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Privileging the Income of the Privileged

Research & Commentary
May 08, 2017

by Bob Lord

The Trump tax plan reserves its highest rates for the income people actually labor to earn — and extends lavish preferential treatment to income from wealth.

Four years ago, my Institute for Policy Studies colleague Sam Pizzigati and I observed in the Los Angeles Times that we effectively have two tax systems in America: one that taxes wealth and the income derived from wealth and another that taxes the income from labor. Since 1980, the first of those systems, the “wealth-based system,” has become more forgiving. The “labor-based system,” by contrast, has become increasingly harsh, and a major chunk of the second system’s tax base has migrated into the first.

The Trump tax plan proposes to eliminate any tax on the estates America’s super rich leave to their heirs.

Those trends obviously place increasing pressure on the labor-based system. Ultimately, we noted, the movement towards complete reliance on the labor-based system would be unsustainable.

But President Trump disagrees. His recently announced tax proposal takes a giant step towards completely eliminating taxes on wealth.

Indeed, if the President’s proposal were to become law, little would be left of the wealth-based side of America’s tax system. The Trump proposal would erase entirely the one tax in America that directly impacts grand private fortunes, the estate tax. If President Trump has his way, the inter-generational passage of billions in wealth from the President and his plutocrat peers to their children would not be subject to any toll charge at all.

Remarkably, eliminating the estate tax would not be President Trump’s most devastating blow to the wealth-based tax system in America. The tax proposal the President has proposed this spring would single out a new category of income for preferential tax treatment. Ordinary income from unincorporated businesses – that is, ordinary income derived from wealth — would be taxed at a bargain-basement rate of 15 percent. Corporate income also would be taxed at 15 percent.

Half a century ago, American policy makers made a decision to tax the income from labor at a preferential rate. The maximum tax rate at the time was 70 percent. Lawmakers opted to tax earned income at a maximum rate of 50 percent.

The philosophy underlying the preferential tax rate for earned income – that those who earn their income from work should not be taxed as heavily as those whose income is derived from wealth – is lost on our President. In Donald Trump’s mind, the most heavily taxed income should be the earned income that was formerly taxed at a preferential rate. Capital gains, dividends, corporate income, and income form unincorporated businesses all should now be taxed, the President believes, at preferential rates. The top proposed Trump tax rate of 35 percent, about double the top rates applicable to all other forms of income, would be reserved only for income from labor.[pullquote]If President Trump has his way, workers will bear the bulk of the tax burden.[/pullquote]

The bottom line: If President Trump has his way, workers will bear almost the entire tax burden in America. The income derived from wealth, income that nobody lifts a finger to earn, would be subject to a modest 15 to 20 percent tax. The passage of wealth from one generation to the next no longer would be a taxable event. The growth of the enormous family fortunes would not be interrupted.

A generation ago, mega-millionaire Leona Helmsley opined that only “little people” should bear the country’s tax burden. Helmsley’s arrogance disgusted Americans. Are we still disgusted? We’ll soon find out.

Institute for Policy Studies associate fellow Bob Lord practices tax law in Phoenix.

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