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The Logic of Taxing the Rich, and Why Dems are Afraid to Use It

No candidate for president has suggested that the nation should raise the marginal tax rate on the richest beyond the 38 percent rate it was under Clinton (it’s now 35 percent, but the richest of the rich, as I’ll explain in a moment, are paying only 15 percent). Yet new data from the IRS show that income inequality continues to widen. The wealthiest 1 percent of Americans are earning more than 21 percent of all income (the data are from 2005, the latest the IRS has examined). That’s a postwar record. The bottom fifty percent of all Americans, when all their incomes are combined together, is earning just 12.8 percent of the nation’s income.

The biggest emerging pay gap is actually inside the top 1 percent. It’s mainly between CEOs, on the one hand, and Wall Street financiers – hedge-fund managers, private-equity managers (think Mitt Romney), and investment bankers – on the other. According to a study by University of Chicago professors Steven Kaplan and Joshua Rauh, more than twice as many Wall Street financiers are in the top half of 1 percent of earners as are CEOs. The 25 highest paid hedge fund managers are earning more than the CEOs of the largest five hundred companies in the Standard and Poor’s 500 combined. CEO pay is outrageous; hedge and private-equity pay is way beyond outrageous. Several of these fund managers are taking home more than a billion dollars a year.

You might think that Democrats would do something about the anomaly in the tax code that treats the earnings of private-equity and hedge fund managers as capital gains rather than ordinary income, and thereby taxes them at 15 percent – lower than the tax rate faced by many middle-class Americans. But Senate Democrats recently backed off a proposal to do just that. Why? It turns out that Dems are getting more campaign contributions these days from hedge fund and private equity partners than Republicans are getting. They don’t want to bite the hands that feed.
Taxing the super-rich is not about class envy, as conservatives charge. It’s about the nation having enough money to pay for national defense and homeland security, good schools and a crumbling infrastructure, the upcoming costs of boomers’ Social Security (the current surplus has masked the true extent of the current budget deficit, but it won’t for much longer), and, hopefully, affordable national health insurance. Not to mention the trillion dollars or so it will take to fix the Alternative Minimum Tax, which is now starting to hit the middle class.

If the rich and super-rich don’t pay their fair share of this tab, the middle class will get socked with the bill. But the middle class can’t possibly pay it. America’s middle class is under intense financial pressure. Median wages and benefits, adjusted for inflation, have been going nowhere for thirty years; health costs are soaring (employers are quickly shifting co-payments, deductibles, and premiums to their employees), fuel costs are out of sight, the prices of the houses occupied by the middle-class are in the doldrums.

What’s fair? I’d say a 50 percent marginal tax rate on the very rich (earning over $500,000 a year). Plus an annual wealth tax of one half of one percent on net worth of people holding more than $5 million in total assets. Can’t be done, you say? Well, the highest marginal tax rate under Republican Dwight Eisenhower was 91 percent. It dropped under JFK to the 70 percent range. You say the rich will leave the country rather than face a marginal tax of 50 percent? Let them, and take away their citizenship.

If the Democrats stand for anything, it’s a fair allocation of the responsibility for paying the costs of maintaining this nation. So far, neither the Dem candidates for president nor the Senate Dems have shown a willingness to uphold this fundamental principle. It seems the rich have bought them out.

Robert Reich is the nation’s 22nd Secretary of Labor and a professor at the University of California at Berkeley. This post originally appeared on his blog.