Representation, Now Taxation

Taxation was one of the most polarizing topics of the recent U.S. electoral campaign. The incumbent, President Donald Trump, promised to extend beyond 2025 the tax cuts he approved in 2017. Challenger Joe Biden, now the president-elect, instead put forth plans to hike taxes for both corporations and high-income individuals in order to fund education, health care, and other social programs. Although his proposal is far less ambitious than what his rivals to the left, Sens. Bernie Sanders and Elizabeth Warren, suggested during their own presidential nomination campaigns, it would represent a first step to address inequality and restore fairness to an unjust tax system. However, without a Democratic majority in the Senate, Biden’s tax plan is unlikely to see the light of day.

Since the 1980s, the American economy has gone through a radical metamorphosis. In 1980, the top 1 percent income earners controlled around 10 percent of national pretax income, while the bottom half’s share was around 20 percent. Today, those figures are reversed. Globalization, skills-biased technological progress, and political cronyism are the usual suspects. But what is peculiar to the U.S. system among other Western democracies is the lack of progressivity of its tax system: The system fails to make the rich pay their fair share of taxes. In turn, taxation becomes an amplifier—instead of a leveler—of inequalities.

According to a number of studies by the University of California, Berkeley, economists Emmanuel Saez and Gabriel Zucman, while the individual income tax is formally progressive—its graduated tax rate goes from 0 percent for the lowest earners to 37 percent for the highest—the very rich manage to avoid paying this kind of tax almost entirely. The bulk of their earnings come from dividends, which are not only taxed at a rate of just 20 percent but are also exempt from Social Security payroll taxes, which are levied on labor earnings only.

The other major source of tax injustice comes from the U.S. system of consumption taxes. In the United States, sales and excise taxes exempt most services, which tend to be consumed more by the rich than by the members of the working class. Country club memberships and lawyer fees, for example, are not subject to any sales tax, whereas purchases of food, clothes, and home appliances are. As a result, the average tax rate, instead of increasing along with income, is flat.

The flattening of the U.S. tax system is a relatively new phenomenon. Public opinion started to turn against tax progressivity in the 1970s, owing to the threat of capital flight, the emergence of an aggressive tax-dodging industry, and the intensification of global tax competition. Since then, average tax rates have declined for everyone, including the poor. But the rich have benefited the most—and massively so. The top marginal federal income tax rate has fallen from 70 percent to 37 percent. The corporate tax rate has declined from about 50 percent to around 20 percent. And estate taxes on large bequests have proved to be highly ineffective, owing to exemptions and deductions. (Not just in the United States: “Inheritance,” as the Guardian put it on Nov. 9, “not work, has become the main route to middle-class home ownership.”)

Biden’s electoral platform envisaged the restoration of some degree of progressivity. He proposed hiking the top marginal rate on income above $400,000 to 39.6 percent from 37 percent, while increasing the corporate tax rate to 28 percent from 21 percent. He also wants to eliminate tax breaks for capital gains and dividends, and he has released plans to subject incomes above $400,000 to payroll taxes. But a split Congress will hardly pass any of those measures.

If Biden is constrained in his ability to use fiscal policy to tame income disparities, then it will be up to corporations to mitigate inequality by closing the salary gap between the top and bottom earners within their companies. They’ve been resistant to doing anything of the kind, but with U.S. society emerging so fractured from this election, corporate America may yet start to feel responsibility to bring some fairness to the system—or else face even less amenable political circumstances later on.