Should the wealthy pay more tax? I'll gather the latest data and arguments on both sides to answer.
Whether the wealthy should pay a higher tax rate than they currently do is a debated question of economics, fairness, and fiscal policy. The U.S. already has a progressive tax system, but there are active proposals to increase rates on top earners.
Current System in the U.S.
A progressive tax takes a higher percentage of tax from people with higher incomes, with the aim to help reduce inequality – taking lower average levels of tax from low wage earners, and taking more from higher wage earners.
Currently, the top federal marginal income tax rate is 37%. That rate is scheduled to sunset at the end of 2025, when it would revert to the 39.6% rate in place before the Tax Cuts and Jobs Act (TCJA) of 2017. For 2025, the 37% rate kicks in for single filers once taxable income exceeds $626,350.
How much the wealthy actually pay is disputed because of different types of income:
•Income from wages is taxed at a higher rate than comparable income from capital gains or dividends. The top federal marginal rate on long-term capital income is 23.8% while the top marginal ordinary income and payroll tax rates on wages is 40.8%.
•Research from UC Berkeley economists found that for the 400 wealthiest Americans - the top 0.0002% - the effective tax rate fell from 30% in 2010–2017 to 23.8% in 2018–2020, and that when taking a comprehensive view, ultra-high-net-worth individuals appear less taxed than the average American. The effective rate for the U.S. population as a whole was 30.2% in 2018-2020.
•Other data shows the top 1 percent of taxpayers paid a 23.1 percent average rate, six times higher than the 3.7 percent average rate paid by the bottom half of taxpayers, and the top 50 percent of all taxpayers paid 97 percent of all federal individual income taxes.
Proposals to raise taxes on the wealthy include:
•Restoring the top marginal rate to 39.6% for high earners, or specifically creating a new 39.6% bracket for individuals earning at least $2.5 million
•A 25% tax on Americans with wealth over $100 million and in the Biden administration's fiscal year 2025 budget a minimum 25% tax on total income including unrealized gains for those with over $100 million in assets
•A 2% annual tax on household net worth between $50 million and $1 billion, and a 3% tax on net worth above $1 billion
Polling suggests partisan divides: While Democrats strongly support higher taxes on the rich, Republicans are more opposed, especially to large income tax increases.
Arguments For Raising Taxes on the Wealthy
1.Fairness and ability to pay: Proponents argue that taxing the wealthy at a higher rate is a matter of fairness and social responsibility, and that wealthy individuals have more resources at their disposal, and it is only fair that they pay a higher percentage of their income. The diminishing marginal utility of money is often cited - for someone on £10,000 a year every £1 is important, but if income goes up from £250,000 to £300,000 there is limited increase in living standards.
2.Reducing inequality and funding public services: Those in favor argue it is a way to address income inequality and ensure everyone pays their fair share towards public services and infrastructure. The aim of progressive taxation to redistribute wealth and reduce income inequality is supported by data that countries with more progressive systems have lower inequality.
3.Revenue and deficit reduction: Arguments for raising rates start with the need to raise additional revenue and to signal effort to reduce the deficit, collecting revenue from taxpayers with the most income, who received the biggest tax cuts, and who are least likely to reduce consumption or work effort in response. Progressive taxation can also provide more resources for government programs that benefit everyone, such as education, healthcare, and infrastructure.
Arguments Against Raising Taxes on the Wealthy
1.Economic growth and investment: Opponents believe it could stifle economic growth and discourage investment. Higher taxes on the wealthy could lead to a decrease in investment and entrepreneurship. Critics of progressive taxation claim it can disincentivize investment and entrepreneurship. The wealthy are often described as job creators whose low tax rate is justified.
2.Disincentive effects and Laffer Curve: If taxes are too progressive, people may face a disincentive for getting a better-paid job, e.g. a top rate of 80% may encourage people to work elsewhere. Laffer curve analysis suggests that if marginal income tax increases too much, it may reduce the incentive to work. One economist found increasing the highest marginal rate leads to greater sheltering of wealth and that higher income taxes actually decrease tax revenue from the rich.
3.Tax avoidance, distortions and timing: Arguments against raising rates cite bad timing in a weak economy, and that higher rates would encourage high earners to convert pay into lower-taxed forms of compensation, are seen as a negative incentive for small business growth, and increase tax evasion and economic distortions. Other critics argue wealth taxation can be seen as unfair to those who have worked hard to accumulate wealth and that raising the rate just because they work hard isn’t right.
4.Complexity of growth link: Studies have shown the relationship between tax rates and economic growth is complex and that moderate increases on the wealthy are unlikely to have a significant negative impact, while other economists are skeptical that tax cuts for the wealthy necessarily lead to increased investment. Empirical evidence on the Laffer Curve is mixed, and the optimal rate may depend on various factors.
Considerations
The answer depends on what policy goals are prioritized:
•If the priority is reducing inequality, funding social programs, and reducing the deficit with revenue from those most able to pay, proponents argue a higher rate is justified.
•If the priority is maximizing investment, entrepreneurship, and avoiding capital flight or tax avoidance, opponents argue keeping rates stable or lower is preferable.
Some propose a middle approach, such as increasing the top rate by 10 to 20 percent rather than a large hike, to balance revenue and incentive effects.