CHAMPAIGN, Ill. – Income inequality is partly a self-inflicted problem, and elected officials have used the law to exacerbate the problem, a University of Illinois expert on taxation issues says.
According to law professor Richard L. Kaplan, tax laws tilt the playing field in favor of the financial elites, making economic inequality a somewhat solvable problem if Congress were inclined to change things.
“The issue is how much do we care about inequality,” said Kaplan, the Peer and Sarah Pedersen Professor of Law. “Our politicians crafted and implemented these policies. If we want to steer a different course, we need to elect people who want to do so.”
For example, Congress could lower the federal estate tax exemption from $5.34 million to a smaller amount or raise the estate tax rate on larger estates – changes that could dilute the concentration of wealth, Kaplan says.
“That is, after all, one of the main justifications for the estate tax even though it was scheduled for complete repeal only a few years ago,” said Kaplan, an internationally recognized expert on U.S. taxation and tax policy. “In this context, the current debate about raising the minimum wage is largely symbolic in terms of reducing economic inequality.”
Kaplan notes that favored tax treatment of capital gains is the principal reason why some very wealthy people such as Warren Buffet and Bill Gates pay much lower income tax rates than the people who work for them.
“While President Obama has managed to raise tax rates on such gains twice in the past two years, capital gains are still taxed much less heavily than wages or interest income,” he said. “Unless Congress is willing to tax capital gains like other income, which last happened during the final years of the Reagan administration, the tax code will continue to favor very-high income individuals.”
In the recent best seller “Capital in the Twenty-First Century,” the French economist Thomas Piketty advocates an 80 percent income tax on income above $500,000.
Even though marginal tax rates under Obama have gone up, “We’re never going to go there,” Kaplan said. “That said, we could certainly add higher rates to income above $450,000, where our top rates now begin. After all, annual income of $5 million is very different from $500,000, but our tax code doesn’t distinguish between two surgeons who are married to each other and a corporate executive making $5 million a year.”
States could also pass higher income tax rates that kick in at higher levels of income, Kaplan says.
“Of course, Illinois House Speaker Michael Madigan tried that recently by proposing a millionaire’s tax, but that idea quickly disappeared,” Kaplan said.
Ultimately, the issue of economic inequality is a question of social values.
“I’m not sure that inequality is a major American concern,” he said. “We still entertain the notion that people can rise up through a combination of personal effort and luck. Even if that narrative is somewhat overstated, it remains the reigning ethos of this country.”
To contact Richard Kaplan, call 217-333-2499; email rkaplan@illinois.edu.
