(Shane | Unsplash)
Ahead of the midnight deadline Monday for Americans to file their state and federal income tax returns, advocates took the day to highlight how the current tax system favors the wealthy as well as corporate interests.
“There’s a whole segment of our society that has largely been shifting the burden onto the rest of us,” said Robert Kraig, executive director of Citizen Action of Wisconsin, in a virtual press conference Monday morning. “And these are the folks most able to pay.”
The press conference was conducted in collaboration with two other advocacy groups, Americans for Tax Fairness and Health Care for America Now. It was held to promote a pair of proposals that would increase taxes on the richest Americans, who, on average, pay a smaller share of their incomes in taxes than the rest of the public, according to Americans for Tax Fairness.
Separately Monday, the Economic Policy Institute (EPI) in Washington, D.C., highlighted its recent report that found nearly two-thirds of Wisconsin corporations paid no state corporate income taxes.
Wisconsin’s eight billionaires collectively saw their wealth rise by 50.1% over the last two years, coinciding with the COVID-19 pandemic, which wreaked havoc for the jobs and livelihoods of millions, particularly in the first several months.
In March 2020, the Wisconsin billionaires were worth about $39.4 billion, according to a Citizen Action report. Today they’re worth about $59.1 billion.
The report does not include the tax data for the Wisconsin billionaires. It states that, based on other analyses of finances of the nation’s wealthiest, “it is likely that these richest people in the state paid little if any federal income taxes on those investment gains, unlike working families in Wisconsin who pay taxes in each paycheck.”
Growing wealth gap
According to a Pro Publica report published last year, the wealthiest 25 billionaires paid an average tax rate of 3.4% between 2014 and 2018 as their wealth increased.
“They’ve also figured out how to work the system,” said Congressman Mark Pocan (D-Black Earth), who took part in the Citizen Action press conference. “And they figure out how to pay the least, as a percentage of their income, than anyone.”
The growing gap between the wealthiest and the rest of the country isn’t just an economic issue, according to Kraig. “There’s a fundamental threat to democracy to have this small number of people that have this disproportionate share of resources,” he says.
Two alternative tax proposals would require the extremely wealthy, including billionaires, to pay substantially more. One, proposed by the Biden administration, would generate about $361 billion over 10 years nationally, or $600 million a year for Wisconsin, according to the Citizen Action report. The other, proposed by Sen. Ron Wyden (D-Ore.), would raise about $557 billion over 10 years, or $935 million a year for Wisconsin.
Enacting a tax hike along those lines on the wealthiest would allow the U.S. and Wisconsin to pay to expand health care access and lower the cost of child care for working families, among other things, Kraig said.
The White House plan would kick in for people worth $100 million or more, which covers about 20,000 households according to Americans for Tax Fairness. It includes a minimum 20% tax on income, “to disincentivize the moving around of funds, not taking money as income,” Pocan said. “Because there will always be a new loophole that people will find.”
The Wyden plan is targeted at an even smaller group, about 700 billionaires in the U.S. It imposes a 23.8% tax rate.
The billionaires whose taxes were the subject of the Pro Publica research paid such low tax rates because their wealth “derives from the skyrocketing value of their assets, like stock and property,” Pro Publica reported. “Those gains are not defined by U.S. laws as taxable income unless and until the billionaires sell.”
But billionaires are unlikely to sell those assets, said Margarida Jorge, executive director of Health Care for America Now. Instead, they pass the wealth on to their heirs. They still benefit from them, however, by gaining access to short-term capital.
“One of the reasons why we like the billionaires’ minimum income tax is because it would require billionaires to pay some amount on those gains that increase their wealth every year, without actually having to wait until they sell the assets,” Jorge said. Both the Biden and Wyden plans include taxes on assets that can be quickly sold, such as stocks.
Corporate tax cuts
The Economic Policy Institute report on how corporations paid state income taxes was based on data collected from the tax-collecting agencies in each of seven states, including Wisconsin. In Wisconsin, 63% of all corporations in the state paid zero income taxes between 2015 and 2019, according to the EPI’s analysis.
One reason for that, in Wisconsin as well as the other states in the EPI report, is the role of S-corporations. Unlike C-corporations — which can have many owners and can retain the money that they earn — S-corporations have a limited number of owners and pass through their profits without being taxed at the federal level. (The two categories of corporations are named for the Internal Revenue Code sub-chapters that define them.)
Most states, including Wisconsin, also do not tax S-corporations’ revenues, although federal law does not bar them from doing so. Instead, taxes are collected from the dividends paid to their individual shareholders. But because the revenues aren’t taxed first at the level of the company, an S-corporation’s profits will produce lower tax revenues, says Josh Bivens, EPI’s director of research.
S-corporations produced 5% of total corporate profits in 1979, but 35% in 2019, according to EPI. That accounts for lower corporate taxes, but it’s not the sole reason, according to the report.
As a consequence of other reductions in corporate income taxes over the last three decades, the effective state and local income tax rates in the U.S. for all corporations has fallen to 3% of profits in 2020 from 5.2% in 1989, according to EPI. That erosion “has made the overall tax system less progressive, and at the state level it has been a key driver of overall revenue weakness, which in turn has fueled too-austere spending,” the report concludes.
A small business owner’s view
Melissa Buchholz, owner of the restaurant Odd Duck in Milwaukee, says corporate tax cuts have been no benefit to her small business or its employees. In an essay criticizing Sen. Ron Johnson (R-Wis.) that she shared on Monday, Buchholz observes that when Johnson voted a year ago against the American Rescue Plan, he voted against expanding two tax credits included in the measure that were helpful to working people: the federal Child Tax Credit and the Earned Income Tax Credit.
“Both are important to the success of my restaurant and small businesses across the state,” she writes. The expanded Child Tax Credit made it possible for her employees with children to afford child care, “making it easier on them to continue working,” she says, and “getting more people into the workforce is critical for our business and the economy as a whole.”
She contrasts Johnson’s vote against those measures with his vote for the 2017 Tax Cuts and Jobs Act, enacted under then-President Donald Trump, “where the average tax cut amounted to $30 for the poorest Wisconsinites, less than $700 for Wisconsinites making up to $113,800 in 2020, but nearly $40,000 for the richest 1% in our state.”
A small business like hers, Buchholz says, “does better when the families that are just getting by can get a little more breathing room, not when the rich can buy a bigger yacht.”
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