It Isn’t Just Tax Rates…

If voters ever wrest America’s government away from the Keystone Kops who are currently hijacking it, we might see a return to thoughtful policy discussions.

By “thoughtful,” I mean good-faith debates over the best way to approach various governmental tasks, conducted by people who actually understand the role and operation of government–and want it to work.

In other words, people other than Matt Gaetz and Marjorie Taylor Green and their ilk.

As readers of this blog know, I spent 21 years teaching classes in Law and Public Policy. Those classes explored both government’s policy processes and the legal and constitutional framework that constrains those choices. Ever since 2016, and the election of a buffoon whose entire administration was blatantly and proudly ignorant of both, I’ve missed the exploration of genuine policy differences –and the approach taken by public servants like former Senator Richard Lugar, who often referred to policy differences as “something about which people of good will can disagree.”

I thought about the current absence of “good will” when I read this paper issued by the Brookings Institution.The paper addressed the thorny issue of taxes, and how the American tax system distinguishes between–and differentially taxes– sources of income.

As the paper begins,

In a famous conversation, the author F. Scott Fitzgerald is credited with saying that “the rich are very different than you and me,” to which Ernest Hemingway replied “Yes, they have more money.”

Our work highlights another key difference: the most affluent Americans not only have more income; they receive it—and pay taxes on it—in vastly different ways than the rest of us.

For policy makers concerned about long-term fiscal shortfalls and high levels of economic inequality, our work reinforces the notion that raising the tax burden on the wealthy requires a special focus on how those households gain wealth and skirt taxes. We highlight four ways to effectively raise taxes on the wealthiest Americans.

The research focuses on an issue that serious policymakers understand, but that all-too-often is missing from public conversations about taxes. Those conversations tend to feature politicians appealing to voters with unrealistic promises to reduce the “tax burden” or eliminate certain taxes. ( Worse, when most voters think about taxes, they focus primarily on tax rates–and a not-inconsiderable number of Americans fail to understand the way  marginal rates work. They think the highest marginal rate is applied to the taxpayer’s entire reportable income.)

The Brookings report focuses upon a related element of the tax system: the different ways in which we tax income generated differently.

Most Americans receive almost all their income through wages and retirement income (pensions, 401(k)s, social security, and individual retirement accounts). The most recent available IRS data (2014) shows that wages and retirement income made up 94% of adjusted gross income (AGI) for households in the bottom 80% of the income distribution. Even for households in the 98th to 99th income percentile, wages and retirement income accounted for 71% of AGI.

At the very, very top, though, these sources are less important, accounting for just 15% and 7% of the income of the top 0.01% and the top 0.001% of households, respectively. These households  receive most of their income from investments (interest, dividends, and especially realized capital gains) and businesses (including sole proprietorships, partnerships, and S corporations). These items constituted 82% of income for the top 0.01% and 88% for the top 0.001%, compared to just 7% for the bottom 80% of households.

These patterns are robust over time and data sources. And in practice, the tilt toward capital income at the top is even larger than these figures suggest because AGI does not include the massive unrealized capital gains and very sizable inheritances that accrue to many affluent households.

The researchers proceed to suggest changes to the tax code that would have the effect of reducing the disparities that have contributed to our current gilded age, and I encourage you to click through and see whether you agree or disagree with their particular policy recommendations.

My point in highlighting this study, however, isn’t to endorse–or rebut–particulars.

This research –and similar investigations of the economic realities of American governance–is a welcome reminder of the way lawmakers should conduct policy debates: examining the evidence (what are we doing now, and what are the outcomes of what we are doing?); highlighting problems that such examination discloses (here, the widening gap between the rich and the rest); and considering policies that might solve or ameliorate those problems.

Budgeting and taxation are complicated issues about which people of good will can differ. But instead of people of good will–and thanks primarily to gerrymandering,–we have elected profoundly ignorant (and arguably crazy) people who think they were sent to Washington to destroy the federal government.

I miss policy…


  1. One change that I think we should address: Raising or eliminating the cap on social security contributions. For example, because of the current caps, many hospital workers will pay social security contributions on 100% of their wages while the doctors and administrators pay that tax on 25% (or less ) of their income. Social Security needs more income and removing that cap seems a logical solution.

  2. It appears that talk of increasing tax rates on the wealthy is moot if they aren’t paying their current tax rates and that appears to be overlooks to concentrate on the fight to raise their taxes. If Trump paid the amount of unpaid taxes he has owed for decades, IRS would be a profit making government office. Add to Trump the others who use his financial system to run corporations and pocket profits we could do away with outrageous student loans and stop arguing about those in need being supported by forms of welfare as well as end the “borrowing” and threats to privatize Social Security and Medicare. My aunt accused me of “living on the dole” because I rely on my Social Security and Public Employee Retirement Funds for support. They owned a family business and Unk was a bookmaker who of course didn’t report that illegal income to IRS. Yes, “The rich are very different from you and me.” and that difference is much more than having more money; it is a mindset that they deserve more and better and the rest of us just need to get a job and pay our bills.

    “Budgeting and taxation are complicated issues about which people of good will can differ.” We need to be concentrating today on the direction financial control of all of us is heading; we were forewarned as long ago as the 1960s of the future cashless/checkless control by banks and that we would only be identified by numbers. That day is here and now with our personal finances getting closer and closer to all control of our income, whatever the source, being taken over by the “go paperless” movement. When will it stop being an option and be enforced by law? The government knows more about our financial status than we are aware of and taking that total control via banks can happen here as it did in Nazi Germany and spread throughout Europe. We, the American government and people, didn’t believe any nation or group would be strong enough to attack this country on our own ground. Not even the first bombing of one of the Towers by a foreign element prepared us for September 11, 2001. We watched, horrified as it happened here and Trump & Company will bring it here full force and full time. We are systematically being controlled and are led to believe it is “helping” us by deducting our money to pay our bills to save us the trouble. Taxes can be deducted from our income without notification before or after the fact; but it will happen first to the 94% of the AGI households. We are nowhere near being “woke” in this area and we will pay for it by ignoring it. Yes; I am aware I have now reached the Richard Belzer level of conspiracy theorist but he was ignored by many in his lifetime as a public figure.

  3. As someone who’s entire working career, all of my income was reported on 1099, I had almost no way to avoid any taxes and some years the total amount that went to the IRS was in excess of $50,000 for our family. It was an eye popping experience when late in my life we opened an Airbnb and suddenly had “passive” income.

    Airbnb still sent me a 1099, so I couldn’t not report that number, but now suddenly that huge $30 package of toilet paper I bought at my local warehouse club was a “business expense” and I challenge the IRS to prove that all of that T.P. did not get used by my Airbnb guests. 25% of my lawn service, cable bill, water bill, house painting, etc… also became a business expense reducing the income and the tax liability disappeared from my tax bill.

    All of my former work friends are all 1099 slaves and most of them believed the lie that an underfunded IRS id to their advantage. In reality, when the IRS is underfunded, all they can do is the most basic computerized checking and that is matching tax returns to 1099s and the only people that get “caught” are the little guys who’s income is all reported on 1099s! If you got caught up in one of those mistakes, then your wait time to actually talk to person to get it fixed was upwards of 3 hours. That was reality under Trump.

    Better tax policies on all of the non-1099 income is a must.

  4. “…we might see a return to thoughtful policy discussions.” – With all respect in the world, I’m honestly unclear as to when good doctor is talking about. When was this mythical policy focused period? Newt Gingrich was happily focused on grievance politics 30 years ago. Reagan loved him some dog whistling fantasy stories about welfare queens 40 years ago.

    I’m 42 and I’m not sure there’s been particularly serious policy discussions in my lifetime — beyond the occasional one off outlier. I suppose one could easily say it’s worse now than it’s ever been with the power of the lunatic caucus turned up to 11, but I worry that pinning for the the good ol’ days is just rose colored glasses and we (as a country) may need to accept that things were quietly(ish) broken long before they were screamingly, on fire broken if we want to make progress and serious change for the better.

    “if only we could go back to the way it was” when the way it was is still broken might be a philosophy that requires a rethink.

  5. I learned about tax deductions from income when I was 16 years old; worked behind the soda fountain/lunch counter at a local pharmacy earning $27.00 weekly. Complained to the owner about FICA; he explained taxes and Social Security to me, told me one day I would be very grateful for that deduction. How right he was. I learned about child exemptions regarding my parent’s annual tax bill when they explained that I was valued at $600 annually for deduction from their filing when one year I earned $612.00 and they made me pay the taxes they owed for losing me as a deduction. They didn’t charge me room and board but I bought my own clothes, paid school fees and for books, my school lunches and my bus pass to get to and from school and any entertainment I had enough to afford.

    Here is another conspiracy theory aside from taxes (but that can change); the sudden GOP support for Jim Jordan as Speaker of the House is scary in and of itself. But should Trump become the RNC presidential nominee, does anyone else see the rising possibility of Trump naming Jordan as his running mate?

  6. JoAnn, that is VERY scary, moreso than Jordan as Speaker!
    And, yes, lifting the SS cap, not a new idea, would do some wonders.
    IMHO, the laws, and regulations that run the tax codes were set up to benefit the already wealthy by the already wealthy.

  7. All – there will be a roll call vote today on Jordan. This is to force non-MAGA GOPers to go on the record out loud, essentially about The Duck. Pray for some “profiles in courage”.

  8. Yesterday I read a ProPublica story about IRS’s audit of Microsoft over several years. Microsoft owes $28.9 billion in back taxes, fines and interest to cover the years 2003-2013. The story states that the IRS hired a corporate law firm to represent the agency and this incensed Microsoft because the corporate law firm enabled the IRS to beat Microsoft in court.

    Basically, Microsoft channeled most, if not all, of its profits to a small 85 person factory in Puerto Rico that burns software onto CDs. They finally got caught shifting income for tax avoidance.

    This is exactly why we needed to increase the IRS’s budget by $80+ Billion. Auditing large corporations and wealthy individuals that hide their income in tax havens could essentially eliminate the federal deficit. Unfortunately, those large corporations have many friends in Congress who will do their best to ensure their campaign donors never have to pay the taxes they actually owe and will instead keep harping on cutting social safety nets.

  9. The GOP House members to watch….if these cave to Jordan….Brian Fitzpatrick (PA), Don Bacon (NE), Young Kim (CA), Gus Bilirakis (FL), Andrew Garbarino (NY), Chris Smith (NJ), David Joyce (OH).

  10. When was the last time the Washingtonians rose to the occasion of debating the issue with intelligence and critical thinking skills? I’m at a loss.

    Therefore, I have to agree with Dirk on this one.

    As for taxes and the IRS, we all saw what Trump did to the IRS. He crippled them to whose benefit?

    Charles Koch is 88 and gifted over $5 billion to organizations his son runs. How is that possible without incurring substantial tax liability?

    It seems he spent hundreds of thousands creating the financial loophole himself. Until this country decides on a general strike, I don’t see the plague in Washington worsening. When one man can single-handedly set up tax loopholes and then benefit from them, it will only get worse.

  11. When I was a child shortly after WW 2, the republicans and democrats had been actual comrades in arms against a common foe and respected each other even when they disagreed on policies. That attitude has since been steadily eroded.

    Immediately after 9/11, there was a very brief resurgence of that sense of comradship. Flags flew everywhere. It didn’t last long.

    I saw it again, for about a week(or less) after Obama was elected the first time. Then Rush Limbaugh trumpeted his hope that Obama would fail and the sense of brotherhood and hope was immediately squashed.

    That feeling of common purpose was resurrected when Covid hit. We saw it in the neighbors who helped each other and the doctors and nurses who worked to the point of exhaustion and the millions of others who volunteered their time and efforts to meet the challenges we faced. But, once again, the forces of chaos, this time led by Trump, promoted fear and hatred instead of brotherhood and successfully turned Americans against each other.

    Where do we go from here? How bad do things have to get before Americans come to their senses and pull together to meet the many challenges we ALL face?

    Fortunately, there are millions of people world wide working to address climate change instead of denying it. There are millions of others helping refugees and immigrants instead of demonizing them. Millions live peacefully with their neighbors instead of attacking them.

    Each individual can do something to help instead of supporting the agents of fear, hatred and destruction. Whatever YOU can do, please hop to it!

  12. ” highlighting problems that such examination discloses (here, the widening gap between the rich and the rest)”

    First it’s necessary to get a critical mass of people to acknowledge that such a widening gap is a) a real problem that b) is amenable to a governmental solution.

  13. SCOTUS is about to weigh in on the tax code. When they do, we may have a clearer path to getting the wealthy to pay their fair share. On the other hand, we might be told that taxing the wealthy is unconstitutional. Keep it tuned to this channel to find out if Clarence and Sam have success in taking good care of their good friends, who go all the way back to the days just after they donned their robes.

  14. Peggy – I would bet real money that SCOTUS will rule that tax law is up to Congress – nuff said about any change.

  15. I have worked in international taxation and have appeared before the Ninth Circuit once in a tax appeal and am here to tell you that it is not only the IRC with its congressional definition of what is and is not taxable but tax treaties with foreign countries as well, agreements that supercede mere statutes such as the IRC per the Constitution.

    Both reportable and non-reportable income are subject to such congressional definition at the behest of corporate counsel of Koch and others, including gift and other taxes than the income version of the code. I have often thought that tax counsel for the rich and corporate class write the IRC and its “amendments”, hand them to House Ways and Means and arrange for expert testimony for the subsequent hearings. Poor people and/or their witnesses are absent at such friendly conclaves, and can’t come up with billions in campaign contributions per Koch et al.

    The most egregious example of reportable income that strikes me is the so-called “carried interest” section of the code, where equity funds are allowed (via congressional definition) to call commissions capital gains rather than what is plainly ordinary income, a pure gift of billions to the already filthy rich at the expense of the rest of us who have to make up such differential to meet budget requirements. I here note that many (including me) have been trying to get this atrocity repealed for years, but that both parties talk about such repeal for years but nothing happens. Wonder why? Campaign contributions, i.e., bribes?

    I have other examples of bad policymaking by the House Ways and Means, and considering the Constitutional requirement that all revenue bills originate in the House and the possibility that Jordan becomes Speaker and Trump is elected, stop the world. I want off.

  16. Racheal Maddow pointed out last night if Jordon is elected speaker, would he certify the vote in 24 if his candidate didn’t win? A lot of Americans don’t want any reps. that aided or condoned the 1/6 insurrection anywhere near the speaker’s gavel! They’re aiming for it again!

  17. The various, and many different, ways that the upper-income people get their money explains the comment that Warren Buffet made once. He said that his secretary is in a higher tax bracket than he is.

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