What will Kamala Harris do about America’s soaring inequality and shameful tax system?

Her announcement today about capital gains and small businesses

Friends,

A few Americans at the very top have extraordinary wealth but pay incredibly low rates of income tax. Why? Their hugely profitable businesses generate very little taxable income. Mostly, they generate capital gains.

Today, Kamala Harris announced that she would increase the capital gains tax to 28 percent. That’s higher than the current rate of 23.8 percent, but far lower than the 39.6 percent rate Biden had proposed.

The move apparently came after pressure from her campaign’s biggest donors to back off some of its most aggressive tax proposals.

In the same speech, Harris rolled out her new plan for an expanded tax break for business startups, including a 10-fold expansion of a tax deduction for new small businesses. She said she would expand the startup-expense deduction for small businesses to $50,000. (Currently, business owners can deduct up to $5,000 in startup expenses—costs they incur for items such as market surveys, advertisements, and salaries for workers in training even before the business officially begins operating.)

I’m hoping Harris sticks with Biden on Biden’s most important tax proposal: A 25 percent minimum tax on Americans worth more than $100 million. This 25 percent tax would apply to a combination of their regular income and their unrealized capital gains.

It would raise roughly $500 billion in tax revenue over a decade, according to the Treasury Department.

Biden would also tax unrealized gains at death for those holding more than $5 million worth of assets.

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Why is Biden’s 25 percent minimum billionaire’s tax so important?

Consider Warren Buffett. Several years ago, Buffett made a claim that would become famous. He said that he paid a lower tax rate than his secretary, thanks to the many loopholes and deductions that benefit the wealthy.

The 400 wealthiest Americans today still pay a lower total tax rate — spanning federal, state, and local taxes — than any other income group, according to newly released data.

According to Forbes, Buffett now has $149.9 billion in wealth. On the conservative assumption that the rate of return on his wealth is 5 percent, Buffett’s real pre-tax income last year — his share of his company Berkshire Hathaway’s profits — was roughly $7.5 billion. Yet Buffet paid an effective income tax rate of less than 1 percent.

How did Buffett accomplish this? His increasing wealth, consisting of shares in his company Berkshire Hathaway, is all in unrealized capital gains. One share now costs some $715,778 — more than 60 times what it sold for in 1992.

To finance his personal lifestyle, Buffett has needed to sell only a few shares each year. By selling just 20 shares, for example, he moves $14 million over to his personal bank account. He then pays tax on the small amount of capital gains he realized by selling 20 shares.

Alternatively, he can finance his lifestyle by taking out tax-free loans backed by the stock he owns.

This is why merely raising the top marginal income tax rate won’t affect Buffett’s (or Bezos’s or Zuckerberg’s or Musk’s) tax bills. They don’t have much taxable income in the first place. It’s why the important action is found in capital gains, especially unrealized — that is, uncashed — gains.

Under current law, if they hold most of their wealth until they die, their heirs can inherit it without paying a dime of capital gains taxes. That’s because it was never cashed out.

Here’s the thing: According to the tax code, the basis from which capital gains are calculated — the original price of the assets — is wiped out on death. Instead, the basis automatically rises to the asset’s current market value.

Which is why the United States is rapidly moving toward an aristocracy of dynastic wealth.

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Combining all taxes at all levels of government (federal, state, and local), the actual U.S. tax system resembles a giant flat tax that becomes regressive at the very top.

Almost everyone pays an effective tax rate of roughly 28 percent, which rises slightly as it moves toward the top 0.1 percent. Then the rate drops significantly at the top — where the effective tax rate falls to 23 percent for the 400 richest Americans (see chart, below).

[Saez and Zucman]

This tax system would be bonkers under any circumstance, but it’s totally absurd now that wealth has been soaring at the top. The Tax Policy Center estimates that the top one-tenth of 1 percent of households receive more than half of long-term capital gains. 

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For much of the 20th century, the U.S. tax system protected against extreme disparities. But as wealth has surged to the top, our tax system in the last four decades has instead reinforced disparities. Wealth translates into power, and power translates into the ability to reduce taxes.

The three traditional progressive taxes — the individual income tax, the corporate income tax, and the estate tax — have all declined precipitously.

The top marginal federal income tax rate has fallen from more than 70 percent every year between 1936 and 1980 — peaking at 94 percent during the final years of World War II, and over 90 percent under Republican President Dwight Eisenhower — to 37 percent in 2018. (The income threshold at which this rate kicked in was several million of today’s dollars.)

Corporate taxes — which are progressive in the sense that they tax corporate profits, a highly concentrated source of income — have declined from about 50 percent in the 1950s and 1960s to 16 percent in 2019. And estate taxes on large bequests are now almost negligible due to a high exemption threshold, many deductions, and weak enforcement.

A renewed political demand calls for progressive taxation to reverse these trends — to achieve greater tax justice, raise revenue to pay for important public goods, and curb the rise of inequality.

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