In case you missed it, California Gov. Gavin Newsom — the subject of my last column — survived his state’s recall election this week. With more than 70 percent of the votes counted at the time of writing, 63 percent of the voters have checked “no” to recalling Newsom. This result is more of a landslide than I expected, though I am not at all surprised that California will remain blue.
This week, I will shift my focus from a prominent west coast Democrat to an east coast one, Rep. Alexandria Ocasio-Cortez (D-N.Y.). Better known by her initials “AOC,” the New York congresswoman turned heads by wearing a “Tax the Rich” gown to the 2021 Met Gala on Monday evening.
Conservative activists had their predictable field day with AOC’s Met Gala attendance, and I honestly can’t blame them too much. Wearing a “Tax the Rich” gown to a $35,000-per-ticket event is just as tone-deaf as it is bold. And, according to Donald Trump Jr., the maskless AOC spent her night mingling with the “authoritarian mask Karens” of high society, such criticism from the former president’s son falls more on the unhinged side.
Name-calling aside, the merits of AOC’s arguments are worth considering. Income inequality in the United States has risen steadily for decades, and its effects have been unsurfaced by the COVID-19 pandemic. As AOC herself pointed out, the pandemic has increased the total wealth of America’s billionaires by $4 trillion.
However, the call to “tax the rich” fails to consider just how skewed the distribution of taxes paid by income group already is. In 2018, the top one percent of earners — those who made more than $540,000 — made 21 percent of all the money earned in the U.S. But when the IRS came knocking, those one-percenters coughed up 40 percent of all the income tax revenue collected that year.
Continuing with the 2018 data, I’ll expand this a bit further. The next group, the top two to five percent, earned 16 percent of all income but paid 20 percent of all taxes. In fact, these wealthy Americans are the only group consistently punching above their weight with the IRS every April.
The third-highest group, the top 5-10 percent, makes and pays 11 percent of both income and taxes, respectively. Perhaps the fact that 10 percent of Americans pay 71 percent of America’s income taxes is a better way to contextualize this.
AOC and other “tax the rich” advocates like Sen. Bernie Sanders (I-Vt.) and Sen. Elizabeth Warren (D-Mass.) often express the idea that the wealthy are not paying their fair share in income taxes. Even after perusing through the aforementioned 2018 tax data, I fundamentally agree with them.
Though the top 10 percent of Americans pay seven times more in taxes than the bottom 90 percent, they are the ones with the resources to scam Uncle Sam. Collaborating with elite accountants, setting up dummy shell corporations that only exist on paper to funnel money and deducting yachts when their primary residence is paid off (yes, this is a real thing) are all legal methods employed by the members of this group during tax season.
In 2015, former New York Gov. George Pataki (R) said that tax loopholes cost the IRS approximately $1.4 trillion. The IRS collected $1.9 trillion in income taxes that year, so it is reasonable to assume that cracking down on ridiculous exemptions like the yacht deduction would add a few hundred billion dollars to the federal government’s revenue.
Of course, no legislative action can address every loophole. Corporate tax policy is quite complicated, as executives have legally combined or dismantled their organizations to cheat in the past.
Because corporate assets are harder to measure than personal wealth, simply raising the corporate tax rate will not work either. Corporations will, and have, taken their headquarters abroad. In 2013, more than half of the foreign profits reported by U.S. corporations were reported in one of seven low-corporate tax countries. Interestingly, some of these countries are wealthy European democracies with an advanced welfare state — similar to the systems proposed by self-described “democratic socialists” like AOC.
In sum, the principle of “taxing the rich” is a great way to jumpstart a successful grassroots political campaign, especially one with some populism sprinkled in. But tax reform, not raises, is the way to close many of the loopholes exploited by society’s powerful members. In time, such reform will replace much of the “tax the rich” debate with legitimate and reasonable action.
And if somehow this column earns me the $35,000 necessary for a Met Gala ticket next year, I’ll be sure to dress in my best “Close the Loopholes” tuxedo.
