Tax and Mend

In the last few days, I’ve come across a couple of intriguing tax proposals aimed at reducing the gap between the 1% and everyone else.

We already index taxes for inflation, so Yale economist Robert Shiller wants to know why we can’t index them for inequality as well — and tax the rich at higher rates as the nation’s income becomes more concentrated at the top.

Shiller and his colleague Leonard Burman suggest a plan that would offset the loss in tax revenue that occurs when we index for inflation by imposing higher tax rates on income falling in the top tax brackets.  (Shiller, clearly an optimist, thinks this approach might even be achievable in the current political environment.)

Shiller thinks we need to see our income taxes “as a colossal insurance system, guarding against extreme income inequality.”

Good idea, but I’m not as optimistic as Shiller–I don’t think such a proposal would survive the displeasure of the guys who pay the lobbyists.

A bill I really like has somewhat better prospects, and has actually been introduced in California.

California’s pending Senate bill 1372, introduced by state senators Mark DeSaulnier and Loni Hancock would tie state corporate income tax rates to corporate pay disparities.

Corporations in California currently face an 8.84 percent tax on their profits. The DeSaulnier-Hancock legislation would up that rate to 13 percent for companies that pay their top execs over 400 times what their typical workers are making.

The same legislation lowers the state corporate tax rate to 7 percent on companies with a CEO-worker pay divide less than 25-to-1. Under the bill, all firms with a ratio under 100-to-1 would end up with a tax cut, all above with a hike.

Carrots and sticks….


  1. The California law is more than reasonable. If, 40 years ago, someone had even proposed the idea that a CEO would be earning more than 100 times the earnings of the average worker, people would have been stunned. If the average worker earns $50K, that’s $5 million! This is just a person employed to run a place, not some mystical savior.

  2. Even Shiller acknowledges his idea would result in something like a 75% top rate, which would never fly. However, it’s important to note that his suggestions refer to *individual* income tax brackets, while the proposed California legislation is aimed at that state’s tax on *business* income. It is a tasty carrot but not enough by itself.
    Despite the claim that “corporations are people too,” most U.S. businesses do not pay federal income taxes. Only those organized as C corporations do. According to the IRS, in 2010, only 14,584 of the many millions of business entity returns filed came from C corps.
    Subchapter-S and similar corporations and partnerships, which are the vast majority of U.S. businesses, do not pay any federal income taxes. The profit or loss from those entities passes through to shareholders, who pay taxes on any corporate profits at their individual tax rates, which may be quite low or even zero. Some states, like California, assess state income tax on all corporations, before any pass-through to shareholders, but that is still the exception rather than the rule. Indiana, for example, does not assess any corporate tax based on income.
    About half of U.S. households hold stock in corporations, but about two-thirds of those shares are held by the wealthiest 5% of Americans, and three-quarters of those shares are held by households with income greater than $100,000 a year. So we need both an adjustment to corporate tax rules as well as a Schiller-type fix to the individual tax code in order to address income inequality. But don’t hold your breath.

  3. We could make it simple with a Progressive Tax Rate on all sources income by individuals and gross sales by companies with no deductions, depreciation or tax credits. Eliminate the loop holes to stop companies from parking profits off-shore. I would not tax Social Security payments.

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