The Tax Code Favors Wealth Over Work. Several in Congress Want to Change That
According to the Pew Research Center, more than a 150 million Americans are part of the U.S. workforce. That’s about half of the total U.S. population. Most of these workers earn their income through salaries, wages and/or tips. Others make their income through more passive means, such as owning and trading stocks and other assets. Unfortunately, for most of us when it comes to tax policy, the U.S. tax code has long preferred and rewarded unearned income over earned income.
For example, if you’re earning income the way most of us do then it’s likely that you are paying some amount of income taxes on the paychecks you’re earning through your work. At the federal level, that can be anywhere from 10%-37% depending on how much income you’re earning over the course of a year.
However, for those that are earning their incomes through stocks, equities and other assets, the federal tax on the sale of these assets—known as a capital gains tax—can be 0% (for incomes between $0 – 39,375), 15% ($39,376 – $434,550) or 20% ($434,551+) after just one year of ownership. In addition to this preferential treatment within our tax code for unearned income over earned income, tax on these assets is only paid at the time of sale and only on the net gain of the sale, not the current value of the asset. What’s more, this tax can be avoided altogether if these assets are passed down as inheritance.
In other words, our tax code rewards wealth over work.
Fortunately, this year has seen several proposals introduced in Congress that build on the work we and others have done to call attention to the many ways our tax code—old and new—is upside down. Specifically, many of these proposals would not only meaningfully turn the tax code right-side up but also generate significant revenues to support critically important programs that help low- and moderate-income families build economic security.
For example, last week, Senator Ron Wyden (D-OR), the highest-ranking Democrat on the Senate Finance Committee, released a proposal to change how capital gains are taxed. Specifically, the Senator’s proposal aims to ensure that all capital gains are taxed at the same rates as ordinary (earned) income. In addition, the proposal would also implement a new accounting process to prevent wealthy households (those with least $1 million in income per year or $10 million in assets) from deferring their taxes–thus avoiding paying any taxes on unrealized gains–until the asset is sold. Instead, these assets would be taxed as regular income each year. Over a ten-year window, Senator Wyden’s proposal would raise between $1-2 trillion, which he envisions being used to fund Social Security for generations to come. In 2017, 22 million people were lifted out of poverty by Social Security, including 15 million seniors.
As promising and important as Senator Wyden’s proposal is, it represents the latest in a string of recently introduced proposals aimed at correcting the inequitable nature of our tax code, while also addressing growing wealth inequality.
Earlier this year, Senator Elizabeth Warren (D-MA) introduced a proposal that would levy a wealth tax of two percent on households with a net worth between $50 million and $1 billion and a three percent wealth tax on those with a net worth of more than a $1 billion. Economists estimate that such a proposal would raise $2.75 trillion over 10 years from less than 0.1 percent of U.S. households. To put this into perspective, that’s enough to cut child poverty in half, all while leaving about $1.5 trillion left over to use on a range of other initiatives to help families move up the economic ladder and get ahead.
After years of working to promote a more equitable tax code, we’re excited to see proposals that aim to meaningfully reform many of the most egregious aspects of our upside down tax code. More importantly, however, we’re also excited to see these proposals take bold action to generate the revenue needed to help families achieve economic prosperity—whether that’s through ensuring that Social Security is available to tomorrow’s retirees, expanding the Earned Income Tax Credit (EITC), enacting a new matched savings program for working families (such as Promise Accounts), or helping low-income children have the resources they need to invest in their future.
As these bills continue to move forward in Congress and as others are introduced over the next several months, we invite you to join our Turn the Tax Code Right-Side Up Campaign to learn about and support policies to improve the flaws in our tax system that disproportionately favor the wealthy. With your help, we can turn the tax code right-side up.