Why Cutting Taxes for the Rich is Bad for Democracy
Many Americans look to the 1950s under the Eisenhower Administration as a golden age of government, and wonder what has gone wrong since. These Americans believe today’s federal government consistently does a poor job, as illustrated by the sneer “good enough for government work.”
In a capitalist society, we show what we value by what we invest in. And one number shows how we do not invest in government the way we once did. What’s that number?
The top marginal tax rate.
Under President Eisenhower, when the federal government built the interstate highway system and began heavily investing in the space program, the top marginal tax rate was 91 percent. So for every married couple earning more than $400,000 a year in 1959 (or $3,180,954.84 in 2018 inflation-adjusted dollars), they paid 91 percent tax on every dollar they earned above that threshold.
Since then, both Democratic and Republican presidents from Kennedy through to today have been steadily hacking away at the top marginal rate. The 2017 tax bill championed by House Speaker Ryan and signed by President Trump slashes the top marginal rate for the wealthy even further. Couples earning $600,000 or more (or $75,205.66 in 1964 dollars) pay just 37 percent in taxes on every dollar over that threshold. This reduction in the top marginal tax rate is just one way that trends in the tax code have been redistributing wealth from working people to the very rich. The Trump/Ryan tax bill also raises the threshold for the estate tax from $11 million to $22 million, further reducing the taxable income of the top 0.1 percent of the population. Additionally, the trend over the past 40 years has seen the capital gains tax rate plummet from 40 percent in the late 1970s to 15 percent now.
This massive and systematic dismantling of taxes on the wealthy has crippled the nation’s ability to invest in areas we all benefit from, particularly infrastructure and education. This reduction in taxes has also accelerated the dangerous increase in income inequality.
Many Americans believe government could do better in many areas. Crumbling infrastructure and increasingly expensive college educations are two obvious manifestations of diminished services provided by government at the federal, state, and local level. If we choose not to pool our resources via taxes, if we forgo the awesome buying power and scale of the federal government, and instead funnel trillions of dollars of wealth upwards to corporations and the already wealthy, it should be no surprise that when federal investment in, say, education falls off a cliff—that working stiffs saving a few hundred dollars in taxes a year, have to individually foot an education bill that’s thousands of dollars more expensive.
Take college tuition at state universities, which has soared over the past 30 years. In the past, our nation invested in educating our best and brightest, no matter which economic strata they came from. Now, relentlessly rising college tuition is a staggering burden for the middle class, whose members seldom qualify for aid and instead must take out loans of tens or hundreds of thousands of dollars to fund their children’s education. Millionaires and billionaires have hijacked our political system to gift themselves tax cuts at the expense of educating the middle class.
Decades of continued tax cuts have the insidious effect of making it more difficult for government to perform its core functions—tasks such as educating our children and constructing the infrastructure that sustains our economy. When tax cuts make it more difficult to accomplish these goals, the logical response is, “Oh yes, of course, we’ve cut taxes too much and need to raise them.” But instead, we confirm the dangerous bias that government never works—which is simply not true. Powerful government-funded projects such as the transcontinental railroad, the moon landing, and the birth of Silicon Valley put the lie to this sentiment—but instead we get behind the concept of ‘fixing’ government by cutting taxes even more!
The slashing of the top marginal tax rate has also had the insidious effect of accelerating economic inequality. CEO and executive pay has skyrocketed in the past few decades, while workers’ wages have stagnated. Arguably the main driver of the increased pay disparity is the relentless cutting of the top marginal tax rate, as a moment’s thought will demonstrate. In the 1950s, a CEO had little reason to lobby for more pay if he could only keep nine cents of every dollar he earned over a certain sum. But as the top marginal tax rate declined, CEOs began lobbying their corporate boards (typically made up of other CEOs) to raise executive pay, because they can keep more than 60 percent of a, say, $15 million annual raise.
This tax policy has poured billions, if not trillions of dollars into the pockets of individuals, while the majority of Americans now struggle to get by. We see Elon Musk and Jeff Bezos send their private rockets into space, while the next potential Musk or Bezos is forgoing a mortgage-sized investment in college, because our ruling class has decided against investing in our future leaders.