These labor-based taxes also include the more difficult to categorize sales and sin taxes. The lion’s share of the revenue raised from these taxes, we would argue, comes from people spending their labor-based income on basic living expenses or, in the case of sin taxes, on cigarettes and alcohol.
What has happened to the rates in these two tax systems?
Over the last three decades, the rates for wealth-based taxes have been plummeting. In 2011, the effective corporate income tax rate dropped to a 40-year low of 12.1 percent. The top federal estate tax rate has sunk from 70 percent to 40 percent since 1981. Estate-tax avoidance strategies have brought the actual rate paid on large estates down to less than half that. Many states have abandoned the state inheritance tax altogether.
The tax rate on capital gains did recently increase at the federal level, but the long-term trend has been downward, and the rate of tax on dividends has fallen dramatically, from 70 percent in 1980 to 20 percent today. Finally, beginning with the passage of California’s Proposition 13 in 1978, average property tax rates nationwide have declined sharply.
Meanwhile, the rates for labor-based taxes, taken together, have increased. Average Americans do pay federal income taxes at a slightly lower rate than 30 years ago. But the effective payroll tax rate has increased sharply, as the ceiling on wages subject to Social Security taxes has risen and the ceiling on wages subject to Medicare taxes has been removed entirely.
On top of that, sales taxes have also increased steadily, as have sin taxes.
The two tax systems, however, don’t operate on a totally separate basis. The money that makes up the base in one system can migrate to the other. Over the last three decades or so, the available tax base from our labor-based tax system has been migrating to the wealth-based tax system.