Beyond Wealth: Addressing America's Deepening Inequality

An equitable distribution of opportunities is critical to the long-term well-being of any society, and especially so for the United States, the richest country on Earth.

And yet.

Despite decades of trying fiscal, monetary, educational, and socio-cultural approaches, the Gini coefficient for the US is still a lamentable 0.49, reflecting acute and persistent societal problems. Wealth inequality—though the most obvious form of inequality—is merely a symptom of a deeper malaise. The unevenness of almost every major parameter—maternal health, primary education, healthcare, job opportunities, life expectancy, “food deserts” etc. across various races, states, and regions within the US is indicative of systemic failure. Economists, social scientists, and politicians have explored various direct and indirect “redistribution” methods including nationalized healthcare (akin to the National Health Service (NHS) in the United Kingdom), nationalized daycare for children (especially between ages 0-5), implementing a Universal Basic Income (UBI), and, most controversially, a race-based “reparations” program to atone for the sins—and consequences—of slavery. As well-intentioned as such efforts were, they all suffered from a common gaffe: attempting to boil the ocean while swimming against public opinion.

Politically, the most palatable, practical, and possible approach is much simpler: a wealth tax.

Today, America taxes only realized income and not accrued wealth. That self-defeating approach is, increasingly, shortsighted, and misses the forest for the trees. Originally instituted in the aftermath of the Civil War (in 1861), the “income tax” began as a 3% tax on all incomes over $800. There were many stutter-stops with either Congress repealing and/or the Supreme Court overturning the levying of income taxes. Eventually, the Sixteenth Amendment was passed (in 1913), thereby institutionalizing the income tax in American society.

Nevertheless, the century-old income tax regime originated during an era when America embodied stronger egalitarian principles, thrived in a markedly more rural environment, and championed localism. “Global” industries, offshoring, venture capitalism, and other such business strategies had not sprouted yet. The country’s primary focus remained on industrial machinery, with far less attention given to financial machinations such as “carried interest” and private equity. Despite science rapidly advancing, the “internet age” remained several decades away. “Wealth” and “income” maintained a high correlation, to the extent that the latter effectively served as a proxy for the former until the 1980s.

That correlation has waned significantly today. Two near-simultaneous and equally seismic developments occurred during the early 80s that inexorably altered the economic and societal fabric of America. The first was the tax-law changes of 1981 that lowered marginal taxes across the board and facilitated “wealth creation.” Additional reductions followed in 1982 and, more significantly, in 1986. The second big change came through the launch of the graphics-based Microsoft Windows computers in 1985. While today’s users would laugh at the primitiveness of computers circa 1985, the reality is that each of those machines had more computing power than the Apollo 11 missions that put Neil Armstrong on the moon. Truly, the advent of the computing age was a “giant step for mankind.” The combined effect of a relaxed tax regime and the quantum leap in technology manifested itself as a steroidal accelerant and unleashed economic forces that are still powering the global economy.

While these two epochal events yielded incontrovertible benefits, they unfortunately had a consequential side-effect: exacerbating societal inequality and asymmetrically distributing economic benefits.

Wealth inequality is a chronic human condition. Even at the dawn of the income tax era (the “Roaring 20s”), the rich became much richer while the poor stagnated. New ideas and technologies—be it the steam engine or mobile computing—may benefit many people (though not nearly all), but the financial spoils inevitably go to a chosen few. One unique attribute of the financially-juiced, technology-driven progress over the last 40 years is that the benefits have seldom “trickled down.” CEO pay (as compared to an average worker) has skyrocketed to almost 350 times in 2020 (from approximately 25 times in 1970). Perfect symmetry in terms of wealth and opportunity distribution can only be approached asymptotically. However, a more meaningful optimality than pitiful today’s situation does exist. And the key component of that more equal society is a judicious and comprehensive wealth tax.

The ultra-rich in America have access to entirely legal tax-avoidance techniques that essentially eliminate their tax obligations. Typically, this is because the IRS does not tax unrealized gains. Unless and until an owner sells and realizes gains from an asset—stocks, bonds, land, buildings, yachts etc.—the gains are not taxed in the US. For example, Elon Musk, with a net worth of $240 billion, has paid almost no federal income taxes over the last several years. He, (in)famously, draws “zero salary” from Tesla and his wealth is almost exclusively from the meteoric rise in Tesla stock over the last decade. Meta’s Mark Zuckerberg and Oracle’s Larry Ellison have consistently gotten an annual salary of $1. No income? No taxes! Jeff Bezos, Michael Bloomberg, Carl Icahn, and President Donald Trump have all utilized this “trick.” Even so-called progressives like Warren Buffett, Bill Gates, and George Soros play this game.

Economists estimate that the “true” tax rate for billionaires, using annual wealth growth instead of their reported income, is miniscule. America has trillions in debt and every sector except Defense has seen budget pressure. Education, transportation, healthcare etc. have all been subject to a series of “Sophie’s Choices’.” The painful truth is that the billionaires are not illegally avoiding taxes through mendacity or chicanery. Rather, they are simply using legal loopholes and procedural quirks (designed and implemented during a long-ago age) and minimizing taxes entirely legally and repetitively. Additionally, because loans and interest payments are not taxed, the rich simply borrow (at low rates) for their “living expenses” collateralized by their rising stock and asset holdings, repay later, and essentially live and get richer tax-free. Elon Musk funded his X acquisition in late 2022 almost entirely with his Tesla stock as collateral and therefore, incurred very minimal taxes—on the $44 billion purchase. Fittingly, the rich even have a morbidly funny name for this strategy: “Buy, Borrow, Die.” Ultimately, morbid or not, the joke is on the rest of us, the average American.

In 2022 alone, the unrealized capital gains for America’s billionaires was $8.5 trillion. A nominal tax on those gains, say 3%, generates approximately $255 billion in additional fiscal revenue. That same year, the IRS processed 160 million individual returns. The new revenue translates to approx $1,600 per person—essentially a form of a “Universal Basic Income” for every taxpayer. “Wealth Tax” is a time-tested strategy. Countries like Norway, Switzerland and Spain have had wealth-taxes since the 1800s. In Norway, for example, all assets over $170,000 (equivalent) are taxed at an annual rate of 1% with higher tiers as the assets grow.

Human nature is such that no one likes to pay taxes. Although the wealthiest individuals contribute significantly to the tax pool, the amount falls far short of what should be considered a fair share. While some grumble that the top 1% already shoulders 40% of the nation’s taxes, a more equitable perspective suggests that they should contribute closer to 65%, aligning with the proportion of wealth they possess. The litany of “complaints” against wealth taxes is well-known:

• Wealth taxes are unconstitutional.

• The rich will leave America and move to “tax havens.”

• Entrepreneurs will be dis-incentivized; there will be no future Teslas or Amazons.

• Money will be parked in trusts and other opaque vehicles.

While there is indeed a sliver of truth in each of these arguments, they are ultimately scaremongering. If the rich were all going to move for an additional 3% in taxes, California and New York would not have any billionaires. But in fact, they have the most. The reality is that wealth tends to cluster and accumulate where there is talent and skill. Corporations like Apple may indeed declare Ireland or Bahamas as their “legal HQ” for tax purposes and avoid taxes (which is a pressing, but entirely separate problem). However, billionaires do not have a “HQ.” Of course, the rich will leverage trusts, “double Irish Dutch sandwiches,” and other strategies to escape taxes. But the government must endeavor to close gaping loopholes and level the playing field by asking the rich to participate in the building and maintenance of the society that ultimately funded and fueled their success.

As the cliché goes, a perfect tax system need not be the enemy of a good, moral, and meaningful tax system. Yes, a “wealth tax,” thanks to Macomber, may presently be unconstitutional. So was interracial marriage—until the law caught-up with reality. The government should update outmoded approaches to revenue gathering. Sen. Wyden’s (D-OR) eminently sensible proposal and similar bipartisan initiatives are aiming to change exactly that.

America began as a tax-revolt. A quarter millennium later, the country is on the cusp of another. This time, the opponents are the rich among us. To quote the French, who are also equally fond of revolutions: Plus ça change, plus c'est la même chose.