As President Biden unveils his robust progressive agenda — it is going to come with a hefty price tag. The President’s dream of moving closer to social democracy will require trillions of dollars in new tax revenue. However, Biden has a plan to somewhat pay for that ambitious transition — taxing the rich. He should at least do that part in the correct fashion. A free-market fashion.
Taxing the Rich in a Pro-Market Fashion
Taxing the wealthy higher than the middle class is appropriate — but how that taxation is conducted is the tricky part. Free marketeers should lead the way in how to really make the wealthy pay their fair share. Here’s a 4 point plan.
Step 1: Allow for Liberal Wealth Creation
The principle is simple — if you want to collect revenue, don’t destroy the wealth that is going to provide that revenue. This guiding principle is used by many free-market parties across socially democratic countries. A dynamic, liberal, and healthy economy is required to provide the revenue that sustains their gargantuan safety-nets.
Taxes aimed at what what make the upper class wealthy in the first place will never collect their desired revenue targets — because they will only destroy wealth in the process. Capital gains, direct wealth, dividend, financial transaction, and corporate profit taxes all fall under this category. They should instead be reduced or eliminated to incentivize the wealth creation that in return provides revenue for the government.
Any set of increases in these taxes will fall short of collecting revenue and won’t be able to pay for Biden’s policies.
Let the markets operate how they should and redistribute income after the fact.
Step 2: Fund the IRS
There are many ways to raise taxes on the rich. We should start by collecting what they already owe. I’ve written before on the free-market benefits of having a fully funded IRS — you can read more there. Yet, the point is simple — someone still has to collect these taxes. Even if these taxes are not damaging to the free-market, the wealthy are still going to try everything in their power to avoid them. A properly funded IRS can combat tax-evasion, efficiently collect revenue, and prevent corruption. It is one of the few government agencies that pays for itself — literally. Free-marketeers would support Congressman Ro Khanna’s IRS investment as reasonable. His plan would boost IRS funding by $100 billion over ten years while collecting up to $1.2 trillion during the same period. If that’s not a good return on investment, I don’t know what is.
Step 3: Slash Hidden Tax-Cuts
Now that we are not destroying and damaging wealth creation — we can effectively begin taxing post-created wealth.
It starts by ridding the current tax code of deductions that mostly benefit upper class individuals — SALT, mortgage, and charitable.
The SALT deduction is a massive tax cut for the rich that prevents billions of dollars in revenue from being collected. 73 percent of the benefit from the mortgage interest deduction goes towards the top 20 percent of home earners. This prevents another 70–80 billion dollars of revenue from being collected every year. Charitable deductions are also a ploy used by the wealthy to avoid paying additional tax. It’s already proven that the charitable deduction has no influence on charity whatsoever. Getting rid of it would largely affect the rich, not the middle-class.
Just with these three deductions alone, the federal government can collect at least an additional one trillion dollars over the next decade. A trillion dollars that could pay down the debt, provide a middle class tax cut, or even pay for one of Biden’s proposals.
Step 4: Embrace the Estate Tax
The estate tax is exactly what it is — a tax on the transfer of estate from a deceased person. However, republicans have done a good job framing this tax as one applied to all estates — that’s completely false. It’s usually levied on the most hefty transfers of wealth, usually well over a million dollars. Republicans under the TCJA successfully increased the exemption to $11 million. This was nothing but a tax cut to the richest number of Americans — literally. Now, only 2,000 estates are subject to the estate tax under the GOP tax plan.
The estate tax is less damaging to free-market process, since there is no wealth being generated, only being transferred. Through that protective free-market feature, I’d support restoring the estate tax to replicate 2009 levels, which would lower the exemption to $3.0 million, but keep the TCJA rate of 40%.
This type of change could generate between $200–300 billion over ten years.
A tax that is both pro-market and collects revenue. That’s a win-win policy.
Taxing the upper class is appropriate and should be done — in the correct fashion. That fashion should be one that compliments and retains the liberal, dynamic, free-market economy. It is only through a liberal, free-market economy that we can collect any revenue at all.
Tax deductions that benefit the wealthy — SALT, mortgage, and charitable — should all be eliminated. Republican estate tax cuts should be reversed and broadened. All the while following Ro Khanna’s framework for implementing large investments into the IRS.
These tax increases should be done at the same time corporate profit taxes, capital gains taxes, and dividend taxes are reduced or eliminated.
Under these measures, the federal government can liberalize wealth creation, collect over $1 trillion in revenue over ten years, and close the budget gap.
All while the free-market is kept intact and the rich are paying their fair share.