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The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

Schmitt: Tax Reform Must Reduce Income Inequality

In his New Republic article, “How Tax Reform Represents Obama’s Greatest Shot at Hope and Change,” Mark Schmitt challenges Dems to seize the initiative “to move the whole country in the direction of greater fairness, growth, and financial stability.”

…Nothing about tax reform is going to be any easier than the debt-limit deal itself. Still, if a budget deal commits Congress to do something, the goal of tax reform can be much more than just moving the long-term revenue line a little closer to the spending line. Because the tax code sets some of the basic parameters of our economic structure, it can also be an opportunity to move the whole country in the direction of greater fairness, growth, and financial stability.
…While far from the only cause of structural inequality, the tax code is a big part of it, and tax reform can change it. The first step is to end the special treatment of capital gains and dividend income–not just because the wealthy get more of their income in that form, but because of the incentives it has created to increase inequality and risk. That’s a reform that would both clean up the code and give us more of what we want more of.
But imagine a tax code that tried to undo its own damage. When so much inequality is created within single companies, why not reward companies that are narrowing the gap and tax companies that widen it? The average CEO now takes home 350 times the pay of the average worker, a difference that’s more than tripled since 1990, and is unknown in any other country. Leo Hindery, a former telecommunications executive, has proposed a tax penalty for companies where executive compensation exceeds a certain level; another proposal, put forward by investor Steve Silberstein, would adjust the corporate tax rate based on the ratio of CEO pay to the average worker. A company with a ratio at the 1980 level of 50:1 would pay tax at the current rate of 35 percent, with the rate rising for companies with a higher ratio and lower for those with a narrower pay gap.

Schmitt argues that merely allowing the Bush tax cuts expire for those earning more than $250K would not raise enough revenue to “make a dent in the conditions of those in the bottom 60 percent who have gained almost nothing over the last 30 years.” He likens it to “dipping into great fortunes with a teaspoon, and sprinkling it over the rest of the country” and, besides, the revenue raised this way in the President’s proposal is “earmarked for deficit reduction.”
He also cites the tax code incentives for spiking executive pay upward as a major systemic injustice that must be corrected in any plan for meaningful reform, and adds that an historic transformation toward greater fairness is now a real possibility. “Taxation provides the basic structure of incentives in our economy, and the Bush and Reagan tax changes got them wrong,” explains Schmitt. “If the budget deal does lead to tax reform, it’s a welcome opportunity to get them right this time. ”

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