I think just normal, progressive taxation. The less you make, the less tax you should pay.
Adam Smith proposed this in The Wealth of Nations. He said because the cost of basic necessities is the same for the poor and the rich, that the rich should pay “not only in proportion to their wealth, but somewhat more than that proportion”. He said this would be a more efficient way to fund social investments, like education. Adam Smith sensed, and modern-day economists have now accumulated the data, that excessive inequality is inefficient for productivity, growth and taxation.
The American revolutionary Thomas Paine also proposed a form of progressive taxation: namely, the estate tax. He proposed that because the amount of available land is finite, and because historically landowners formed an aristocracy that imposed monarchy and stifled democratic government, that anyone who owns property should owe some small amount back to the community. He also felt that inherited wealth, like the kind perpetuating dynasties in Europe, did not promote a meritocracy like the wealth one earns in one’s own lifetime.
Because of this, Paine proposed that all inheritances be taxed at a modest 10%. I.e., the estate tax, or what contemporary critics in America derisively call the “death tax”. Paine said that this could be used to fund a pension system for the elderly and the disabled. Also, he wanted it to fund a system where every man upon reaching the age of 21, would receive 15 British pounds (about half a year’s pay for the average working man). His theory was that this would give everyone a chance to create wealth for themselves: you could use that money to fund an education, or training, or travel to a place with more opportunities, or buy your own land. His essay was called “Agrarian Justice”.
Smart guy, huh? I wonder if this celebrated American revolutionary would be labeled a “socialist” and booed by MAGA country today.
The propaganda against the so-called “death tax” has been so successful, that the US estate tax has been repeatedly lowered. Today, 99.9% of people’s estates pay zero estate tax. Of the 0.1% which pay the tax, the average amount is 17%. The tax only applies to the amount of an inheritance received in excess of $5.3 million. So if you are prosperous enough that you plan to leave a lot more than $5.3 million to each of your beneficiaries, you might want to do some estate tax planning. (And, if that’s the case, let me say - congratulations! I admire wealth, I don’t envy it.)
In the US, back in the post WWII period - you know, when America was Great Again - the top marginal tax rate was 90%. Think about that! But that was only on income above $2.3 million, in today’s dollars.
Still, that marginal rate, to me, feels excessive, and it was lowered over the years ... first down to 77% in the 1960’s, and so on. Today, the top marginal income tax is 37% for individuals who earn more than about $500,000 per year. Keep in mind: you only pay 37% on every dollar
above that $500k threshold. The dollars you earn below that threshold, get taxed less.
Think about that. There are plenty of people who earn $1 million, $2 million, $10 million a year, and more. Yet, they never pay more than the 37% rate. This stratosphere of people experiences a very nice flat tax regime, where no matter how much more they earn, they never encounter a higher tax bracket. Nice!
Meanwhile, there are people who earn $20k, $50k, $100k and $500k per year. For those people, the more they earn, the higher tax rate they pay. This group is burdened with progressive tax, starting at 10% and marching up to 37%. Ouch!
That is progressive tax on the poor and middle class, and a nifty flat tax on the rich. How is this efficient or sensible? It’s not, unless you believe in “trickle down”: i.e., the benefits to the rich will come back to the poor and middle class multiple times over. Because the beneficent rich will bestow their newfound riches on the poor (presumably by buying more yachts to stimulate the economy).
Sadly, referring back to the OP, the data has not borne out the trickle-down hypothesis. So the poor and middle class have just been getting hosed.
But wait, that’s not all! The capital gains tax rate is even lower, at 20%. Wealthy people are able to derive a substantial amount of their income from capital gains - i.e., the dividends and coupons from stocks and bonds, or the appreciation in value of their investments over time. Most wage-earners derive most of their wealth and income from their labor in the form of wages, not capital gains on investments. As a result, wealthy people benefit disproportionately from a lower capital gains tax.
So, in 2012, Republican candidate Mitt Romney earned about $14 million, most of it not from his labor, but from gains on his invested wealth - which is good work if you can get it!
That year, Mitt Romney, who is not a tax cheat - in fact, by all accounts he is an honest and generous man, and no one accuses him of any shenanigans whatsoever - paid an effective tax rate of 14.7%. That’s a lower effective tax rate than many bus drivers, engineers, teachers, nurses, etc.
I am not picking on Mitt Romney. It’s just a well-known example you can easily verify for yourself. The point is that this is how taxes work in America, now, after decades of flattening the once-progressive tax curve.
Guess what else? The poor and middle class have to pay sales taxes on their purchases. That’s another non-progressive tax, since the prince and the pauper pay the same price for a gallon of milk, and therefore the same tax.
Then we have a non-progressive system of property taxes, typically 0.5 - 1.5% on the assessed value of a person’s home. Where I live, it doesn’t matter if you live in a shack or a mansion, the rate is the same. Also, the poor and middle class tend to have the bulk of their wealth in the houses they live in ... But the very rich? A lot more of their wealth will be in other forms, like stocks and bonds. There is no property tax on that whatsoever, so
that wealth gets special treatment; it is protected.
So ... to answer your question ... if “trickle down” doesn’t work, what would work? What would work is if we reversed decades of intentionally flattening our once sort-of progressive tax system, which has resulted in the unnatural and inefficient tax outcomes I just described. We should have:
(1) a meaningful estate tax, perhaps exempting all inheritances below [$500,000?],
(2) progressive taxation, such that as your income gets to $1 million, $10 million and higher, your tax rate increases,
(3) progressive taxation should be in effect whether income is through labor or capital gains, i.e., if you earn $10 million off your investments you should pay a higher tax rate than someone who earned $100k in wages.
(4) the amount of additional tax revenue from implementing this progressive taxation on the wealthy, could be used, in part, to reduce the tax burden on the poor and middle class. I.e., we could lower the tax rate for people earning $20k - $500k, lower property taxes, lower sales taxes, etc. In a progressive way, so the less you earn / the less wealth you have, the lower rate you pay.
(5) conservatives have in the past complained that a large number of people pay “no tax”. They think everyone should have “skin in the game”. I don’t disagree with this. I would be happy to charge some small tax on low wage earners. But it should be progressive, i.e., they should not end up paying a higher effective tax rate than people earning $15 million a year, like Mitt Romney.
If you made it this far ... sorry for the long post!
