Taxes on the Wealthy: New Top Brackets Needed for the Have Mores

Any solution to the nation’s fiscal challenges will require tax increases, and tax increases on high earners in particular. But as the debate over the wealthy and taxes revs up yet again, fueled by President Obama’s renewed call to repeal the Bush tax cuts, it is time for some fresh thinking about how much the rich—and especially the super rich—should be paying.

Under current law, the top income tax rate applies to all earners making above $373,650—treating the merely affluent no different than the super rich. This doesn’t make sense. A couple making $400,000 a year in a major metro area is certainly very well-off, but they are not rich in the way of a CEO who pulls down $10 million a year. The tax code should reflect this reality by including new brackets for the richest of the rich.

The need to make distinctions between the Haves and the Have Mores has grown as those at the tippy-top of the income ladder have pulled far away from even the upper rungs. Between 1979 and 2008, according to data compiled by the scholars Thomas Piketty and Emmanuel Saez, the upper rungs (households in the top 10 percent) saw their average incomes nearly double from $135,429 to $233,711 (in 2008 dollars)—nice gains, and far greater than middle class households.

But folks in the top 10 percent may feel downright poor when they look upward, given that the top 1 percent really raked it in, seeing their incomes nearly triple during those decades, going from an average of $336,311 to $905,570.

And the inequality within the top 1 percent is even bigger. Between 1979 and 2008, average income in the top 0.1 percent of households quadrupled, soaring to $3.98 million a year. That’s a lot of money, to be sure. But maybe not when compared to the real winners of the new Gilded Age: households in the top .01 percent saw their average incomes grow from $2.57 million to $17.1 million—a whopping sevenfold increase.

Put another way, when President Reagan enacted historic tax cuts in 1981, households in the top .01 percent made about 2.5 times more than those in the top 0.1 percent and eight times more than those in the top 1 percent. Today, those at the very pinnacle of the income stream make over four times more than those in the top 0.1 percent and 19 times more than the merely affluent in the top 1 percent.

A lot of numbers, I know. But the point is that the largest income disparities in America today can actually be found among the wealthy. The U.S. tax code should reflect this new reality.

Last month, Representative Jan Schakowsky introduced the Fairness in Taxation Act that would enact new brackets for income starting at $1 million. Here’s how it would work:

  • $1-10 million: 45%
  • $10-20 million: 46%
  • $20-100 million: 47%
  • $100 million to $1 billion: 48%
  • $1 billion and over: 49%

The Fairness in Taxation Act would also tax capital gains and dividends as ordinary income for those making over $1 million a year.

Higher taxes on the super wealthy are sure to meet stiff resistance. Objections will be made on the grounds that such taxes are unfair and will stifle growth. Neither argument holds water.

Taxes pay for the public structures that make wealth creation possible: the infrastructure, schools and universities, courts, scientific investments, and all the rest. As Andrew Carnegie pointed out in “The Gospel of Wealth” over a century ago, and as Warren Buffet likes to stress, people get rich by capitalizing on these common societal investments. It is reasonable that those who do the best in this regard contribute the most to bolstering the public systems that underpin success and wealth.

As Carnegie argued, taxes paid by the wealthy allows these winners to “recycle” the opportunities they have had for others. Without such regeneration, Carnegie feared that the U.S. would be dominated by the inherited rich and face economic stagnation.

History suggests that higher taxes on the wealthy can actually fuel growth by helping to bankroll new investments in the future. The United States had average annual growth of 4.4 percent during the 1950s and 3.9 percent in the 1960s, decades that saw major new public spending on education, infrastructure, and science—and very high taxes on the super wealthy. President Clinton raised taxes on the wealthy and presided over a historic boom, with average growth rates of 3.9 percent.

In contrast, George W. Bush slashed taxes on the wealthy and drove taxes down to their lowest portion of GDP since 1950. The result? The worst economic years in postwar history, with an anemic 2.1 percent growth, almost zero net job creation, and stagnant income for most households.

Ultimately, all Americans will do better economically in a country that invests in the foundations of prosperity. But even those whose yachts are lifted highest these days will more than recoup the cost of higher taxes if these contributions help ensure robust growth. And the legacy they leave for the next generation will be the tools of opportunity that were available to them.

— By David Callahan, Demos Senior Fellow and Editor of Policy Shop

The graphic above may be republished free of charge with attribution to Demos. Contact for high-resolution file.