Even before the effects of the Trump administration’s 2017 Tax Cut and Jobs Act (TCJA), U.S. tax systems raised significantly less revenue as a percentage of the gross domestic product than almost any other country in the OECD. In addition to raising less tax revenue, the United States spends less than nearly all similarly situated countries on social benefit safety nets. U.S. safety nets are less accessible, narrower in scope, and provide less generous benefits than comparable countries. As a result, Americans suffer poverty rates post-tax and transfer payments that are much higher than comparable countries. Similarly, before taxes and government transfers, U.S. inequality (measured by the Gini coefficient) is comparable to other OECD countries; but after those taxes and transfers, it ranks highest for inequality, indicating the United States is doing less than other advanced economies to mitigate inequality.
We can fix these problems. America was founded on taxation with representation. Thus, tax and spend systems are statutory, enacted by representative members of Congress who are elected by “we the people.” Together, we can reverse these trends. Here are two areas where we can kickstart change:
Increase Tax System Progressivity
U.S. tax systems have become less progressive with recent reductions in corporate and individual income and inheritance effective tax rates. By comparison, taxes on labor and employment, including income and payroll taxes, have become more significant sources of aggregate tax revenue. Together with wages that have not kept up with the cost of living, reduced fringe benefits, including lack of affordable health care coverage and higher consumption taxes, America’s workforce was struggling before the pandemic. By comparison, shareholders, including hundreds of billionaires, have enjoyed skyrocketing stock values, preferred long-term capital gain tax rates, and gain exclusion strategies. As top marginal tax rates have declined, the share of income going to the top 1 percent of earners has grown. The disconnect between Wall Street and Main Street has become increasingly destabilizing for the financial well-being of individual families and the economy at large.
Congress should reverse these trends by reinstating higher marginal tax rates at increasingly higher taxable income levels and reversing the inflation-adjusted, annually increasing almost $12 million per person estate and gift tax exemption. After the attack on Pearl Harbor, President Roosevelt proposed a 100 percent top marginal tax rate. He reasoned that, “At a time of grave national danger, no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year” (about $440,000 in 2021 dollars). Congress compromised with a top marginal tax rate of 88 percent that it increased to 94 percent on taxable income over $200,000 (almost $3 million in 2021 dollars) in 1944.
Under the TCJA, the highest marginal income tax rate is only 37 percent for taxable income over $628,300 and only 20 percent on dividends and net long-term capital gains for these same high-income families. These tax rates should be increased as well for even higher levels of taxable income. Moreover, under the Affordable Care Act (ACA), high-income households with significant investment income have been subject to Medicare taxes (like wage earners) on some of their net investment income. However, if the Supreme Court overturns the ACA, this tax will be repealed, and the top 0.1 percent will reap $198,000 in average tax cuts. Congress should respond by reinstating this leveling tax as well as crucial health care that meets all constitutional requirements.
Finally, too many financial resources for Americans have work requirements. These requirements are antithetical to the concept of safety nets provided when families suffer economic downturns from unemployment, illness, child or dependent care, or a global pandemic. As a result of minimum income requirements for eligibility for many benefits like tax credits, including the Earned Income Tax Credit (EITC), the Additional Child Tax Credit (CTC), the Child and Dependent Care Credit, and the Lifetime Learning Tax Credit, families that are most vulnerable do not receive the full benefits of these credits. Consequently, extreme poverty rates have exploded.
At a minimum, Congress should repeal the earned income requirement for the CTC and deliver it to all qualifying lower-income families, including those without any federal income tax liability. Presently, the lowest-income families without a federal income tax liability are limited to a maximum per child CTC of only $1,400 as compared to the full credit of $2,000. Moreover, the CTC should be increased to $3,000 for all qualifying children and $3,600 for children under age 5. The CTC should be paid out monthly rather than in a lump sum with a family’s annual tax refund (that requires tax preparation and filing at ever-increasing fees). Finally, given the significant workload and underfunding of the Internal Revenue Service (IRS), these monthly payments should be administered by the Social Security Administration (SSA). The SSA is already set up to issue Social Security numbers to newborns as well as deposit tens of millions of monthly payments to retirees, dependent spouses, and minor children.
Fund the IRS
For at least a decade, the IRS has been asked to do more with less. Since 2010, Congress has decreased the IRS’s general budget by 20 percent while requiring the implementation of significant components of the ACA; sweeping tax reform under the TCJA; and, most recently, a broad-based economic response to COVID-19. Most critically, given these significant cutbacks, America has not been able to collect hundreds of billions of dollars in tax revenue every single year. In a July 2020 report, the Congressional Budget Office estimated that an additional $20 to $40 billion in IRS funding would generate $60 and $100 billion, in additional tax collections over 10 years. Scholars have suggested even these estimates are low. They estimate that if the IRS’s funding is increased to 2011 levels, it could collect over $1 trillion in existing unpaid taxes. Because of budget cuts, audit rates for large corporations have dropped from almost 100 percent to less than 50 percent and by 75 percent for millionaires. Nevertheless, audit rates for America’s most vulnerable families have decreased by only 36 percent.
In 2018, 43 percent of all audited tax returns were of families that had claimed the Earned Income Tax Credit, a refundable tax credit for lower-income working families with dependent children. Shockingly, the top 10 counties for the highest federal income tax audit rates are in communities where the average population is 80 percent people of color and the poverty rate is triple the national average. By comparison, the 10 counties with the lowest audit rates are in communities where the average population is 90 percent white and the poverty rate is about one half the national average. While audit selection may be “colorblind,” this disparate impact is patently racist. Communities of color, with few resources and little access to tax justice, are having to provide affirmative proof to the IRS that they qualify for critical safety nets delivered as tax refunds.
In 2021 and beyond, we must fund the IRS to enforce existing tax laws and collect the billions of dollars that go uncollected every year from those who are more than capable of paying their fair share. Statistics demonstrate that the top 10 percent of income earners are responsible for about 70 percent of the uncollected tax gap. Moreover, we must stop targeted auditing of low-income working families with children. These families should be supported rather than persecuted so that their kids have a chance to thrive rather than suffer without basic necessities. If the IRS, a tax collection institution, cannot manage the delivery of safety net benefits for working families without disparate racial mistreatment, the SSA should administer these benefits.