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The Case for Raising Top-End Tax Rates Over Minimizing Deductions

Paul Krugman’s column today includes some additional possibilities for taxation beyond just returning to the Clinton-era tax rates, which he implicitly endorses here (the first major name to endorse do-nothingism, as far as I can tell). One of his options is higher rates on the rich:

About those high incomes: In my last column I suggested that the very rich, who have had huge income gains over the last 30 years, should pay more in taxes. I got many responses from readers, with a common theme being that this was silly, that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.

Folks, you’re living in the past. Once upon a time America was a middle-class nation, in which the super-elite’s income was no big deal. But that was another country.

The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.

For example, a recent report by the nonpartisan Tax Policy Center points out that before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. According to the center’s analysis, restoring those high-income brackets would have raised $78 billion in 2007, or more than half a percent of G.D.P. I’ve extrapolated that number using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit.

What’s important to note here is that this would be true even in a world where the rich hired very shrewd accountants to avoid as much taxation as possible, aka the real world. David Kocieniewski’s “But Nobody Pays That” series highlights how one family, the heirs to the Esteé Lauder fortune, have cleverly avoided taxes in this fashion:

The charitable deductions generated by Mr. Lauder — whose donations have aided causes as varied as hospitals and efforts to rebuild Jewish identity in Eastern Europe — are just one facet of a sophisticated tax strategy used to preserve a fortune that Forbes magazine says makes him the world’s 362nd wealthiest person. From offshore havens to a tax-sheltering stock deal so audacious that Congress later enacted a law forbidding the tactic, Mr. Lauder has for decades aggressively taken advantage of tax breaks that are useful only for the most affluent.

His vast holdings — which include hundreds of millions in stock, one of the world’s largest private collections of medieval armor, homes in Washington, D.C., and on Park Avenue as well as oceanfront mansions in Palm Beach and the Hamptons — are organized in a labyrinth of trusts, limited liability corporations and holding companies, some of which his lawyers acknowledge are intended for tax purposes. The cable television network he built in Central Europe, CME Enterprises, maintains an official headquarters in the tax haven of Bermuda, where it does not operate any stations.

And earlier this year, Mr. Lauder used his stake in the family business, Estée Lauder Companies, to create a tax shelter to avoid as much as $10 million in federal income tax for years. In June, regulatory filings show, Mr. Lauder entered into a sophisticated contract to sell $72 million of stock to an investment bank in 2014 at a price of about 75 percent of its current value in exchange for cash now. The transaction, known as a variable prepaid forward, minimizes potential losses for shareholders and gives them access to cash. But because the I.R.S. does not classify this as a sale, it allows investors like Mr. Lauder to defer paying taxes for years.

There’s much work to be done on all of these tax shelters and deductions. But importantly, raising rates STILL would capture more of Mr. Lauder’s money on whatever was left over after the creative accounting. Capping or eliminating deductions still risks having an accountant blow open another loophole. It’s much harder to do that with a higher rate. You could even put a surtax on wealth, which would do an even better job at getting to the underlying money.

If you believe that the rich just “don’t pay taxes,” it would behoove you to raise their rates as much as possible, because at least you would capture a significant amount from the income they couldn’t shelter. Playing the loophole whack-a-mole game is worse by comparison.

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David Dayen

David Dayen