Editor’s Note: Abigail Disney is an Emmy-winning documentary filmmaker, activist and member of the Patriotic Millionaires. Her latest film, “The American Dream and Other Fairy Tales,” co-directed with Kathleen Hughes, had its world premiere at the 2022 Sundance Film Festival. Morris Pearl is the chairman of the Patriotic Millionaires and a former managing director of BlackRock. The opinions expressed in this commentary are their own. See more opinions on CNN.
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Tuesday is Tax Day in the United States, one of the most stressful days of the year, when many taxpayers finally put an end to their procrastination, file their federal tax returns and hope for a refund from the IRS. But for many of the country’s wealthiest, it’s just another Tuesday.
Tax Day isn’t just a deadline to file your taxes. It’s also an annual reminder that the ultra-wealthy live in a world of their own when it comes to taxes. For us, tax loopholes are bigger and rates are sometimes lower. Meanwhile, the rich keep getting richer, with billionaires’ wealth in particular increasing by more than $1.5 trillion in recent years.
This status quo is not only unjust, but unsustainable. Such levels of inequality are pushing our economy and our democracy to the breaking point. That is why we must think about how we can prepare our country for long-term stability and prosperity. And we must start by ensuring that the ultra-rich pay more of what they owe to the country that made their success possible.
There are three changes to the tax code that would help us achieve this:
Currently, the U.S. tax system values money over sweat and tears. If you work hard to earn your money instead of earning it passively, you are essentially penalized for it. People who earn a salary pay significantly higher tax rates on their income than wealthy investors who earn capital gains income passively.
Inheriting money is an even sweeter deal. Thanks to former President Donald Trump’s 2017 tax law, the first $12.92 million (or $25.84 million for a married couple) is completely exempt from any estate tax, and the step-up tax loophole allows wealthy families to permanently wipe out millions of dollars in capital gains taxes by resetting the market value of those assets to their value at the time of the original owner’s death. This makes it relatively easy for the wealthy to inherit tens or even hundreds of millions of dollars and pay next to nothing in taxes. By contrast, someone working for that money would pay more than a third of that federal income tax.
Why do we have a tax code that says working people should be taxed more than wealthy investors and those who became rich simply because they were born into a good family? At the end of the day, money is money, whether you earned it through your work or inherited it. As heirs and investors, we should not pay lower taxes than those who earn their money through work.
It’s time for the tax code to treat all income equally by taxing all capital gains over $1 million at the same rates as ordinary income and replacing our loophole-ridden estate tax with a simpler estate tax that treats inherited wealth as income.
But we can’t focus on income alone, because most of the wealthiest Americans have virtually no taxable income in a normal year. Capital gains are taxed only when the assets are sold. So instead of selling them, the ultra-rich use their assets as collateral to borrow huge sums of money at extremely low interest rates to live on, and then report low or even negative “income” on their tax returns. This “buy, borrow, die” strategy is a major reason why billionaires have paid lower effective tax rates than working-class families in recent years.
By rethinking what is taxable, we can access the trillions of dollars of billionaire wealth that is untouchable under our current tax system. That’s why President Biden has proposed the billionaire minimum income tax, which would tax the unrealized capital gains of the wealthiest households, and why others have proposed taxing billionaire wealth.
Finally, one of the simplest changes to implement would be to tax the extremely wealthy more than the merely wealthy. Our income tax caps at 37% on income over $578,125 (or $693,750 for married couples). No matter how much income a person makes, they will never pay more than 37% in federal income tax.
If a person earning $600,000 a year earns enough to live comfortably, they live in a different world than one earning $600 million a year. To account for the real differences between the rich and the ultra-rich, we need to go back to the top rates we had during the most prosperous decades of the 20th century and add much larger tax brackets. They should reach 90% for people earning more than $100 million a year.
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These three changes will certainly not solve all of our country’s problems on their own, but they would go a long way toward ending the steady flow of wealth from our country to an ever-smaller group of people, a change that would make our democracy and economy more stable. The tax code can be a powerful tool for social and economic change. We just need to use it more effectively.
