Tax Policy

National Voter, Oct, 2008 by William H. Woodwell

What We Must Do:

The United States is hailed as a land of opportunity, a place where anyone can succeed, provided they work hard and play by the rules. For too many Americans, however, this vision has become an unattainable dream--not because of anything they did or didn't do, but because the system is stacked against them.

The combination of an unfair tax system and insufficient (and inequitable) public investment in education, job creation, and crucial supports for middle-and lower-income Americans has created a nation where the rich get richer while millions struggle just to get by. We have to restore equality and fairness to America's tax system, while ensuring that the federal government continues to play a leading role in providing health insurance, income support and vital services to the elderly, children and others in need.

"We can have democracy in this country, or we can have great wealth concentrated in the hands of a few. But we can't have both," said U.S. Supreme Court Justice Louis D. Brandeis.

Why It's Important:

Americans have always understood that living in a free, capitalist and entrepreneurial society means accepting disparities in wealth and income. In recent years, however, government decisions have made those disparities more pronounced, harder to bridge--and, as a result, harder to accept.

Poverty is on the rise. In 2006, according to the U.S. Census Bureau, 36.5 million Americans were living in poverty--defined as roughly $20,500 income for a family of four. This marked an increase from 31.5 million in poverty in 2000. The official poverty rate for 2006-12.3 percent of the population--masked glaring differences among various segments of the population. The poverty rates for African Americans and Hispanics, for example, were 24.3 percent and 20.6 percent, respectively. Among children under 18 years of age, the rate was 17.4 percent--meaning 12.8 million American children were living in poverty in 2006, up from 11.6 million in 2000.

Inequality is on the rise. According to the Center on Budget and Policy Priorities, the gap between the richest and poorest families, and between rich and middle-income families, grew significantly in most states over the last two decades. In fact, the income gap accelerated since the late 1990s as incomes fell for poor families and stagnated for middle-income families in a number of states. In 2006, the top 20 percent of households earned more than half (50.5 percent) of the nation's total household income, and their share continues to grow. Meanwhile, the share of income earned by those at all other income levels has been in a steady decline over the last two decades.

Government policies have widened the gap. An array of government decisions in areas from tax policy to levels of funding for education and social services have contributed to growing inequality in America. Among the government actions that have done the most to widen the gap: reductions in taxes for the wealthiest Americans (see below and Sounding Off, inside back cover).

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What's in It for Us:

Inequality threatens the well-being of all Americans, no matter what we earn or where we live.

A fraying social fabric. That millions of Americans are living in poverty or on the edge can lead to family breakdowns and higher rates of crime and violence. People feel more isolated, more disconnected and more frustrated and are more reluctant to join with others to solve common problems. Other concerns take a backseat to the work of surviving and getting by.

Researchers such as Robert Putnam at Harvard University have linked a steady decline in civic engagement in the United States to rising levels of inequality. As Putnam notes in the Pittsburgh Post-Gazette:

Folks in small towns who have managed to climb the ladder of success through education and well-paid employment are just as happy and socially engaged as their advantaged peers elsewhere. But the large numbers of small-town people who have not managed to get on that ladder are as unhappy, fearful about the future and unlikely to think government will listen to them as their peers in cities and suburbs.

A weakening economy. Growing disparities in wealth and income hurt the nation's economy by lowering efficiency and productivity, reducing demand for goods and services, and increasing costs for health care and social services. A recent analysis found that the costs to the United States associated with child poverty alone total about $500 billion per year. More specifically, the authors found that childhood poverty reduces productivity and economic output by about 1.3 percent of the U.S. gross domestic product (GDP) each year, while raising the costs of crime by 1.3 percent of GD (P.sup.2).

Where We Are Now:

In the year 2000, dividend income was taxed as ordinary income--this meant the wealthiest Americans were paying a top marginal rate of 39.6 percent on dividends. The top tax rate on capital gains from the sale of stocks and other assets was 20 percent. In 2003, the President and Congress lowered the top rate for capital gains and corporate stock dividends to 15 percent.