Last month’s ProPublica revelations identified what many experts, some lawmakers, and a majority of Americans already knew about the U.S. tax code: Policymakers over the past several decades have created a system that allows some of the nation’s wealthiest individuals to pay little or no federal income tax each year.
Ongoing negotiations over the next round of recovery legislation give Congress an opportunity to reverse course by closing loopholes and rolling back tax cuts for those at the top, thereby raising the revenue needed to strengthen the nation’s infrastructure and respond to economic and racial inequalities, according to a new report from the Center on Budget & Policy Priorities.
Improving and expanding the taxation of wealth will bring more balance to the country’s tax code and raise the revenue we need to invest in a recovery that helps Pennsylvania and other states build a better future and an economy that works for everyone, not just the wealthy. Pennsylvania families contribute to the investments that create opportunity and prosperity for all of us. It’s time for the wealthiest Americans and corporations to do the same. All Pennsylvania members of Congress should support policies to advance tax fairness and fund our recovery.
The federal income tax accounts for roughly half of all federal revenue. And it’s essentially a voluntary tax for the richest Americans because much of their income comes in the form of gains in the value of their stocks and other assets and they can avoid taxes on those capital gains if they hold onto their assets rather than sell them.
The tax breaks and loopholes that make this possible have been expanded in recent years, including in the 2017 Trump tax cuts, helping to widen the enormous gaps in income and wealth between the nation’s richest and everyone else.
Many state and local tax codes worsen America’s economic and racial inequities by asking low- and middle-income taxpayers to pay a larger share of their income in taxes than the wealthiest taxpayers. In Pennsylvania, those with the lowest incomes (20% of taxpayers) face an average state and local tax rate that is more than twice the rate paid by the top 1 percent of households in the state. The average effective state and local tax rate is 13.8% for the lowest-income 20 percent of individuals and families, 11.1% for the middle 20 percent, and 6% for the top 1 percent.
To ensure the wealthiest Americans pay their fair share and contribute to much-needed public investments, federal lawmakers should address flaws in the U.S. tax code with the following reforms, all of which would affect only households with incomes above $400,000:
- Make more income of the nation’s wealthiest taxable each year (e.g., their unrealized capital gains)—or at least at some point. President Joe Biden has proposed taxing capital gains that have escaped taxation at the end of an individual’s lifetime.
- Reduce tax breaks tied to income for the wealthiest households. The president has also proposed eliminating the lower tax rates on capital gains and dividends for those with incomes over $1 million, taxing that income at the same tax rate as salaries and interest, and eliminating the deduction for pass-through income created in 2017. A new tax on the incomes of millionaires should also be strongly considered.
- Bolster other taxes, such as the corporate income tax and the estate tax, which fall most heavily on the wealthiest households. President Biden has proposed increasing the corporate tax rate to 28 percent, along with international tax changes to address the longstanding and rampant use of tax havens.
While none of these proposals alone would ensure that wealthy tax filers pay a fair amount of taxes, together they represent a commonsense step in the direction of greater tax fairness.