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17 September 2017

How US states are fighting inequality with a “millionaire tax”

The rise of progressive taxation has coincided with the rise of the super-rich.

By George Eaton

Donald Trump is often characterised as an “economic populist”. Many attribute his election victory to voters disillusioned with free market capitalism and the Republican mainstream. Yet his recent tax proposals represent an intensification of Reaganomics.

The US president has promised to reduce the top rate of income tax (levied on earnings over $418,400 a year) from 39.6 per cent to 35 per cent and corporation tax from 35 per cent to 15 per cent, and to eliminate progressive measures such as the estate tax and the alternative minimum tax (which ensures that high earners who benefit from tax exemptions contribute to the US treasury).

Should the proposals receive congressional approval – a significant hurdle – they would serve to increase both the deficit and inequality. The Tax Policy Center estimates that the programme would increase borrowing by $7.8trn over the next decade, with 60.9 per cent of the lost revenue accruing to the top 1 per cent of earners.

This approach contrasts with that advocated by Trump’s recently departed political strategist Steve Bannon. The alt-right nationalist argued for a new top tax rate of 44 per cent on earnings over $5m a year. For Bannon, Trump’s refusal to embrace the idea was a betrayal of his campaign promise to prioritise middle-class tax cuts. (“It’s going to cost me a fortune,” the president once erroneously boasted of his plan.) The divergence reflects the tensions inherent to the Republican coalition of libertarians (such as the house speaker, Paul Ryan) and interventionists.

Beyond the White House, the cause of progressive tax reform is advancing. State legislators in Massachusetts recently voted by 134 to 55 to hold a referendum in 2018 on a “millionaire tax”: a surtax of 4 per cent on annual earnings over $1m (the current flat rate is 5.1 per cent). The “fair share amendment”, as it is known, is designed to raise $1.9bn for education and transport.

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US citizens are taxed significantly less than their European counterparts (tax revenue represents 26 per cent of GDP, compared to the EU average of 35.7 per cent), but America is far from a bastion of pure libertarianism. At present, three states levy millionaire taxes – California (a 13.3 per cent rate), Connecticut (6.99 per cent) and New York (8.82 per cent) – as does Washington, DC (8.95 per cent). In addition, New Jersey imposes an 8.97 per cent rate on earnings over $500,000 and Maine a 10.15 per cent rate on earnings over $200,000 (the measure was approved in a 2016 referendum by 50.4 per cent to 49.6 per cent, giving the state the second-highest rate after California).

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Though opponents of the Massachusetts proposal warn of tax flight, this phenomenon has not occurred elsewhere. As Noah Berger, president of the Massachusetts Budget and Policy Center, observed: “We just have not seen… the kind of mass migration of millionaires that people keep predicting.”

The rise of progressive taxation has coincided with the rise of the super-rich. Since 2001, the number of households with an income greater than $1m has doubled. Most of the gains from the US recovery (GDP is now 13 per cent above its pre-crisis peak) have flowed upwards.

Recently published research by the economists Thomas Piketty (the author of Capital in the 21st Century), Emmanuel Saez and Gabriel Zucman found that inequality is even greater than previously assumed. Between 1980 and 2014, the share of income held by the bottom half of earners fell from 20 per cent to 12 per cent, while, in a mirror-image trend, that enjoyed by the top 1 per cent rose from 12 per cent to 20 per cent.

In the UK, where the top rate of tax on earnings over £150,000 was cut from 50 per cent to 45 per cent in 2012, a similar pattern has emerged. The share of income held by the top 1 per cent has more than doubled since 1980 to 12.7 per cent.

The US has often served as a laboratory for future UK policies (such as tax credits and free schools). As the Conservatives grapple with the rise of Jeremy Corbyn, ambitious Tory MPs may yet alight on the “millionaire tax”.