Editor’s Note: Lily Batchelder and David Kamin with the Economic Strategy Group at the Aspen Institute have laid out options to reverse Donald Trump’s $1.4 trillion tax cut and raise taxes on high income earners to ease income inequality and finance pressing needs. The following is Batchelder’s summation of their findings, which she presented on Twitter. You can read the full paper here.
ABSTRACT: The U.S. economy exhibits high inequality and low economic mobility across generations relative to other high-income countries. The U.S. will need to raise more revenues to reduce these disparities, finance much-needed new services and investments, and address the nation’s long-term fiscal needs.
This paper outlines policy options for raising a large amount of revenues primarily from the most affluent, first discussing potential incremental reforms and
then focusing on four main options for more structural reform: (1) dramatically increasing the top tax rates on labor and other ordinary income, (2) taxing the wealthy on accrued gains as they arise and at ordinary rates, (3) a wealth tax on high-net-worth individuals, and (4) a financial transactions tax.
Although we summarize the relative advantages and disadvantages of these approaches, we generally conclude that they all merit serious consideration. Several options are also complementary to one another.
In practice, however, the relative strengths of each of these policies will depend to a large extent on how each is designed after it has made its way through the legislative and regulatory process.
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The United States has one of highest levels of income and wealth inequality among high-income countries. Has one of lowest levels of intergenerational economic mobility. Means economic disparities btwn individuals reflect luck of one’s birth, not hard work, to especially large extent in United States.
The way the US taxes the wealthy is broken. Part of reason why is wealthy earn income and accrue wealth in very different ways from most Americans. Get much larger share of income from CGs, dividends, and income flowing through business entities they own.
The wealthy pay tax at much lower rates than would guess based on statutory rates. Is because, unlike wage earners, can classify and report their income in lower-taxed categories. Here is the patchwork of rates available to wealthy through just a few tax planning strategies.
Policymakers have proposed many measures to raise more revenue from the very wealthy. Together, can raise on the order of $4-5 trillion over 10 years.
But if policymakers dislike some of these proposals or want to raise more revenue from the wealthy to address mounting fiscal challenges and finance needed investments in low- and middle-income families, need to consider more structural reforms.
We discuss advantages and challenges associated with 4 potential structural reforms: (1) dramatically increasing top tax rates on labor/ordinary income, (2) taxing accrued gains as arise and at ordinary rates, (3) wealth tax, and (4) financial transactions tax.
We (very roughly) estimate an accrual tax limited to top 1% would raise $2.1T/10 if 15% avoidance rate, no other behavioral responses. Assumes MTM tax for publicly-traded assets taxed, retrospective accrual tax for other assets, CGs taxed at ordinary rates pre-TCJA.
We (very roughly) estimate an accrual tax limited to top 0.1% would raise $750B/10 if 15% avoidance rate, no other behavioral responses, CGs taxed at ordinary rates pre-TCJA.
We (very roughly) estimate a 2% wealth tax limited to top 1% (net worth over ~$10 million) would raise $5.1T/10 if 15% avoidance rate and no other behavioral responses.
We (very roughly) estimate a 2% wealth tax limited to top 0.1% (net worth over ~$43 million) would raise $2.6T/10 if 15% avoidance rate and no other behavioral responses.
Lily Batchelder is the Robert C. Kopple Family Professor of Taxation, NYU School of Law; firstname.lastname@example.org.
David Kamin is a Professor of Law, NYU School of Law; email@example.com.