The U.S. personal income tax system is what economists call a “progressive” one — meaning that the tax rate increases with the amount of taxable income. The idea is to take the tax burden off of lower-income people and shift it to those with a higher ability to pay. To make the concept even clearer, consider its opposite, the “regressive” tax: A sales tax is the same for everyone, so by definition those with lower income pay a higher percentage of that income in tax when they purchase, say, even just a box of tissues.
The bottom line with income tax: the more money you make, the more taxes you pay — right? Not necessarily.
Sure, the wealthiest in the United States are subject to a top rate of 37 percent on their taxable income (a reduction from 39.6 percent thanks to Trump). But this is capitalism, and the golden rule is that whoever has the gold makes the rules. Our system is riddled with ways for the ultra-wealthy to “protect their assets,” effectively decreasing the amount of income on which tax can be levied.
The ultra-wealthy — or more accurately, their accountants, and they can afford to hire the best ones — use all sorts of tricks. They hide their money in tax havens — places like the Cayman Islands, where taxes are very, very low. They create shell companies that exist only on paper, and channel their money into them. There are equity swaps: two rich guys exchange the gain and loss of a set of assets without actually transferring ownership. They create shell trust funds. The list goes on and on — and every one of these tricks, allowed within the letter of the law, is a form of tax evasion.
No one in the working class has the ability to take advantage of any of these tax-avoidance gifts to the ruling rich. The wealthy hold on to their money while the rest of us fund everything from trash collection to U.S. imperialist forays into other countries. The number one way they do this is by having a tax system that distinguishes between labor income (wages, salaries, and employer-provided benefits) and capital income (dividends, interest, rental income, capital gains, and so on). The former flows from doing actual work; the latter flows from ownership of assets. The U.S. tax code is page after page of helping the wealthy keep their capital income. Meanwhile, if workers fail to pay their income tax, the government will just take it directly from their paychecks.
As a result of those “loopholes, the richest 1 percent pay an effective federal income tax rate of less than 25 percent. And one of every five millionaires pays a lower rate than someone making $50,000 to $100,000.
On top of that, it’s important to remember that only about half of the taxes the federal government collects come from the income tax. About a third come from payroll taxes, which are levied only on the first $130,000 or so of earned income. That means they soak working people while letting those who make the most money completely off the hook for most of their earned income. (The word “earned” here is a misnomer, of course. When was the last time you saw any rich people put in a hard day’s work to “earn” their money?)
New research shows that tax avoidance by the “very top sliver of high-income Americans” (in the words of the Wall Street Journal) is even greater than thought. “Tax Evasion at the Top of the Income Distribution: Theory and Evidence” is the latest working paper from the National Bureau of Economic Research. The study conducted by academic economists and the Internal Revenue Service estimates that the top 1 percent of U.S. households do not report more than 20 percent of their income, and that the highly sophisticated strategies they use for a good portion of that is beyond the capability of random audits to detect. For the top 0.1 percent, unreported income may be nearly twice as large as the IRS has long thought.
What does the IRS propose to do about that? Commissioner Charles Rettig, testifying before Congress last week, begged for money for more specialized agents to track down the taxes.
Of course, that’s mostly posturing. Those agents would only be looking for the “bending” of the rules that favor the wealthy. The IRS stance has nothing to do with achieving the true intent of progressive taxation, and shifting the tax burden to the wealthy.
There are nearly 640,000 millionaires living in the United States. According to the TracIRS project at Syracuse University, they are rarely audited; in fact, since 2012, there has been a 72 percent reduction overall in the number of millionaire audits. In 2020, 98 percent of those making more than $1 million were not audited — despite that it is supposed to be routinely done. At the same time, most giant corporations have watched audits disappear.
All in all, there is nothing progressive about U.S. taxation. The working class and poor subsidize the wealthy. This is not going away, regardless of whether a Democrat or Republican is in the White House. The two parties are committed to upholding a system based on the exploitation of the great majority of people to serve the interests of the few. Sure, there may be this or that reform, and even calls to “tax the rich” at higher rates so they pay their “fair share.”
Karl Marx and Friedrich Engels wrote on several occasions that tax reform can make small inroads into addressing some income inequality, even without overthrowing capitalism. But “fair” is no less a misnomer than “earned.” There is nothing fair about capitalism. The real solution lies in toppling a system that puts the interests of the few above the needs and interests of the many, and replacing it with socialism — that is, organizing society so everyone collectively owns and regulates the means of production, distribution, and exchange in the interest of serving the needs of the many.
No one needs a million dollars.
