftermaths of this crisis was that it wiped out $16 trillion in household wealth.The wealthy have compounded their wealth by stifling true, dynamic capitalism and making America no longer the land of opportunity that it once was. They have made America the most unequal, advanced industrial country while crippling growth, distorting key policy debates, and fomenting a divided society.The objective of this paper is to develop a federal-tax framework. Taxation is as much a political as an economic issue. There are two visions or schools of federal taxation. While one is grounded in lower taxes for the wealthy and the corporations; the other’s calling card is community: and shared prosperity. These two schools can be described as: (1) The School for the “Rich and the Privileged,” and (2) The School for the “Masses.”The former consists of three groups: (a)“Trickle-down” Economics; (b)“Supply-side Economics;” and (c)“Meritocracy” or the “Job Creators.”The latter has just one group: “Progressive Taxation.”We believe that a good way to judge the merits of the two schools of thought is to see their historic track record. So we looked at the economic history of America over the entire twentieth century. Economist John Kenneth Galbraith has called the “trickle-down” economics as the “horse-and-sparrow” theory. David Bradley argues, that another name for this theory should be “horse shit” economics.The “trickle-down” idea has a long pedigree, and has long been discredited. This is because higher inequality has not only not produced more growth, but, the median family income in America has been stagnant for almost a half century.The idea of “supply-side” economics was proposed under Ronald Reagan. This was based on the notion that emphasized deregulation and tax cuts: with the argument that this would free up the economy that would then lead to increase in the supply of goods and services—as well as incomes of individuals.This policy was in direct contradiction to Keynesian economic theory, according to which, aggregate demand--not supply--is the driving force in an economy.However, the idea did not work for Reagan. Neither did it work for Gorge W. Bush.Supporters of meritocracy try to peddle the myths that we are living in a meritocracy, in which great wealth is both earned and deserved. But what if the rich derive much of their income not from work they perform, but from the assets they own? Moreover, what if great wealth increasingly comes not from enterprise, but from inheritance?Presidential candidate Mitt Romney--and President, Bain Capital, a private equity firm--argued that 47 percent of Americans were paying no income tax. He said they were freeloaders because they were living off of government handouts. Ironically, Romney paid only 14% of his reported income as federal income tax in 2011: which is far less than what people with substantially less income paid. Second, the source of his income was Bain Capital. The private equity firms, like Bain Capital, are associated with offshore bank accounts and big corporate buyouts. In these buyouts, previously healthy firms are loaded up with debt, stripped of their assets, with mass layoffs, and after milking the firm’s assets are sold to the highest bidder.So, the reality is that it is people like Romney who are the real freeloaders.An important distinction we need to make is to recognize the difference between “Takers”: those stifling job creation, versus “Makers:” businesses that create real jobs.Finally, our analysis revealed that the “Rich and Priviledged” school consistently offered false promises that failed to materialize, but instead, produced big deficits. The birthplace of freedom—and progressive taxation--happens to be President FDR’s America. The years 1947-1973 are considered the golden years of America’s middle class. The foundation of this goldilocks economy was the social covenant of shared prosperity, based on President Kennedy’s dictum--that “a rising tide lifts all boats.” Its main features were: powerful unions, a high minimum wage, progressive taxation, and corporations providing health and retirement benefits.