A Bold Tax Reform Proposal and the Miracles It Could Create

A weekend with Bill Ayers and Bernadine Dohrn has thrown the doors wide open to what is possible. And today we consider how a simple change to the income tax rates could generate $600 billion in additional revenue while eliminating income tax on everyone earning under $77,000. So much possible if we open our eyes.

First some good news: Solarization of the Airport. Yesterday, we reported that the City Council’s Comprehensive Airport Expansion Plan did not include funds to solarize the airport and we encouraged you to contact the Council. Well, the City Council bent to the pressure applied by New Energy Economy, Retake Our Democracy, and others and voted unanimously to include solarization of the Santa Fe Airport as part of its Comprehensive Plan. Our take-away? With an engaged, activated community, climate, economic, racial, and social justice initiatives can be achieved.

Events & Opportunities.  Great stuff this week, including TODAY’s 3-5pm Roundhouse Activism meeting, this evening’s tremendous New Energy Economy panel discussion, and this weekend’s two-day Red Nation Conference in Gallup. Click here to get details.

The rest of this post provides a radical proposal, something entirely possible, but also entirely outside current public policy discourse, at least among elected officials. What if we radically changed the federal personal income tax code, returning to 1965 rates. You will be blown away by what might be possible. Read On.

What If Our Tax System Were More Equitable 

As described in yesterday’s post, Bill Ayers’ book, Demand the Impossible, points out how we have been subtly led to accept an unending number of insults to our sense of justice as part of the fabric of life in America, part of the landscape like so many mountains and lakes, the immutable reality of America. But are these things immutable? Are they impervious to change? Are they inevitable in 21st century America? Let’s look at just one affront, the wealth gap, and how we could address this gap by adjusting the tax rates of the top 5% of income earners and return the tax rate to 1965 levels. It is mind blowing. The analysis of tax rates and the revenue changes those rates produce is a tad wonky and requires concentration to follow. But the bottom line is that by returning to the personal income tax rates of 1965 for the top 5% of American wage earners, we could completely eliminate federal personal income taxes for the bottom 50% of Americans (those earning $77K and below) and still increase the federal tax revenue collected by $600 billion — a 40+% increase in revenue available for social services, infrastructure, education, etc. Read on for the details. The analysis of tax rates and revenue generated can be a bit thorny, but hang with me, as the rewards can be very significant.

The wealth gap has reached an unspeakable level due to political tinkering with wage laws and tax laws and the ever-rising cost of core human needs. Shifts in tax policy began in 1965 and accelerated in 1982 under Reagan. But since 1981, tax policies benefiting the 1% have been approved by Democrats and Republicans alike. In 1981, both Democrats and Republicans began embracing neoliberal policies that were built on the premise that if you didn’t tax the wealthy, they would spend more and stimulate the economy.  It was a theory at the time, but the ‘trickle down theory’ has been proven to be false. The chart below shows that since Eisenhower, the income tax rate on the wealthy has been reduced from 92% to today’s rate of 39.6%. The 39.6%  rate does not include the wealthy’s capacity to shelter income, to utilize an array of tax deductions on housing and the like, and to accumulate wealth through capital gains taxed at only 20%.

Let’s stop and ponder this. A person earning the minimum wage in New Mexico ($7.50/hour) earns $15,600 a year working full-time. He or she likely isn’t working in an air-conditioned office. This person is likely doing serious manual labor, and minimum wage jobs are notoriously unstable employment. Yet he or she must pay 15% of their income to taxes. What’s more, they likely do not own their own home, so they can’t utilize a mortgage deduction. It is still less likely that they will be sheltering some of their income into a 401-K. So they are likely to pay precisely 15% of their income or $2350. A billionaire who makes a particularly prescient investment (maybe not so prescient, maybe insider information only available to the wealthy) invests a million dollars in a property and sells it a year later for $2M. He earns $1 million by writing a check or clicking a few times on his computer. Yet, he or she pays just 20% on that gain. Let’s say this billionaire also earns $500K a year in income, while paying a tax rate of 39.6% of his/her income to taxes, that is before he writes off $100K in interest on his four-bedroom home with a pool and putting green, and before he deducts all the donations to the charter school his children attend so they don’t have to go to public school; and before he deducts the cost of country club membership where he golfs with business associates. What kind of ‘deductions’ does our pal earning $15,000 a year get? Which of these folks do you suspect could use a tax refund more? Who do you think works harder? But it doesn’t have to be this way.

Now let’s take a look at the very illuminating chart below and kick open the doors of our imagination to consider what might be possible. The chart below is from the National Taxpayers Union, a conservative think tank that argues that the top 1% pay a disproportionate share of the total Federal personal income tax collected each year. But I turned their thinking on its head. The top 1% pays roughly 36.9% of their Federal personal income in taxes (before deductions, of which there are plenty). Even after these deductions this group pays 40% of the $1.4 Trillion of the total US personal federal income taxes collected or roughly $560B. The top 2-5% pays 20% of the total collected in Federal personal income tax, so these two brackets contribute 60% of all personal income taxes. As you can see, the totals contributed by each tax bracket decline as income declines, with the bottom 50% of US income earners — those earning $38K or less per year — contributing just 2.75% of all personal income taxes collected.

While not discussed in Ayers’ book, one obvious and far-reaching policy change that could substantially improve the quality of life for the majority of Americans and substantially address the wealth gap is to restore the 1965 personal income tax rates on the top 5% of income earners. Thanks to the Tax Foundation and other sources, The Business Insider was able to analyze tax rates over the past century, along with government revenue and spending over the same period. This analysis revealed a lot of surprising conclusions, including the following:

  • “Today’s government spending levels are too high, at least relative to the average level of tax revenue the government has generated over the past 60 years. Unless Americans are willing to radically increase the amount of taxes they pay relative to GDP, government spending must eventually be cut.
  • Today’s income tax rates are strikingly low relative to the rates of the past century, especially for rich people. For most of the century, including some boom times, top-bracket income tax rates were much higher than they are today.
  • Contrary to what Republicans would have you believe, super-high tax rates on rich people do not appear to hurt the economy or make people lazy: During the 1950s and early 1960s, the top bracket income tax rate was over 90% — and the economy, middle-class, and stock market boomed.
  • Super-low tax rates on rich people also appear to be correlated with unsustainable ‘sugar highs’ in the economy — brief, enjoyable booms followed by protracted busts. They also appear to be correlated with very high inequality. (For example, see the 1920s and now).” Just looking at the first graphic in this post shows that the Great Depression and the 2008 financial collapse each correspond to periods when tax rates on the rich were lowest and, as noted above, the period of greatest economic growth occurred when tax rates on the rich were highest.

So I asked myself, what would happen if we increased the personal Federal income taxes paid by the top 1% to 1965 levels (80% in 1965), and increased the rate paid by the top 2-5% income earners to an average rate of 50%? Doing this would essentially entirely reverse the gap identified at left which depicts the decline in average weekly income compared with increased productivity. In 1965, the rate paid by the top 2-5% was 53-63%, so this represents an actual reduced rate from what that bracket paid in 1965. This simple adjustment in the Federal personal income tax rate for the top 5% would generate $300B more revenue than all taxes paid by all tax payers in 2015. If you maintain the 28% tax rate for those earning between $133K-$189K (the 5-10% top earners) you produce $150B.

If you then cut the tax rate from 28% to 21% for those in the 25-50% tax bracket (who earn between $77-$133K) and eliminate all income taxes on the bottom 50% of American tax payers (individuals earning less than $77K), you wind up with a total INCREASE in Federal personal income taxes collected of just over $600B. Imagine the impact on the majority of working Americans — absolutely no personal income taxes to be paid. And the next 25% of income earners (earning between $77-$133K) would get a 25% cut in their taxes, as well. But this is where things get very interesting, as we also have $600B a year of extra revenue to play with. The imagination soars as to what could be done with this.

What if we used this newly found surplus provided by the top 5% to create a Universal Basic Income (UBI). From a recent TruthOut report I found that, “The UBI would be for those who truly needed it — those who could not endure traditional full-time employment, either because of age, illness, disability, care-taking or student status. As baby boomers grow old and need care, as students struggle to earn an education without becoming hideously indebted, and as parents yearn to stay home with infants and very young children, a UBI would truly revolutionize society. Proposals vary, with costs depending on whether or not UBI would be paired with other social programs, like universal health care. Karl Widerquist, a Georgetown professor of political philosophy, estimated that at $6,000 per child and $12,000 per adult, the net cost of UBI would be $539 billion per year. This number may sound astronomical, but to put it into perspective, Widerquist writes, a UBI would cost ‘less than 25 percent of the cost of current US entitlement spending, less than 15 percent of overall federal spending, and about 2.95 percent of Gross Domestic Product.’ It would immediately lift more than 43 million people out of poverty, including 14.5 million children.”

And as Truthout describes, “But as basic income advocate Scott Santens points out, for the cost of UBI to truly be accurate, economists need to deduct the cost of all the social safety-net programs and tax credits that UBI would replace. Depending on the other choices that we, as a country, make, the total cost of UBI would be somewhere in the “hundreds of billions of dollars range.” The cost of not eliminating poverty? It’s over $3 trillion a year.”  Click here to review a TruthOut report on the Universal Base Income proposal, which includes citations to support assertions made above.

UBI may not be the program where you might choose to put 70-80% of the $600 Billion generated through the tax reform plan above, although lifting 14.5 million children out of poverty seems a noble purpose. What’s more, at $12,000 per adult, retirees on SSI would get a significant boost in their income, while students attending college would have $12,000 a year to pay for expenses and tuition. And if we decided to use $70 billion of our new revenues, we could fully fund the free college tuition plan proposed by Sen. Sanders. Together we would entirely eliminate student debt, lift 14.5 million children out of poverty, and provide significantly greater economic security for our seniors and low-medium income families, with another $50-$100 billion left to spend.

What’s more, the income distributed to families, students, and seniors would be spent (not hoarded), stimulating the economy significantly. The UBI may not be where we ultimately decide to spend our $600 billion, but it is an example of what might be possible. By paring back the UBI somewhat, you could have $100 billion a year to spend on infrastructure or on universal pre-K. But the point is that as long as we operate under an assumption of scarcity, the limits of possibilities for achieving justice are severely limited. I owe much to Bill Ayers for opening my mind to the kind of possibilities outlined in this post. We will continue to examine these possibilities in future posts.

And before you dismiss the possibility of achieving this kind of adjustment in the tax brackets, consider that in 2004, 54% of Californians passed a millionaire’s tax that has produced billions of dollars of revenue to support innovation and service delivery in mental health services. And recall also, that this tax proposal would eliminate personal income taxes entirely for half the population and reduce it by 25% for another 25% of the population. That is quite a constituency in the making.

The People’s Platform: A Modest Step Toward Justice. But let’s not forget, there are eight far more modest bills in the People’s Platform, and our NM leadership has an abysmal record of sponsoring those bills. Our pressure encouraged the City Council to incorporate solarization of the airport, let’s continue to pressure our House delegation to advocate for these eight bills (while remembering how economically feasible this all would be by making the above tax reform a reality). Click here to get to a recent post, which includes discussion of the bills, the report card of Rep. Lujan and Rep. Lujan Grisham, and links to contact info. Let’s demand that our representatives show leadership on these bills.

In solidarity,

Roxanne and Paul

Below is an example of what leadership looks like.


One thought on “A Bold Tax Reform Proposal and the Miracles It Could Create

  1. Paul, please correct the house bill number for industrial hemp that I sent to you. The correct number is HR 3530. Ask Retake readers to call/write Lujan asking him to cosponsor. He sits on the subcommittee where it’s been assigned – Energy & Commerce Health Subcommittee. Thanks. Marge


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