Untapped Revenue

 

The United States economy has struggled to maintain stability over the past several decades. Raising taxes on those who receive an income much greater than the national average, however, will provide a boost in the economy that can allow for improvements in various sectors of society, including schools, roads and highways, and public safety. While improving societal conditions, raising taxes on the wealthy can also help to chip away at the tremendous national debt that has been building up over the last half century. Recent studies have shown that “raising taxes to 39.6 percent on [those making $250,000 or more] would yield around $40 billion to $45 billion in added tax revenue in the first year of the president’s plan” (Frank). This is a rather modest proposal, increasing the rate by only 0.6 percent, yet it provides over $40 billion to the U.S. economy. This money can then be used, for example, to improve school systems across the nation by providing books, computers, renovations, more teachers, or whatever other needs the schools may have.

           

These taxes, however, are based on earned income taxes. While wealthy individuals do have an earned income that is taxed, many of them also have an unearned income which yields millions, even billions of dollars that is taxed at a much lower rate than earned income. Unearned income includes money made from investments such as bonds and stocks. Investment income has a tax rate cap of 23.8%, while income from work has a tax rate cap of 43.4% (TaxFairness). This discrepancy in tax rates between earned and unearned income illustrates the idea that it is much easier to make money with money than it is to make money with hard work; the rich can get richer while the less wealthy struggle to move up in their economic class. These ‘loopholes’ in taxation have created a situation where “taxing investment income at a much lower rate than salaries and wages are taxed loses $1.3 trillion over 10 years” (TaxFairness). That is a massive amount of money to lose out on because of faulty tax policies. While investments are sometimes a risky way to make money, they should not be taxed at a rate almost half that of salary and wage income. This is especially true when those investing are making hundreds of millions of dollars on these investments and paying only a fraction of that in taxes. “The richest one percent of Americans pay a top federal rate of 29 percent…because almost a third of their income derives from capital gains and dividends” (Porter). While even 29 percent may seem like a large number to some people, keep in mind that these are people who are making hundreds of millions if not billions of dollars. 29% of one billion is $290 million. A large sum of money, yes, but so is the $710 million that they get to keep. Saying that the richest Americans pay the largest amount of money in taxes is true, but the reality is that they could pay much more and still be wealthier than most people could ever imagine.

           

With a large portion of income coming from investments, wealthier Americans generally have a lower effective tax rate than most middle class Americans. The “effective tax rate for individuals is the average rate at which their total income is taxed” (Investopedia). In the United States, “the richest 1% paid an effective federal income tax rate of 24.7% in 2014, someone making an average of $75,000 is paying a 19.7% rate” (TaxFairness). A difference of hundreds of millions of dollars in income relates to a 5% increase in tax rate. Someone making $75,000 a year is paying around $14,775 in taxes, leaving them with $60,225 to spend and save if possible. Someone making, for example, $500 million is taxed $123,500,000, leaving them with $376,500,000 to spend and save. With this money, the wealthy will typically re-invest in other stocks or bonds, further increasing their wealth while still being able to maintain a minimal tax rate. Because of the much lesser tax rates on investments, “the average federal income tax rate of the richest 400 Americans was just 20 percent in 2009” (TaxFairness). This is a huge portion of money that the government is missing out on because our tax laws and policies have failed to adapt to the changing forms of income. In fact, many of our policies have regressed as “in the early 1950’s… the top federal income tax rate exceeded 90 percent. In 1980, the top marginal rate was 70 percent for families making more than $215,400 – about $587,000 in current dollars” (Porter). Today that rate has dropped down to a maximum of 43.4 percent. Even this rate of 43% would be an improvement if all earnings were taxed at this rate, but they are not. A majority of earnings made by the wealthiest American’s come from investments and are therefore taxed at a much lower rate. An increase in tax rates on investments would create a much more fair and equal effective tax rate across the nation. Those making $75,000 a year would no longer be paying a tax rate just below that of a billionaire, but rather everyone would be paying a tax rate more proportionate to their total yearly income.

           

One of the most prevalent arguments against raising taxes on the wealthy is that doing so will slow economic growth throughout the nation. This notion, however, is simply not true. A recent study conducted by Emmanuel Saez, an economist at the University of California, found that “while the rich would respond to a big tax increase by shielding income from the tax man and working less, this would not slow the economy at all. That’s because a lot of what the rich do does not, in fact, generate economic growth” (Porter). Over the past 4 decades, tax rates on the rich have consistently fallen, yet there has been little to no growth in the economy. In fact, there has actually been an economic decline. Keeping tax rates low for the rich will not bolster the economy, but instead bolster the bank accounts of these rich men and women. Most wealthy people in the U.S. are only concerned with acquiring more wealth, not with improving our national economy. They will not use this money to help others, but rather they will use this money to help themselves by re-investing in areas that they know will make them more money, and once again, this money gained will not be taxed on the same spectrum as earned income tax. Saez’s study found that “top tax rates could go as high as 80 percent” without causing the government to lose money from wealthier individuals hiding their assets (Porter). This idea of ‘hiding assets’ stemmed from Arthur Laffer, who argued that “if taxes were too high…people would come up with ways to avoid or evade them” (Porter). While this may be true after a certain point, it is unknown where this point actually exists, and rather than try to find out, policies have been enacted to keep taxes seemingly as low as possible. Saez’s study also found that “raising the top tax rate on the top 1 percent of earners to 67 percent would raise about $4 trillion over a decade” (Porter). This is a massive sum of money that the government not only could use, but that it actually needs. $4 trillion could provide countless improvements across the board, from renovating old, dilapidated schools to providing more police officers per district. The money gained from these raised taxes do not need to be appropriated to one sector or another, rather it can be used in various budgets that allow for growth in all parts of society.

           

Another argument against raising taxes on the rich is that they already pay enough in taxes, and that they can’t afford to pay more. This again, is not a true statement. As was discussed earlier, the top 400 wealthiest individuals pay an average tax rate of 20 percent, leaving them with 80 percent of their earnings. An overwhelming majority of people in the United States live on under $100,000 a year. Someone making one million dollars a year could pay 80% of their income towards taxes and still have double the amount of money that someone else makes total in a year before taxes. Saying that the rich cannot afford to pay more in taxes is a ludicrous statement because not only could they pay much more in taxes, but they would still be in an economic standing well above most other individuals in the United States.

           

The United States economy is struggling to find stable ground and grow out of the rut that it has now become entrenched within. Budgets are failing, people are living in worse and worse poverty, and yet the wealthiest Americans continue to get richer and richer. Taxes on the rich over the last 50 years have consistently fallen, yet no economic growth has been developed. The only growth that has occurred is within the bank accounts of these super-rich Americans, who under these faulty tax laws have found loopholes allowing them to keep most, if not all of their income. I am proposing a tax increase on both earned and unearned income of those making above $250,000 in the United States. These raised taxes will not debilitate the rich in any way; they will still be able to live the lavish life that they have become accustomed to, but they will be paying a larger portion of their income in taxes. This money will then be used to improve various sectors and facets of our nation, including public schools, roads and highways, police and fire departments, our national debt, etc. These raised taxes are not an unfair burden being placed on the rich. These raised taxes are a leveling factor, equaling out the responsibilities between the rich and the middle and lower class and creating a much more balanced tax burden.