TAX CUTS OFTEN INCREASE ECONOMIC INEQUALITY

Small government advocates have worked to shrink government by cutting taxes. The results have been exploding economic inequality and federal budget deficits. They are now working to cut state income taxes and local property taxes. This will only expand economic inequality and feed the oligarchy.

SUMMARY: For over 40 years, small government advocates have worked to shrink government by shrinking its revenue, i.e., by cutting taxes. Despite their claims of strong economic growth benefiting everyone, the reality has been exploding economic inequality and federal budget deficits. Now, they are turning their focus to cutting state income taxes and even the local property tax. If they succeed, it will only expand economic inequality and feed the oligarchy that is trying to take over our democracy.

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

(Note: Please follow me and get notices of my blog posts on Bluesky at: @jalippitt.bsky.social. Thanks!)

For over 40 years, small government advocates, historically conservative Republicans, have worked to shrink government by shrinking its revenue, i.e., by cutting taxes. At the federal level, they have succeeded in dramatically reducing income taxes on corporations and high-income households.

Year Corporate tax rate Top personal income tax rate
1950s 50% 90%
1970s High 40% 70%
1980s 34% 50%
2026 21% 37%

Republicans and so-called supply-side economists promised that tax cuts would spur economic and job growth resulting in prosperity for all (aka trickle-down economics), but the reality has been exploding economic inequality. Everyday working Americans are struggling with the affordability of the cost of living and many middle-class Americans have seen their dreams and economic security vanish. Meanwhile, the wealth of the wealthy has skyrocketed. Note that if tax cuts did indeed stimulate economic growth, based on the tax cuts documented above, our economy should have been soaring for the last 50 years.

Despite Republicans’ and supply-side economists’ claims that tax cuts would actually increase government tax revenue due to strong economic growth, their tax cuts and increases in military spending have caused the federal budget deficit to explode. The annual budget deficits have grown from under $74 billion in 1980 to almost 30 times that or $2 trillion in 2025. The accumulated federal debt has grown from under $1 trillion in 1980 to $38.5 trillion in 2025. Although Republicans have offset their tax cuts’ increases in the deficit somewhat by cutting social spending, these efforts have met with limited success because of the need for and public support of a social safety net that includes unemployment benefits, food assistance, and subsidized health care when workers fall on hard times.

Republicans and their supply-side economists have also been trying to get states to cut taxes. The focus has typically been on personal and corporate income taxes and they’ve had significant success. Since 2021, twenty-six states have cut their personal and/or corporate income taxes. [1] Massachusetts will likely have two tax cut measures on the November 2026 ballot.

They are proceeding with these tax cut efforts despite the dreadful experience a decade ago in Kansas. In 2012, Kansas dramatically cut its personal and business income taxes based on the supply-side promises of booming economic growth. However, by 2017, state revenue was down hundreds of millions of dollars, economic growth was below average, and the state was having to cut funding for schools and roads. The Republicans in the state legislature voted to repeal the tax cuts, the Republican Governor who’d sponsored the cuts vetoed the repeal, and the Republican legislature voted with an over two-thirds majority to override the Governor’s veto.

Furthermore, in part because not every state has an income tax, the Republicans and their supply-side economists are now targeting the source of 70% of local government revenue, the property tax. They claim that state governments will step in to make up local government shortfalls through sales taxes and other state revenue sources.

Almost inevitably, tax cuts on personal or business income, as well as to property taxes, disproportionately benefit wealthy individuals and corporations. Although middle- and lower-income individuals may see some benefits, the larger benefits go to the well off. This expands the already growing economic inequality in the U.S. For example, one of the Massachusetts proposals would cut the state’s base income tax rate from 5% to 4%. While the proponents state that on average families would get a $1,300 tax break, low-income families would get about $70, those with incomes of roughly $1 million would get $1,000, and the wealthiest families would get $35,000 or more. Similar effects would occur with cuts to, let alone elimination of, property taxes as the wealthiest families have the properties with the highest values.

Note that replacing this lost income or property tax revenue with sales taxes or gambling revenue means using very regressive taxes to replace often progressive ones. Moreover, the loss of government services and supports due to loss of revenue will hit the lowest income families the hardest.

Therefore, these tax cut strategies that Republicans and their supply-side economists are pushing will further increase economic inequality, which will only strengthen the oligarchy that is working to take control of our democracy. If someone tries to tell you they can cut your taxes without cutting the services you get from government, such as schools, roads, public safety, and a safety net for hard times, don’t believe them. There is no such thing as a free lunch. And if they tell you you’ll save a little money, ask them how much the millionaires will save and what you’ll lose from your government in the bargain.

I encourage you to contact your state and local elected officials, as well as your U.S. Representative and Senators, to ask them to support progressive tax policies that support everyday working Americans. [2] Such policies include progressive income tax rates, wealth and unearned income taxes, and fair business taxes. (See this previous post for more on fair taxation.)

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

[1] Curry Wimbish, W., 4/8/26, “Live tax-free and die,” The American Prospect (https://prospect.org/2026/04/08/apr-2026-magazine-live-tax-free-and-die/)

[2] 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.

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!)

(Note: Please follow me and get notices of my blog posts on Bluesky at: @jalippitt.bsky.social. Thanks!)

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.