The most consequential national tax policy change during the past three decades has been the steady shift of the nation's tax burden from wealth to work. This shift in tax priorities is connected to stagnant growth, unemployment, economic inequality, societal stress and, of course, our national deficit and debt problems.
It wasn't always this way. The 25 years following World War II were a time of great American prosperity, growth and expansion of the middle class. I can't tell you how many Americans old enough to remember have told me America was a better country then, and economically speaking, they're right. As recent books by Paul Krugman, Larry Bartels, and Paul Pierson and Jacob Hacker all demonstrate, post-war America celebrated strong economic growth rates and an expanding, more-prosperous middle class.
Conveniently forgotten is how different tax policy and economic circumstances were then. Unions were stronger and more pervasive; top marginal income rates were higher; payroll tax rates on labor were lower; the share of federal revenues derived from corporate taxes was higher; the ratio between CEO pay and that of the average worker was much smaller; the inflation-adjusted value of the minimum wage was higher; and massive public investments like the GI Bill were considered patriotic — not socialistic.
These were the happy days when Mr. Cunningham raised Richie, Joanie and Chuck into college from the working-class suburbs of Milwaukee without the benefit of a college degree or a wife who provided a second income. Pause a moment to count how many families you know who can do that today.
The American dream — doing better than one's parents did — persists. What's changed is how one gets there. Working hard used to be sufficient. But hard work is taxed more heavily now. In fact, it's the only behavior that, in all but a few states, is triple-taxed via state and federal incomes taxes, plus payroll taxes.
Today, the easier path to prosperity is to start at the finish line: to be wealthy in the first place. Why? Because wealth is often taxed just once, typically at half or less the rate work is.
As an example, for a typical middle-class earner, the marginal income tax rate on $100 gained from what the government deems "earned income" — that is, from work, whether paid hourly, by salary or commission — is either 25 percent or 28 percent, depending on one's top tax bracket. But a person who gains $100 in income from most capital investments held at least a year is taxed 15 percent.
The wealth-work disparity explains how it's possible for Warren Buffett to pay a lower net tax rate than his secretary, or that the 400 wealthiest Americans last year paid an average federal income tax of about 18 percent, compared to 23 percent in 2002 and 30 percent in 1995. Because the wealthiest derive their incomes almost exclusively from wealth, they pay lower overall rates than the vast majority of Americans, who of course derive almost all of their annual income from work.
What should happen as the tax burden steadily shifts from wealth to work? Well, exactly what has happened: Life has gotten tougher for working-class Americans while wealth has concentrated in the pockets of an elite few. The wealthiest 20 percent of Americans presently hold 84 percent of the nation's wealth; the wealthiest 40 percent control 93 percent.
For realized gains — that is, income derived annually from sales of assets or appreciations in wealth — the wealth gap is more lopsided. According to a recent Washington Post analysis, on their tax returns, the top 0.1 percent of Americans now account for half of the nation's total capital gains. That's right: For every thousand Americans, the wealthiest person reports the same total gains from capital as the remaining 999 persons combined.
Unless working-class Americans start paying attention during tax debates like the coming one on President Obama's stimulus and tax reform proposals, the wealthiest — who, because they pick up most of the campaign tab for both parties' candidates, are also the most powerful — will continue to reinforce the wealth-work tax disparity. And America will continue its steady bifurcation into a so-called "ownership society" for the few who control most of its wealth and a debtor society for the vast majority of hardworking Americans who do not.
Thomas F. Schaller teaches political science at UMBC. His column appears every other Wednesday. His email is email@example.com.