Labor Day is the perfect opportunity to fix a tax code rigged against working people

By MORRIS PEARL

Patriotic Millionaires

On Monday, the United States celebrated Labor Day. First recognized as an official federal holiday in 1894, the day offers an opportunity for all Americans to come together and celebrate the remarkable achievements that laborers and the labor movement as a whole have made over the years.

The United States is a country that has always, in the minds of most of its citizens, rewarded hard work and dedication. From the early days of our country’s founding, a strong work ethic has been as American as apple pie. Yet for all of the respect American society gives an honest day’s work, our tax laws actually do the opposite. The way our tax code is structured puts working Americans at a permanent, structural disadvantage when compared to wealthy people who live off their investments.

Since the inception of the federal income tax in 1909, lawmakers have consistently privileged income from capital, like the sale of stocks, bonds, mutual funds, etc., over income from traditional labor. In the process, they have given an unnecessary break to wealthy Americans like me who make most of our money from investments. This year’s Labor Day was an opportunity for lawmakers to strengthen their resolve to right this wrong and finally start rewarding work over wealth in the tax code.

This preferential treatment for already-wealthy Americans over their working counterparts isn’t a loophole – it’s a core feature of our tax code. Today, the top marginal rate that traditional workers’ pay on their income is 37%, while the top rate that investors pay on capital gains is just 20%. That puts the top rate for someone earning hundreds of millions of dollars passively, through the sale of their investments, lower than the top rate paid by someone earning just $70,000 per year. Even more fundamentally, it means that every dollar a working person earns is worth less after taxes than every dollar earned by an investor making the same amount of money.

There is a common misconception that investors like me need lower tax rates. Otherwise, the argument goes, we will have no incentive to invest, which in turn will tank the economy. This is utter nonsense. Research has found that changes in capital gains tax rates have no significant effect on private saving behavior or economic growth. Even if tax rates on gains are very high, investors like me will always choose to invest because it’s more lucrative than the alternative: hiding our money under our mattresses.

The special treatment for investment income doesn’t stop there. Nearly every working American pays taxes every month – you work, you get a paycheck, and some money is withheld for taxes. Rich Americans, on the other hand, only pay taxes on capital gains when they decide to sell their assets. In effect, this means that investors like me essentially get to pick and choose if and when we pay taxes. We can accumulate enormous amounts of wealth without paying a dime in taxes. And if we die before we sell our assets? Thanks to a provision known as the “stepped-up basis,” our heirs can inherit our stocks, bonds and real estate holdings without having to pay a dime either.

All of this has led to a situation where the wealthiest among us pay next to nothing in taxes. Between 2014 and 2018, Elon Musk – currently the richest man in the world – paid an effective tax rate of just 3.27% – a far cry from the 13.3% average rate that the rest of America pays. And if that wasn’t enough, in 2018, Musk paid no federal income taxes whatsoever.

This all needs to change. To start, we need to equalize tax rates for capital and labor income. There is no reason someone working for a living should be paying higher tax rates than a rich person who makes more money sitting on a beach, sipping daiquiris while their stocks increase in value. It is okay to use the tax code to incentivize people to do things we want to encourage, but there is no need to encourage rich people to invest their assets to get richer: they would want to do that even if taxes were higher. We also need to tax capital gains on a more regular basis. We can do so through a “mark-to-market” tax – like those recently proposed by President Biden, Representative Bowman, and Senator Wyden – that taxes capital gains as they accrue, not just when assets are sold. This would raise hundreds of billions in tax revenue each year and ensure that ultra-wealthy investors don’t get to opt out of paying taxes.

Democrats took a big and important step by passing several key tax reforms in the Inflation Reduction Act last month, but they need to go much further than this to win the battle for tax fairness and economic justice. They need to strengthen their resolve to take decisive action on behalf of workers around the country and finally start the long-overdue process of rewarding work over wealth in the tax code.

Morris Pearl is a former managing director of BlackRock and the chair of the Patriotic Millionaires.

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