In the last two years, researchers have unearthed stunning statistics related to tax policy in America and North Carolina. For the first time in history, the 400–FOUR HUNDRED–wealthiest people in the country pay a lower average tax rate than the bottom half of Americans. In North Carolina, as we have become accustomed to seeing in this age of far-right governance, the trend is worse. Analysts at the Square Center explained that poor North Carolinians now send a 50% larger share of their income to the state treasury than the wealthiest 1%. Both of these trends have been exacerbated by policy changes.
Unlike, for example, voter ID, tax reform did not spring from the imaginations of conservative polemicists. North Carolina’s tax code had become musty and crusty, badly in need of an update for the New Economy age. Though the disparity between income and sales taxes in terms of volatility is overstated by conservatives, it was clear as of 2012 that our imbalanced revenue mix had cost the state during the Great Recession. A prudent course of action would have been to expand the sales tax to more services while reducing the rate charged to consumers. Instead, Republicans left the sales tax rate at its current level while imposing new levies on services like car repairs, which disproportionately impacted the poorest. And that was just the sales tax.
More pernicious were Republicans’ “reforms” to the personal and corporate income taxes. Insisting that our tax rates had become “non-competitive,” GOP leaders initiated a series of cuts paralleled only by Governor Sam Brownback of Kansas. Our progressive tax structure was converted into a flat tax that effected a large tax cut to the wealthy. Estimates suggest that the top 1% of North Carolinians have received a $23,600 tax cut since tax reform set in in 2013. To put that number in perspective, the average ANNUAL INCOME of the poorest quintile is only $11,200. On the corporate front, Republicans cut the tax rate from 6.9% all the way down to 2.5%, half the average corporate tax rate for Southern states. Overall, GOP tax cuts have cost the state $3.6 billion in annual revenue.
Federal tax policy has been little better. Donald Trump’s signature legislation, the Tax Cuts and Jobs Act, deposited billions of dollars into the pockets of the wealthy and corporations. By 2025, the top 1% will have received three times the benefits afforded to the bottom 60%–this despite the fact that share of national income going to the working class has declined by 4.4% sine the beginning of the Reagan era while the wealthiest have seen a gain of 5.7%. The Trump tax cut reduced the corporate tax by even more than K Street had asked for, and it included an unadulterated giveaway to the wealthiest families in America in the form of an estate tax cut. Like North Carolina’s tax cuts, Trump’s will reduce revenue substantially: $1.5 trillion
The common theme that has emerged is a simultaneous transfer form the bottom to the top, and a reduction of the revenue available to government for essential public investments. North Carolina and the United States cannot rebuild their broken societies under these conditions. As the new decade dawns, we need to fundamentally reorient tax policy.
At both the state and federal levels, progressives’ top priority should be to raise more revenue from wealthy taxpayers. Raising income taxes on the top 1% to a level of 45% would generate $1 trillion in new federal revenue. This should be complemented by an equalization of investment and labor income, a change that would yield an additional $1 trillion. North Carolina policymakers should institute a 7% tax rate (the highest allowed under 2018’s unfortunate constitutional amendment) on incomes above $500,000. The North Carolina corporate tax should rise to the southeastern average of 5.8%. Conservatives will object that that would undercut our competitiveness, but if we can’t out-compete South Carolina and Mississippi without bottom-of-the-barrel tax rates we do not deserve to win.
The bottom 60% of earners have experienced serious erosion in the long era of Reaganomics. Tax policy should reflect that change. We should cut federal taxes on working families by passing Senator Kamala Harris’s signature LIFT Act, which would provide a $3,000 tax credit to most working- and middle-class Americans. In North Carolina, the income tax base has eroded so severely that an income tax cut even for working-class families is not practical. To provide relief, we should pursue a progressive sales tax reform that implements new sales taxes on services enjoyed by the wealthy–accounting, financial advice and the like–while reducing the sales tax rate by 2%.
Phew. For readers who have made it this long, thank you. Tax policy is sometimes a dry subject, but it is the foundation of domestic policy. Republicans have made a mess of it since 2013, and it is of the highest importance that progressives get it right in the 2020’s.
Alexander Jones is an original contributor to PoliticsNC.