By Robin Lehman’s recent piece got me thinking about taxes. That piece got me thinking about tax policy. I agree that we need taxes to pay for the things that benefit everyone. Infrastructure, defense, education, health care are all things that are supported by tax policy. Tax policy is also intended to alter behavior and it does in a big way. I agree that our highest marginal income tax rates could go up. That rate was around 90% post-World War II and through the 1950s. That was a marginal rate; it was only on income above $200 to $400 thousand, depending on the year. In today’s dollars, that means incomes above roughly $3.5 to $4 million. You didn’t pay 90% on everything you earned.
Reaganomics was problematic, even at the time, and very few thought “trickle-down economics” was going to work. We can’t blame it all on Reagan. It was Kennedy, completed by Johnson, who proposed the Revenue Act of 1964 that cut the top marginal rate to 70%. Reagan took the marginal rate down to where it roughly is today; 37% on incomes over $600,000 for single filers. The band actually moved down since the $600,000 has remained constant and was worth a lot more in the 1970s. We are taxing middle earners at higher rates than we used to. One could also argue that the 90% was extraordinary since the country was paying off the huge debt incurred fighting World War II. Appropriately, the rate came down when the war debt was paid. One could further argue that our debt situation today is just about as bad as it was in 1946.
Distinctions are important. First who are the “rich” in “tax the rich”? A lot of people, take professionals, who’ve done very well for themselves - many of their careers took extraordinary personal sacrifice. At the end of the day, they were still working for a paycheck. Their wealth is based on income. Many of them feel that they are one health care emergency away from bankruptcy, no matter how carefully they manage their money. From the perspective of an Elon Musk, these folks are closer to homeless people than to him. People like Musk don’t have large incomes (well, comparatively they do, but it isn’t what you think). Instead, they borrow money against their capital to generate cash flow. They turn income into debt and don’t get taxed on that. It’s a loophole it would be nice to change.
As a matter of tax policy, we treat capital differently from income. We treat corporations differently from individuals. If you acquire most of your wealth through capital, you typically end up paying much lower taxes than someone whose wealth is based on income. E.g. Person A makes $100,000 in income for the year, they work a job and get a paycheck. Person B sells shares of stock that year for a gain of $100,000. At the end of the year, they both have the same amount of cash. But A will have a tax liability of about $13,000 while B’s will be about $5,000. B would actually have more cash, because they’d have the basis of the shares they sold, which wouldn’t be taxed.
Corporations have a similar story. We’ve encouraged business growth, so tax rates for companies have been relatively low. But corporations have many ways to reduce their tax burden even more. E.g. Corporation A takes its patents and intellectual property and puts them in a corporate entity in Ireland. It charges a large license fee to its U.S. subsidiary for use of that property. Taxable U.S. profit is reduced since that is a cost to the U.S. business, and profit is shifted to Ireland. Ireland’s tax rate is very low, so you have moved profit out of a high tax jurisdiction to a lower tax one. This is standard practice and perfectly legal.
I pay taxes for services and for the value I receive. So, if tax dollars go to address the homeless situation, I’m OK with that since reducing homelessness has a positive impact on me, my family and our society. But, taxes are not about transferring wealth from those who’ve earned it to those who haven’t. That’s confiscation. Reasonable people can argue about whether an initiative creates value for society or not, but there’s a hard line between creating societal value and simply transferring wealth.
My tax dollars also must be used efficiently and effectively. One of the reasons our current astronomical property taxes annoy me is that we fund a very broken system that is failing the children we’re trying to educate. We are wasting money at an unsustainable rate and our legislature needs to get its act together and do something.
In terms of tax policy, we should do away with property taxes altogether. I own my home. I worked hard to buy it. But, in Vermont, what I really bought was an option to rent my home for as long as I decide to stay here. As a retiree, my income is flat, but my landlord keeps raising my rent 10% a year or more. Property taxes are appropriate perhaps, to fund local services; but it isn’t appropriate to use it to fund hair-brained schemes thought up by Montpelier bureaucrats.
I’m concerned this “just raise taxes” mindset isn’t going to change anytime soon. Our new democratic candidate for governor commented in a recent interview something like, “we can tax high earners more because they got big tax cuts from Trump’s Big Beautiful Bill.” That’s not true. It’s dangerous to assume everyone got lower taxes and use that as justification for raising taxes in a state that already has one of the highest tax burdens in the country.
In my opinion, “tax the rich” is as simplistic and ill-advised as “defund the police.” “Tax the rich” is a cynical and punitive way to come at tax policy. We should consider what incentives we want our tax policy to create. We need to consider not just income, but capital and corporate taxes. We also need to fix broken systems like education and health care that absorb huge amounts of treasure without creating value for Vermonters. We need to attract more people to the state and bring in businesses. Our current mindset seems to be figuring out how to get a bigger slice of a shrinking pie. Not how to make the pie bigger.
Mooney lives in Waitsfield
