The real reason we want to raise taxes on the rich

My name is Bob Lord and I’m the Patriotic Millionaires’ Senior Advisor on Tax Policy. Before my time here, I practiced tax law for forty years and also ran for Congress back in 2008.

We usually write this newsletter in the collective voice of the Patriotic Millionaires’ membership. This week though, I’d like to take the reins and give you my perspective on the new Republican tax package, and share my thoughts on the real reason we should care about taxing the rich.

Last week, the Republican-controlled House Ways and Means Committee voted to advance the American Families and Jobs Act, a tax package comprised of three bills that will, among other things, extend a number of the tax cuts enacted as part of the Trump 2017 Tax Cuts and Jobs Act. Just like its predecessor, the tax cuts from this new package will overwhelmingly benefit the wealthy. According to an analysis by the Institute on Taxation and Economic Policy, the top one percent of earners would see an average tax cut of $16,560 under the proposal in 2024, while the bottom 20 percent would receive an average tax cut of just $40.

Congressional Democrats came out swinging against the GOP tax package, and so did we. Our members know better than anyone that rich people don’t need tax cuts. Congress should be working to RAISE, not cut, taxes on the wealthy, which is why our members launched the Patriotic Millionaires organization over a decade ago.

This new bill from Republicans is as ridiculous as any trickle-down proposal they’ve put out, and we’ll spend plenty of time in future weeks tearing it apart, but I don’t want to focus this week’s email solely on their efforts to give even more tax cuts to the rich. Instead, as we head into yet another fight over taxing the rich, I want to articulate a bit more clearly why we care about raising taxes on the rich.

As we said in last week’s Closer Look, we don’t think, as some do, that we need to raise taxes on the rich to raise revenue to “pay for” things like education, infrastructure, and transportation. Instead, we believe we need to raise taxes on the rich to reduce inequality.

The problem with the “raising taxes to pay for things” model is that it will drive a result like the one we always see coming with Republican tax proposals. If one side dogmatically opposes taxes and the other sees taxes only as a vehicle to justify spending programs, while the financial backing of both sides is coming from the same people who would bear the burden of higher taxes, some of the most important principles of tax policy will rarely be served.

Which is why we need an entirely different framing for the purpose of taxes. Here’s how we see it:

At the state level, it’s pretty simple: the state needs the revenue to pay for the government and the services it provides. At the federal level, it’s more complicated.

Imagine how things would work if you were creating a hypothetical country from scratch. Job 1 would be to form a government, which would require employing people and paying for things like the construction of buildings. This would mean that you would have to create a currency to pay for those expenses. But you can’t just start issuing currency, because there’s no inherent value to it, right? (To acquire goods like food, clothing, etc., people could simply barter with one another without using any of your new money.) So, in order to make your currency actually worth something in your new country, you need to impose taxes, payable only in that currency. In other words, if people HAVE to pay taxes in order to enjoy the right to live in your country, they will have to start using your currency, which will give it value. So that’s one purpose of taxes — infusing the currency with value.

The next consideration is how much tax to impose. Do you want to balance the budget? Probably not, right? That would mean taking back in tax every dollar you pumped into your country’s economy. You want some of that currency to stay out there to facilitate commercial activity. But on the other hand, you also don’t want to tax too lightly and have too much money floating in the economy, because then the currency has little or no value and you run the risk of inflation and demand/supply mismatches. (A budding economy would only be able to produce so many goods at a time, and might not be able to handle high levels of demand.) So you need to strike a balance, which highlights a second purpose for taxes: keeping the liquidity of the economy in about the right position – enough to lubricate the economy and stimulate commercial activity, but not so much that inflation gets out of control.

The final consideration is who to tax. That’s where we need taxation to counteract the economic forces that are in play. We want to make sure the folks struggling to get by are taxed little or not at all. And we want to impose heavier taxes on the rich because economies operating under democratic capitalist models tend to push wealth and income up to the top. In other words, we also need tax policy to control inequality.

So there you have it. The three purposes of taxes, as we see it, are to 1) infuse currency with value 2) keep the liquidity of the economy in the right position (i.e. not too much money floating around, but also not too little) and 3) control inequality.

Can we reconcile this with the idea that the purpose of taxes is to raise revenue to pay for the government? Yes, if we keep in mind that the federal government is fundamentally different from state and local governments. State and local governments DO, in fact, raise taxes to “pay for” things like roads, schools, courts, and parks. They operate very similarly to private entities in that they can really only spend what they take in – they must raise money in the form of taxes before they can spend it.

The federal government, on the other hand, is different. Because it issues the currency that we all use, it does not need to raise revenue to “pay for” things. It is not subject to the same limitations as households, businesses, and state and local governments. But that doesn’t mean it doesn’t need to raise taxes – it certainly does, for the reasons outlined above.

I am not trying to suggest that there is no connection whatsoever between taxes and spending at the federal level. When additional taxes are imposed on the rich, additional spending will have to kick in because we need to maintain a reasonable balance between taxing and spending. So while taxes are not imposed to fund spending at the federal level, they nonetheless drive spending. And there’s no shortage of programs on which to spend.

Our main concern with taxes at Patriotic Millionaires is their role in containing inequality. Unfortunately, over the past four decades, they have spectacularly failed in this role. Our tax code is not nearly as progressive as it once was – doctors making $700,000 per year pay the same top marginal tax rate as billionaires making $100 million per year. Loopholes and preferential rates for various categories of income that flow mainly to the rich allow some rich people to get away with paying next to nothing – or sometimes literally nothing – in taxes. We also have no tax at all that directly counteracts the accumulation of obscenely large fortunes; the federal estate tax originally was designed to do this, but it has failed to achieve that objective.

Consequently, inequality has reached a level so extreme that it threatens to blow up our society. It has reached a crisis point. Too many Americans now hold wealth so great that its significance lies not in the goods and services it can buy but rather in the power it can buy. That’s a threat to our society.

Increasing taxes on the rich is imperative to address the destabilizing inequality that exists today. By giving more tax cuts to the rich, the new Republican tax package would be a huge step backward in this regard. In contrast, we’re doing all we can at Patriotic Millionaires to take a step forward in this fight by calling on Congress to raise taxes on the wealthy and recommit themselves to use taxes to shrink the gap between the rich and the poor.

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