Changes in tax policies that benefit the wealthy and large corporations have been a key driver of America’s skyrocketing inequality. While a relative few at the top have gained enormous economic and political clout, the squeeze on public revenue has undercut much-needed public investments and services that benefit ordinary Americans. Reversing that trajectory will require an overhaul of our tax code to ensure everyone pays their fair share.
Tax rate hikes at the top were an effective tool in reversing the extreme inequality of the “Gilded Age.” Under high top rates in the post-WWII decades, the share of national income flowing to the richest 0.1 percent fell significantly. When policymakers once again slashed those rates, beginning in the 1960s and accelerating in the 1980s, inequality shot back up. According to Professor Emmanuel Saez, the richest 0.1 percent of Americans pocketed 10.84 percent of total U.S. income in 2018, a level not seen since 1929. Contrary to the arguments of tax hike opponents, real U.S. GDP grew faster in the 1950s and 1960s than in more recent decades. The subsequent decade with the highest growth rate was the 1990s — after Congress enacted moderate top tax rate increases.
In the United States, wealth inequality is even more severe than income inequality, and the reduction in the top income tax rate has been a key factor. According to Institute for Policy Studies analysis of data collected by Saez and fellow economist Gabriel Zucman, the share of U.S. taxes paid by the top .01 percent was just slightly higher in 2018 than in 1962, despite the more than tripling of their share of the nation’s wealth. By contrast, the bottom 50 percent saw their share of U.S. wealth drop by more than half during this period. The top marginal tax rate in 1962 was 91 percent, compared to 37 percent in 2018.
Institute for Policy Studies analysis adds further evidence of the direct connection between tax policy and extreme wealth concentration. The rate of taxation of America’s richest .01 percent of households, as a percentage of their wealth, decreased by over 83 percent between 1953 and 2018. The decline in this relative tax rate accelerated after 1979. Stronger minimum wage, antitrust enforcement, and unionization rates during the 1953-1979 period undoubtedly had some equalizing effect, and yet during this period it required a top tax rate four times the current rate simply to keep the wealth share of the top 0.1 percent in check.
Why do the rich pay such a small share of total U.S. taxes, relative to their great wealth? Beyond their ability to hide their money from the IRS, the rich benefit from the tax code’s preferential treatment of income from investments. Currently, the top marginal tax rate for the richest Americans is 37 percent, while the top rate for long-term capital gains is just 20 percent. The higher the U.S. income group, IRS data show, the larger the share of income derived from investment profits. By contrast, Americans who are not among the ultra-rich get the vast majority of their income from wages and salaries.
The rich are well-positioned to benefit from the discount tax rate on investment earnings because of their dominance on Wall Street. Federal Reserve data indicate that the richest 1 percent hold more than half of all stocks and mutual funds, while the bottom 90 percent of Americans own just 11 percent. The disparities in stock ownership are even starker if race is factored in. While 61 percent of white families owned at least some stock in 2019, only 34 percent of Black and 24 percent of Latino families did, according to the Federal Reserve.
America’s richest also exploit estate tax loopholes, shell corporations, trusts, and other sophisticated methods of shielding their accumulated fortunes from taxation. This has accelerated the accumulation of wealth — and power — in the hands of a few individuals while entrenching oligarchic dynasties. According to Institute for Policy Studies research, America’s 50 wealthiest family dynasties together held $1.2 trillion in assets in 2020. By comparison, the bottom half of all U.S. households—an estimated 65 million families — shared a combined total wealth of just twice that, at $2.5 trillion. The five wealthiest dynasties (the Walton, Koch, Mars, Lauder, and Cargill-MacMillan families) saw their wealth increase by a median 2,484 percent from 1983 to 2020.
America’s wealthy have also benefited enormously from reductions in the corporate tax rate, which has fallen from a peak of 52.8 percent in the 1960s to 21 percent under the 2017 Republican tax law. The windfalls of lower corporate taxes flow primarily to high-income Americans because of their disproportionate ownership of corporate stock. Wealthy corporate executives, who receive most of their compensation in some form of stock-based pay, also benefit, while evidence of gains for workers is lacking. This corporate tax rate-cutting, combined with rampant use of offshore tax havens and other avoidance schemes, puts a strain on public budgets. The percentage of total federal revenue from corporate tax receipts dropped from 32.1 percent in 1952 to 6.6 percent in 2019, according to Office of Management and Budget data.
As corporate tax obligations have declined, CEO pay has skyrocketed. According to Office of Management and Budget data and Economic Policy Institute research, when corporate tax receipts made up 21.8 percent of all federal revenue in 1965, the average CEO-to-median worker pay ratio was 21 to 1. By 2019, corporate tax receipts had fallen to just 6.6 percent of federal revenue and the average pay ratio had risen to 320 to 1.
Opponents of raising the U.S. corporate tax rate often point to lower statutory rates in other large economies. But huge loopholes in the U.S. tax code have lowered the effective rate that corporations actually pay the IRS. In fact, the Institute on Taxation and Economic Policy found that 55 large, profitable U.S. corporations paid zero in federal income taxes in 2020. Because of these loopholes, U.S. corporate tax revenue as a share of GDP is actually lower than in any other G7 country. By contrast, average CEO pay at large U.S. corporations is off the charts compared to their international counterparts, according to Institute for Policy Studies analysis of Willis Towers Watson data.
Policymakers should not tie their hands by requiring every dime of new spending to be offset with new revenue, especially given the enormous long-term benefits of health care, education, and climate change investments. But there will be pressure to pay for a considerable share of new spending and all of Biden’s proposed corporate tax changes, including a global minimum tax and other loophole closures, would generate an estimated $2.2 trillion. This chart compares revenue from just one of Biden’s proposed reforms — an increase in the corporate rate from 21 percent to 28 percent — with the cost of select investments that would help American families fulfill their potential and live in dignity.
Wall Street jobs are extremely lucrative in part because the U.S. government applies no sales tax on the buying and selling of financial market instruments. Ordinary Americans are used to paying sales taxes when they purchase a car or home, a tank of gas, or a restaurant meal. But when a Wall Street trader buys millions of dollars’ worth of stocks or derivatives, there’s no sales tax at all. This tax-free approach has also contributed to the explosion of the algorithm-based computerized trading that dominates our financial markets while adding no significant value to the real economy. Just one indicator of the disparity between these traders and low-wage workers: since 1985, the average Wall Street bonus has increased 1,217 percent. If the minimum wage had increased at that rate, it would be worth $44.12 today, instead of $7.25, according to the Institute for Policy Studies.