Tax code

How the U.S. tax code drives income inequality

Matthew X. Rolling

Over the past decades, wealth inequalities in our country have started to spiral out of control.

I believe one of the main culprits is the US tax code.

When you step back and take a look at our tax laws, they seem like they were written for a select group of people. People who are married, have children, own a house or two, and own stocks.

Considering that only 20% of millennials are married, only 44% of African Americans own a home and 90% of the stock market belongs to the richest 10% of American households – the Venn diagram for whom the tax code was built for startups look like a very specific group of people.

Matthew X. Rolling

And as the ultra-rich who benefit from this system have become even richer, we have started to see them taking initiatives and roles traditionally reserved for government, like Mackenzie Scott, the ex-wife of Amazon founder Jeff Bezos. , funding colleges. , Bill Gates funding public health initiatives or Elon Musk funding space exploration. While laudable, these efforts fundamentally take control of government out of the hands of the people and into the hands of the wealthy elite in a very undemocratic manner.

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The generosity the tax code bestows on the ultra-rich was notoriously demonstrated last year when billionaire Donald Trump’s $ 750.00 tax liability was finally exposed. Indeed, the benefits of the tax code for billionaires have grown so out of hand that a University of California study found that for the first time in a century, the working class is paying a higher tax rate than the working class. billionaires. Our tax system has evolved to the point that it can no longer be called “progressive”.

Different prices for different people

First, let’s understand one of the main reasons the tax code favors the wealthy: capital gains tax rates versus regular income tax rates.

Imagine your favorite NFL star signing a 10-year contract for $ 10 million a year.

Let’s also imagine that a high net worth investor earns $ 10 million per year by selling stocks that have long term gains (investments held for more than a year).

NFL Star and Investor to Make $ 100 Million Over the Next Decade; however, the investor would be taxed at much more favorable capital gains rates, which last year were capped at 20%. The active athlete would pay over $ 37 million (at 2020 tax rates) and keep nearly $ 63 million while the investor would pay $ 20 million, or just over half of the taxes, by keeping 80% of the money he earned.

Just to be clear, dear reader, you are probably taxed more like a professional athlete than a wealthy investor.

As the ultra-rich began to use their earnings to take over government functions, it caught them in the headlines and a halo effect for their good deeds. But what does it really mean for a billionaire to make a hypothetical donation of $ 50 million? And what does this change of role mean for society?

Let’s first put the $ 50 million donation into perspective. The median net wealth of an American household is approximately $ 121,000. If a billionaire is worth $ 50 billion and gives a giveaway of $ 50 million, that is algebraically equivalent to the average American household giving a giveaway of $ 242.00 – that’s just not a lot of skin on their back.

And, in case you were wondering, it would literally take an average American earning $ 50,000 a year 1,000,000 years to make $ 50 billion. In our simple example, if the person worth $ 50 billion were taxed at the same rate as the professional athlete, the proceeds from the sale of his fortune would generate an additional $ 8 billion in tax revenue, or 166 times a donation of $ 50 million. of dollars.

Noblesse oblige is for monarchies

The shadow government of billionaires usurping the role of government in our society has created a dangerous shift in power. Historically, we the people have used the ballot box to make decisions about elections and initiatives to decide who and how we pay for our common defense, the common good and our common wealth.

The increased concentration of power in the hands of the wealthy elite looks less like a democracy and more like a monarchy.

If we are serious about creating a world where more Americans have a voice in our government and more Americans have an opportunity for prosperity, we must first reverse the scenario on a tax system that penalizes work and revere wealth.

Because this tax expert does not want to live in a society where the well-being of our neighbors and the security of our infrastructures depend on the generosity or not of the kings of the industry.

Matthew X. Rolling is the Executive Director of the Office of Business Innovation at Wayne State University