Tomorrow morning, I’ll be joining CNBC’s Squawk Box to talk about a new effort tax the rich The segment will air at 7:50 ET.
I don’t mean the so-called multimillion tax that President Biden called for in his State of the Union address last week. This will almost certainly go nowhere. I’m talking about a state-led effort to raise taxes on billionaires and billionaires living in California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington.
Lawmakers in those eight states say they are looking for ways to address some of the inequities in the federal tax code. They point to the fact that income from investments receives preferential treatment compared to income from work.
And they complain that the rich have avoided “paying their fair share” by taking advantage of the tax code to legally avoid paying up to 163 billion dollars in taxes every year.
The Inflation Reduction Act, which includes 45.6 billion dollars to strengthen enforcement at the IRS would address some of the problem, but still leaves a lot of money on the table. Money that legislators in these eight states would like to use to finance investments in their communities.
Unlike the federal government, individual states actually need to “find the money” to pay for their expenses. And with more than 60 percent of the nation’s wealth residing in these states, it’s easy to see why lawmakers have focused on their high-net-worth residents. It’s a bit like asking the famous Willie Sutton why did he rob the bank
Each state has a slightly different plan for capturing some of that money. How The Washington Post put it:
Some of the state’s bills resemble the “wealth tax” introduced by Sen. Elizabeth Warren (D-Mass.) during her 2020 presidential bid. It’s a form of taxation that’s never been tried in the United States, in which the very wealthy would have to pay taxes annually on the assets they own, rather than just their income that year. Other bills focus on raising money from more conventional forms of taxation, including capital gains taxes and property taxes.
I have no idea how many of these states will succeed, but I wouldn’t be surprised if some of them manage to pass legislation that raises taxes on their wealthiest residents. Of course, many states already have estate taxes or inheritance taxes, so taxing wealth is not entirely new, but some of the newer proposals have already been found. court challenges
In addition to constitutional objections, critics argue that the rich will simply move to more tax-friendly states.
And there are many. Right now, at least 24 states they are considering legislation that would move them in the opposite direction, lowering personal income tax rates, enacting flat taxes, cutting property taxes, etc.
Of course, the argument is always that cutting taxes will make states more attractive places to work and do business, which ultimately means that states will have even more income to work. In reality, as we’ve seen time and time again, things tend to work out different.
[A] A decade ago in Kansas, after Republican Gov. Sam Brownback instituted tax cuts for the wealthy that [Art] Laffer praised as a “revolution in a corn field,” State leaders had to impose severe cuts to education and infrastructure as they struggled to close a massive deficit. The state legislature then reversed the tax cuts.
“It went pretty badly,” said Bruce Bartlett, a former Reagan domestic policy adviser and Laffer critic. “He lost so much revenue that the same people who passed the tax cut had to pass an increase to keep the whole financial enterprise afloat. It shows the lack of seriousness that underlies all of Arthur’s analysis.
I was living in Kansas for The Brownback Tax Cut Disaster, and I had two children in public school when things started to go really bad. Like Heather Boushey explained:
[T]the experiment was such a failure that his party turned against him. In 2017, the Republican-dominated legislature, overriding the governor’s vetohe reversed the tax cuts.
That summer we moved to New York.
I’m generally in favor of what these eight states are trying to do. They are looking for a way to address issues such as lack of affordable child care and homelessness in their communities in a way that is politically popular. I surveys they show that there is substantial bipartisan support for raising taxes on the wealthy.
Recent polls indicate a huge increase in voter appetite for taxing wealthy Americans. Throughout the 20th century, Gallup polls found that less than half of Americans favored taxing the wealthy, before a slim majority—just 52 percent—turned in favor of an estate tax in 2012. But a Vox/Data for Progress poll in 2021 found 71% support for raising taxes on the richest 2% of Americans, while a 2020 Reuters poll found 64% support for a wealth tax, a slight increase from a 2019 Brookings poll which found 61% support for taxing the rich.
I wish Congress would do more to clean up the federal tax code, which is a huge mess and a big part of the reason income and wealth inequality has risen so sharply over the decades. Enforcing the laws already on the books would address some of the problems, but there are hundreds (if not thousands) of ways Congress could make the tax code more efficient and fairer.
Ending the base increase and eliminate (or substantially limit) asset-based lending would help So I would close the carried a gap of interest. And it makes no sense—in my opinion—to keep the preferential treatment on capital gains. The bottom 80% of households only get about 1% of their income from capital gains, while the top 1% get more than 20% of their income from capital gains.
By making changes like these, Congress could address some of what legislators in these eight states hope to achieve in terms of tax justice. But they would not, on their own, result in better public services at the state level. Because of this, these states need more money to spend.
Nothing these eight states are proposing would do that substantially reduce income and wealth inequality in America. That doesn’t mean it doesn’t help. It would be slower the growth rate (of wealth and income) among a small segment of the population in exchange for improved education, childcare, housing, transportation, etc. within these states. And that would make a huge difference in the lives of tens of millions of Americans.
Alternatively, the federal government could further ease the strain on families by reinstating the extended Tax credit for children (CTC), pass Medicare-for-All, or make public colleges and universities free. But none of that will happen anytime soon.
Hence Willie Sutton’s solution.
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