This Labor Day Let’s Commit to Ending the Tax Code’s Disrespect of Workers

Once a year, Labor Day honors America’s workers. But all year long, our tax code treats them with disrespect. If we really want to celebrate the value of labor, we need to reform our tax code.

By William Rice

Once a year, Labor Day honors America’s workers. But all year long, our tax code treats them with disrespect. If we really want to celebrate the value of labor, we need to reform our tax system so that it no longer favors wealth over work. Following are five prominent ways the tax code privileges money over manpower, household riches over human resources.

Work income can be taxed at nearly twice the rate of wealth income. The highest federal tax rate on wages and salaries is 37% (40.8% if you include payroll taxes). The highest federal tax rate on long-term capital gains and qualified dividends is 20% (23.8% if you include a special surtax). That means that a surgeon working all night in an emergency room saving lives can pay a tax rate on her income almost twice as high as that of an idle investor who just checks stock quotes all day. President Biden tried to end this outrage on the highest incomes, but as of now the “wealth over work” loophole is still the law of the land. 

The main form of income for the superwealthy is never taxed at all. Billionaires and other hyperwealthy folk generally don’t live off a paycheck, pension, or any other form of taxable income. Instead, their income mostly comes in the form of rising values on the investment assets they don’t sell. They don’t need to sell to benefit because at the levels they enjoy it, these capital gains are as good as money in the bank. They can borrow at favorable rates against their rising fortunes, living off those low-interest loans. Then, when the underlying assets are passed along to the next generation, all that capital appreciation simply disappears for tax purposes. Wall Street even has a clever name for this intergenerational tax avoidance: Buy, Borrow, Die. 

Again, President Biden tried to fix the problem with a tax on these so-called unrealized gains enjoyed by billionaires and the billionaire-adjacent. So did the Democratic chair of the Senate Finance Committee, Ron Wyden, who’s now the ranking member of that tax-writing panel and is still pushing his proposal. Biden also proposed a solution to one part of the problem: the “stepped up basis” loophole that makes inherited gains disappear for the wealthy. But both reforms were blocked. 

Economic dynasties face few barriers to growth. In order to uphold the American principles of equal opportunity and personal initiative, inherited fortunes have been subject to an estate tax for over a century. The reasonable idea has been that lucky heirs still get the bulk of the money passed down, but have to share some of it with all of us who weren’t born rich. Those fortunes, after all, were created in part thanks to communal goods we all pay for like roads, ports, internet, public schools, public safety agencies, and our legal system. It’s only fair that we should all receive some of the fruits of those investments.

That system has been undermined in recent decades, however, both from within and outside the government. On the inside, Republican politicians have continually weakened the estate tax, mostly by raising the amount of family fortune exempt from it. They explain their hostility to intergenerational tax fairness with the entirely false argument that family farms and small businesses are somehow threatened by the levy. 

Meanwhile, clever accountants and tax attorneys have been chipping away at the tax with aggressive estate planning that uses creative accounting to spare large fortunes. An ATF report from a few years ago estimated that the nation’s richest families could dodge over $8 trillion in intergenerational transfer taxes over the next few decades thanks to the breakdown of the system. 

Corporate tax breaks mostly benefit the rich. In 2017, President Trump and a Republican Congress cut the corporate tax rate by two-fifths, from 35% to 21%. This year, they opened up multiple loopholes in the corporate tax code. Corporate taxes used to provide up to a third of all federal revenue–now it’s rarely over 10%. 

Corporations aren’t people, but the investors who own them are–and those people are almost exclusively rich. The top 10 percent own 93% of corporate stocks while the bottom 50% own one percent. So when corporate taxes are raised, it’s mostly the wealthy who are paying more; and when, as has happened so often recently, corporate taxes are cut, it’s the rich who benefit most.  

The tax code encourages offshoring of jobs. Foreign profits of U.S. corporations are taxed at about half the rate of domestic earnings, encouraging the offshoring of profits and jobs. When American companies are rewarded by the tax code for shifting production overseas, wealthy executives and shareholders prosper while U.S. workers suffer. 

Labor should not be our national focus for only one day a year. We should reform our tax code so that workers and their families are our highest priority all year, every year.