Should we hit the rich with taxes? You bet!

US President Donald Trump promised struggling working-class voters that he heard their frustrations and would act.

He did: He pushed through a tax cut that made income inequality worse. In 2018, for the first time, the 400 richest US households paid a lower average tax rate than any other income group, according to new research by two economists.

Those billionaires paid an average total rate of 23 per cent in 2018, down from the 70 per cent their 1950 counterparts paid. Meanwhile, the bottom 10th of households paid an average of 26 per cent, up from 16 per cent in 1950.

That's the rot in our system: Great wealth has translated into immense political power, which is then leveraged to multiply that wealth and power all over again — and also multiply the suffering of those at the bottom. This is a legal corruption that Trump magnified but that predated him and will outlast him; this is America's cancer.

We hear protests about "class warfare" and warnings not to try to "soak the rich". But as Warren Buffett has observed: "There's class warfare, all right. But it's my class, the rich class, that's making war, and we're winning."

The infuriating data on tax rates, reported a few days ago by my colleague David Leonhardt, come from a new book, The Triumph of Injustice, by Emmanuel Saez and Gabriel Zucman. The class warfare against struggling Americans has unfolded in many dimensions aside from tax policy — factory closings and lack of job retraining, corporate greed and irresponsibility, assaults on labour unions, stingy social welfare, mass incarceration and so on — and we've seen the results in rising "deaths of despair" from drugs, alcohol and suicide. America's richest men now live almost 15 years longer than the poorest men — roughly the same gap in life expectancy as exists between the US and Nigeria.

As a society, instead of playing Robin Hood to smooth out the inequities, we've played the Sheriff of Nottingham. Lawrence Summers, the economist and former Treasury secretary, has calculated that if we had the same income distribution today as we had in 1979, the bottom 80 per cent would have about an extra $US1 trillion each year and the top 1 per cent would have about $US1 trillion less.

Instead, each household at the top has averaged an annual bonus of more than $US700,000 a year.

One of the most consequential political debates in the coming years will be whether to raise taxes on the wealthy. Senator Alexandria Ocasio-Cortez has suggested returning to a 70 per cent marginal income tax rate, and both Senators Elizabeth Warren and Bernie Sanders have proposed taxes on wealth in addition to income.

Two MIT economists, Abhijit V. Banerjee and Esther Duflo, demolish the traditional arguments against higher taxes on the wealthy in an incisive book out next month, Good Economics for Hard Times. While major league sports teams have salary caps that limit athletes' pay, Banerjee and Duflo note that no one argues "that players would play harder if only they were paid a little (or a lot) more. Everybody agrees that the drive to be best is sufficient."

Considerable evidence suggests that the same is true of CEOs, and that higher tax rates don't depress effort. In Switzerland, a shift in tax timing meant that the Swiss were not taxed for one year. This tax holiday, which they knew of in advance, turned out to have no impact on how hard people worked, Banerjee and Duflo write.

"High marginal income tax rates, applied only to very high incomes, are a perfectly sensible way to limit the explosion of top wealth inequality," Banerjee and Duflo write.

There are legitimate concerns about tax evasion, but it would help if the IRS focused its audits less on impoverished Americans claiming the earned-income tax credit and more on wealthy people with murky assets. It's ridiculous that the county in all America with the highest audit rate is Humphreys County, Mississippi, which is poor, rural and three-quarters black.

As for the wealth tax, which in Warren's version would begin at $US50 million, there are legitimate concerns about how to value assets, avoid marriage penalties and enable zillionaires to pay when their wealth is illiquid. But we already have a wealth tax — the property tax — that hits widows on Social Security with an illiquid asset (the family home). If these widows can figure it out, tycoons can as well.

Even if Trump disappeared tomorrow, we would still live in a country where the top 1 per cent own more than the bottom 90 per cent — and where on any given night more than 100,000 children are homeless.

By raising taxes on the wealthy, we could end the lead poisoning that afflicts half a million American children, we could provide high-quality preschool for all, we could offer treatment for all people with addictions and we could ensure that virtually all children graduate from a decent high school and at least get a crack at college.

The wealthy would still have more money than they could ever spend: Jeff Bezos would have had $US87 billion in 2018 if Warren's wealth tax had been in place all along, rather than $US160 billion, according to calculations of Saez and Zucman. But we would be, I think, a fairer and better nation.

So should we soak the rich? You bet we should.

The New York Times


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