Commentary: Tax the rich? It’s a lot harder than it seems

It seems like it would be quite easy to raise taxes on the rich. Polls show it’s popular. But Democrats in Congress have been having a really hard time figuring out how to do it. It needs to be a substantial increase that will bring in a lot of money to help pay for all the new social programs the Democrats want. It needs to pass constitutional muster. It must avoid unintended consequences that might reduce investment and job creation, or drive investment overseas, or damage the economy.

Personally, I’m not opposed to hitting the ultra-wealthy with higher taxes if there is a sensible way to do it. It should be confined to the ultra-wealthy. They can afford to pay higher taxes. Some of them arrange their finances to avoid paying personal income taxes, although some of their businesses pay substantial taxes. But the reality is that taxing the rich is harder than it looks. A variety of schemes have been floated, but each has substantial problems.

And it’s important to keep the nation’s tax structure in perspective.  

David F. Eisner, in a recent opinion column in The Hill, wrote: “Even on its face, the claim that the rich were under-taxed was always erroneous. The top 10 percent of taxpayers pay 70 percent of federal income taxes. . . . The top one percent pays 40 percent of federal income taxes, despite earning only about 21 percent of total reportable income. Is that less than “their fair share?” Since 2001, the top 1 percent’s share of federal income taxes paid grew from 33 to 40 percent.

“Moreover, what goes unsaid in liberal framings of our tax system is that 50 percent of Americans pay virtually no (less than three percent of) federal income tax. This fact is especially problematic, as half of Americans have no direct personal interest in reducing federal spending. This explains why rich new social programs often poll so well — they do not cost half of Americans anything. If you don’t have to pay for Congress’s profligacy, why oppose more spending?

Eisner notes that payroll and excise taxes (paid by most working Americans) are more regressive, “but, by almost any measure, the United States’ tax system is significantly more progressive than almost every country in the left’s beloved Europe, which relies primarily upon highly regressive value-added taxes to fund their vast social programs.”

The reality is that even if Congress finds a way to tax the ultra-wealthy, it won’t bring in enough money to pay for the trillion-dollar programs the Democrats want to enact. 

The nation’s tax system absolutely needs a major overhaul. It is horrendously complicated, and features so many loopholes, exemptions and deductions added over many decades (by businesses or interest groups that can afford platoons of accountants, attorneys and lobbyists) that it needs to be dramatically simplified. A broad tax base with low rates is certainly the best system. The problem is that for every loophole, an interest group exists that will fight to the death for it. It’s easier to just keep adding layers of complexity. Try to solve one problem and create another.

Everyone knows our tax system is terribly broken. But there exists no political will to do anything about it. So, good luck trying to tax the rich.