The key plank of Bernie Sander’s campaign for president is to reduce the growing income and wealth inequality in the United States. On his official website, under the issue of income and wealth inequality is the statement “The issue of wealth and income inequality is the great moral issue of our time, it is the great economic issue of our time, and it is the great political issue of our time.”
A key part of any program to reduce economic inequality is to alter our system of taxation. If enacted, Sander’s proposals would increase the taxes on those with higher incomes.
However, the Sander’s campaign proposals keep in place much of the unfairness in our existing system of taxation that exacerbates inequality.
Perhaps, the biggest hole in his proposals is a greater focus on the taxation of income and not on the taxation of wealth—where one finds the greatest disparity.
When the wealth of the super-rich increases during a year, it presumably is mostly a result of an increase in the value of their assets. Until the assets are sold, this increase in value is not subject to taxation.
By contrast, if a worker’s salary goes up by $1,000, taxes will be paid on the entire $1,000.
Wealth Surtax Only After a Wealthy Person Dies
Under Sander’s proposal, taxes on the part of estates worth more than $3.5 million would be 45% and as high as 55% on the part of an estate worth more than $50 million. He also proposes an additional tax of 10% on the estate of billionaires. Shouldn’t this 10% surtax be even higher on estates worth $10 billion or more? Should it only apply to estates worth more than a billion? Shouldn’t estates worth, for example, half that much—a “mere” $500 million also be subject to such a surtax?
Unclear is whether Sanders’ estate surtax would be applied to the wealth the superrich placed into foundations or other similar institutions through which they shape social policy.
Should a just society seeking to reduce inequality ever allow any individual to ever be worth billions of dollars and be able to exercise the power that goes with that wealth?
Would making the surtax a current yearly tax instead of being a one-time tax after the person dies be more just? Were it a current tax of 10%, the wealth of Bill Gates would shrink from $80 billion to a “paltry” $72 billion.
Social Security Tax Proposal
Currently, an employee pays social security taxes on earned income at a rate of 6.2%, whether making $10,000/year or $100,000. In other words, it’s a flat tax that is not based on one’s
ability to pay. Under the current law, the tax is capped at the first $118,500 of one’s salary/pay which results in a person making $118,500 paying the same amount of social security taxes as one with a yearly salary of $1,185,000 or even $11,850,000. The rate of social security taxation of the latter is .062%, or a hundred times lower than the rate paid by a person earning $10,000/year.
Sanders calls for lifting the cap on social security taxes. Under Sanders’ plan, individuals earning $11,850,000 a year would pay the same percent of their earned income in social security taxes as one making $10,000.
Should a worker who makes an income less than what is considered the threshold for poverty be subject to this tax? Shouldn’t the person making $11.85 million pay social security taxes at a higher rate?
Tax Rates on Investment Income Proposal
Starting with Bill Clinton’s presidency, most dividends and gains from the sale of property such as stocks owned for more than one year are taxed at a much lower rate than income earned at a job. For example, in 2015, a single person who rents, who has no deductions or investments, and whose only income is $50,000 earned at a job pays $5,725 in federal income taxes, $3,100 in social security taxes, and $725 in medicare taxes for a total of $9,550, or over 19% of their income. By contrast, a single person with similar circumstances whose only source of income is $50,000 in the form of dividends would pay less than $400 in federal income taxes–under 1% of their income–and no social security or medicare taxes.
Sanders proposes to end the lower tax rate on investment income (in the form of dividends and long term capital gains) on the part of total income in excess of $200,000 if one is single, or $250,000 if a couple. However, single people with “only” $200,000 of income from dividends would remain eligible for the lower tax rate on investment income. Such an individual would currently pay less than $23,000 in federal taxes which is less than 12% of their income–compared to more than 19% paid by the worker cited above earning $50,000/year.
Those with dividends totaling $200,000 are not poor. They could be receiving dividends at a rate of 4% on stock valued at $5 million, could also own additional stocks worth millions that pay no dividends, own expensive homes and possess a large retirement account.
To help to further reduce inequality, shouldn’t taxes on investment income be subject to an even higher rate than the rate of taxes imposed on the wages and salaries of workers?
Higher Proposed Tax Rates, But Tax Deduction Benefits that Favor those with Higher Incomes Would Remain
Sanders partly addresses inequality by proposing higher income tax rates raising them to 43% on income between $500,000 and $2 million, to as high as 52% on income in excess of $10 million, compared to the current highest rate of 39.6%.
Connected to the proposed higher tax rates are limits on the tax benefits for deductions to 28% which is less than the possible current benefit of 39.6%.
The impact of deductions on the amount one pays in taxes works as follows. For a mortgage interest payment of $10,000/year, a person with a large income may currently save $3,960 in taxes while a person with a much lower income might save only $1,500 or even $0. Under Sander’s proposal, a high income individual would now save at most $2,800 on this $10,000 expense. His proposal, while reducing the tax benefit of a deduction, still keeps in place a larger tax savings on a similar expenditure for one with a larger income. Is that fair? 1
The only people who achieve any savings from these type of deductions are those who itemize their deductions usually because they have large medical expenses and/or state taxes and/or home mortgage expenses. By contrast, renters receive no tax break for essentially paying off their landlord’s mortgage. Furthermore, those who do not itemize do not receive any comparable tax break.
Additionally, Sanders offers no proposal that stops speculators from deducting as an itemized deduction the interest they pay on loans used to engage in speculation. That means the government loses revenue—essentially subsidizing speculation.
Surprisingly, Sanders also proposes to eliminate other provisions that can limit the tax breaks that especially benefit the wealthy. They include dropping:
1 the alternative minimum tax which is a different way of calculating one’s taxes under a system that eliminates or reduces the regular tax savings from certain deductions, and can result in one having to pay more in taxes;
2 the personal exemption phase-out which prevents people with a higher income from taking this deduction; and
3 the phase-out of itemized deductions that reduces these deductions for those with a higher income.
Instead of eliminating these provisions, Sanders could reform them to make sure they prevent those with the highest incomes from paying a fairer share of income taxes by taking advantage of deductions and other loopholes.
Taxes, $15/Hour and Single Payer
Sanders could offer more creative proposals. For example, he favors a $15/hour minimum wage, but under his proposal, the minimum wage would not reach $15/hour until 2020—near the end of a first term. What he could offer in the meantime is to require employers to list the number of hours a person has worked on their W-2 to arrive at their average hourly rate of pay for the year. The government could then offer a refundable tax credit to bring the pay up to $15/hour.
Sanders also uses the tax code to pay for his single payer medical plan. He plans to finance it with a tax of 2.2% on all taxable income which, again, is a tax not based on one’s ability to pay. A higher tax rate than 2.2% should be imposed on those with a greater ability to pay to further reduce inequality.
Sanders’ proposals are refreshing compared to what is being offered by all the other major candidates. However, if the goal is to significantly reduce economic inequality, they would need to go much further. His proposals are a far cry from being revolutionary.
1 An alternative and fairer approach would be to substitute a refundable tax credit as a percent of the expense instead of letting one deduct the expense from their income. To make the benefit more progressive and based on one’s ability to pay, the credit would need to be phased out for those with a higher income.