Tag: Income tax

FAIR TAXATION IS ESSENTIAL FOR DEMOCRACY Part 2

Democracy requires fair taxation. The current U.S. tax system is unfair. Increased progressivity of individual and business income tax rates, especially on income from wealth (versus work), is one essential piece of re-establishing a fair tax system and reducing economic inequality.

(Note: If you find a post too long to read, please just skim the bolded portions. Thanks for reading my blog!)

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The American democracy described in the Declaration of Independence and further detailed in the  preamble to the Constitution requires fair taxation linked to meaningful representation to produce a government of, by, and for the people. (See this previous post for more detail.)

Fair taxation requires individuals and businesses to pay their fair share. The current U.S. tax system is unfair based on common sense,an historical perspective, and the current experiences of everyday Americans. It has allowed wealth and income inequality to grow dramatically in the last 45 years, both among individuals and among businesses. To re-establish a fair tax system and reduce economic inequality, the U.S. must: [1]

  • Increase the progressivity of individual and business income tax rates, especially on income from wealth (versus work), such as interest, dividends, and capital gains on the sale of assets that have appreciated (i.e., increased in value).
  • Tax increases in wealth even if assets are not sold. These increases in wealth are effectively income even when the assets are not sold.
  • Tax existing wealth to slow or reverse the huge growth in wealth inequality and because the wealthy can (and do) maintain their extravagant lifestyles without having income by borrowing money and using their wealth as collateral for the loans. U.S. billionaires’ wealth has doubled since 2019 and in 2024 alone, the 19 richest billionaires added one trillion dollars to their wealth, an average of over $50 billion each. [2]
  • Tax intergenerational transfers of wealth because otherwise America will have a class of reigning, perpetual oligarch families.
  • Close loopholes in tax laws to prevent tax avoidance by wealthy individuals and corporations.
  • Establish an international tax system to prevent tax avoidance by wealthy individuals and corporations through the shifting of wealth and income streams to low-tax countries. [3] [4]
  • Give the Internal Revenue Service (IRS) the resources to enforce U.S. tax laws and dramatically reduce the hundreds of billions of dollars a year of tax dodging by wealthy individuals and businesses when they do not pay the taxes they legally owe.

Progressive income tax rates are fair (i.e., percentage tax rates that increase with increases in income) because the value of $1,000 of additional income to a millionaire is far less than it is to someone with a $50,000 or $100,000 income. Or from the perspective of taxes, a tax of $100 (10%) on that $1,000 of additional income has much less impact on the millionaire than the lower income individual.

What tax rates are fair across the income range is, of course, a matter of judgment. However, for a starting point, a relatively small increase in the top marginal personal income tax rate (i.e., the tax rate on the last dollar of income) back to its pre-2017 level (i.e., from 37% to 39.6%) would generate revenue of over $30 billion a year for the government to use to deliver public goods that people need or want. (Note: In 1980, the top rate was 70% and it was over 90% in the 1950s and the wealthy and the economy, nonetheless, did quite well.)

Returning the tax rate on large corporations to 35% (where it was before the 2017 Republican Tax Cut Act reduced it to 21%) would make sense, be fair, and generate over $250 billion a year in revenue for the government.

I encourage you to contact your state and local elected officials, as well as your U.S. Representative and Senators, and ask them to support enacting a fairer tax system with progressive income tax rates for wealthy individuals and businesses. You can find contact information for your US Representative at http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

For lots of good news, see Jess Craven’s Chop Wood Carry Water blog’s most recent good news Sunday post here.

My next post will discuss taxing wealth and the intergenerational transfer of it. It will also discuss the IRS and its role in enforcing a fair tax system.

[1]      See this previous post on reducing economic inequality, which includes information on tax reforms proposed by the Economic Policy Institute and in the Money Agenda of a group called Patriotic Millionaires.

[2]      Collins, C., 4/5/26, “Tax the rich across the land!” Common Dreams (https://www.commondreams.org/opinion/how-to-tax-the-rich)

[3]      Johnson, J., 11/19/24, “Tax dodging by super-rich, big corporations costs nations half a trillion per year: Study,” Common Dreams (https://www.commondreams.org/news/global-tax-dodging)

[4]      Conley, J., 11/19/24, “G20 leaders reach ‘landmark commitment’ for global tax on ultrarich,” Common Dreams (https://www.commondreams.org/news/global-wealth-tax-2669945403)

ARE TARIFFS AND NO TAX ON TIPS GOOD POLICIES?

Trump’s proposal to eliminate taxes on tips sounds good but analysis shows it’s bad policy. Tariffs can be used effectively, but Trump’s tariff actions are already hurting our economy and will raise prices. They’re also ripe for political corruption.

Trump’s proposal to eliminate taxes on tips sounds good but careful analysis shows it would benefit few workers, be unfair, create perverse incentives, and open a door for tax avoidance. On the other hand, tariffs can be used effectively, but Trump’s on-again-off-again, high, broad-based tariffs are already hurting our economy and will raise prices for consumers and businesses. They are also ripe for political corruption.

(Note: If you find a post too long to read, please just skim the bolded portions. Thanks for reading my blog!)

Let’s take a step back from the dramatic and illegal actions of the Trump administration for a moment and take a look at their policy proposals on tariffs and eliminating taxes on tip income.

Trump has proposed eliminating income tax on tips, which sounds like a good policy that would help low-income workers. However, when carefully analyzed, it’s clearly a bad idea. First, it’s one more complexity in our tax code, unfairly treating some low-income workers and one type of income differently than others. It also creates a perverse incentive to create tip income, even the conversion of regular income to tip income. This is a new avenue for tax avoidance that some employers and business people would take advantage of. [1]

Second, eliminating tax on tips would help very few workers. Workers who earn less than $25 per hour and are in traditionally tipped jobs are only 2.5% of the overall workforce, which is about 4.3 million workers. However, 37% of tipped workers earn so little that they already don’t pay federal income tax. So, fewer than 2.5 million workers would benefit from eliminating tax on tips. Moreover, some low-income tipped workers would lose their eligibility for tax credits such as the Earned Income Tax Credit and the Child Tax Credit.

It’s unfair to give this benefit to low-wage tipped workers but no similar benefit to low-wage workers who don’t get tips, such as fast-food workers, teachers’ aides, retail cashiers, and bank tellers, for example. The biggest beneficiaries of eliminating taxes on tips would be servers in high-end, expensive restaurants who are already making a decent living.

Third, it undermines efforts to increase wages for all low-wage workers. Some employers might see this tax cut as a justification for not increasing workers’ wages. So, in effect, part of the benefit of this tax cut would go to employers rather than employees. It undermines efforts to raise the federal tipped worker minimum wage of only $2.13 per hour (set in 1993), as well as efforts to raise the regular federal minimum wage of $7.25 (set in 2009).

Fourth, it would incentivize increasing the number of tipped jobs because it would allow employers to pay $2.13 an hour rather than $7.25. Furthermore, tipping might proliferate to many services that currently aren’t tipped. Businesses might add an automatic “tip” to bills or classify a portion of their fees as “tips.” The use of “tipping” to dodge taxes could spread to a wide range of services such as car repair and servicing, appliance installation, child care, and even dental and legal services. [2]

An expansion of low wage tipped jobs is clearly not in workers’ economic interests and, furthermore, tipped work is rife with wage theft, worker mistreatment and abuse, and discrimination (including by tippers).

Turning to tariffs, Trump declared a fake economic emergency that gives him the power to unilaterally impose tariffs. Putting aside the disruptive aspects of threatening or implementing tariffs and then stepping back from them, let’s examine the role and impact of tariffs.

Tariffs can be used effectively to achieve important goals of economic and trade policy. They are most effective when they are narrowly targeted at well-defined goals as part of a larger, clearly established policy strategy. The three main goals of tariffs are: [3]

  • Protecting domestic production of specific products for reasons of national security, resilience of key supply chains, or other clearly justified purposes,
  • Protecting U.S. workers from unfair competition from specific other countries, and
  • Protecting domestic climate change and environmental policies from specific other countries with weaker policies.

High, broad-based tariffs harm the U.S. economy in multiple ways, and they do not reduce the U.S. trade deficit. They raise prices of imported goods for consumers and for businesses who use inputs that are imported. Furthermore, other countries are very likely to implement retaliatory tariffs or restrictions on the importation of U.S. products. For example, when Trump imposed tariffs on China in his first term, China retaliated with tariffs on U.S. agricultural products and a ban on the purchase of Boeing airplanes. The loss of the Chinese market had such a profound impact on U.S. farmers and ranchers that the Trump administration authorized $61 billion in emergency relief for them. This ate up (no pun intended) roughly all the tariff revenue generated by the Trump tariffs. Boeing lost the 25% of its sales that had been in China, and this strengthened the Chinese competitor to Boeing and increased its sales.

High, broad-based tariffs facilitate political corruption. They typically allow importers to petition for reductions of or exclusions from the tariffs. This favors politically connected or favored companies. The first Trump administration granted more than 100,000 exclusions or reductions to tariffs through a process that the Government Accountability Office (GAO) and the Commerce Department’s Inspector General found lacked transparency and made inconsistent and apparently arbitrary decisions. Further analysis found that tariff reductions were used to reward political supporters and contributors, while punishing political opponents. [4]

[1]      Cooper, D., & Mast, N., 2/6/25, “‘No tax on tips’ will harm more workers than it helps,” Economic Policy Institute (https://www.epi.org/blog/no-tax-on-tips-will-harm-more-workers-than-it-helps-proposals-in-congress-and-now-20-states-could-encourage-harmful-employer-practices-and-lead-to-tip-requests-in-virtually-every-co/)

[2]      Cooper, D., & Mast, N., 2/6/25, see above.

[3]      Hersh, A. S., & Bivens, J., 2/10/25, “Tariffs – Everything you need to know but were afraid to ask,” Economic Policy Institute (https://www.epi.org/publication/tariffs-everything-you-need-to-know-but-were-afraid-to-ask/)

[4]      Hersh, A. S., & Bivens, J., 2/10/25, see above.