Imagine a society with two tax systems. One taxes the wealth people have accumulated. The other taxes the labor people perform. This society seems to be getting along well enough, raising enough tax revenue to finance the public goods and services that voters have told lawmakers they want to see supported.
Now imagine that lawmakers have decided to cut the tax rates on wealth and raise them on labor. At the same time, the amount of wealth subject to the lower tax rates is rising as income from labor is shrinking.
That society, we would agree, is asking for trouble. In real life, would any society choose to take such an unsustainable course? One already has _ the United States since 1980.
In America today, virtually all the taxes that local, state and federal governments levy can be classified as either wealth-based or labor-based.
The wealth-based taxes include the state and local property taxes we pay on an annual basis and the one-time taxes on large inheritances and estates. Wealth-based taxes also include taxes on the income people get from holding wealth _ dividends and interest, for instance _ and the capital gains income from buying and selling assets. Throw in the corporate income tax here, too.
To sum up: The overall rate for wealth-based taxes has been decreasing while the overall rate for labor-based taxes has been increasing. At the same time, the potential base for labor-based taxes is migrating to the wealth-based tax side. And an ever-increasing portion of that potential base for wealth-based taxes faces no tax at all.
This is unsustainable.
Bob Lord practices tax law in Phoenix. Sam Pizzigati edits Too Much, the Institute for Policy Studies’ weekly publication on excess and inequality. TooMuchOnline.org.
Labor-based taxes obviously cover the levies paid on the income we earn from the work we do. These include personal income taxes and the payroll taxes that fund Social Security and Medicare.