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Q&A: History of Ultra Wealthy Taxes

Write-Off: The Tax Blog

A few weeks ago, I testified before Congress. As part of this process, members of the Senate can send me written questions that I am to respond to for the written official record of the hearing. It is my understanding that these official records might be a year or two in coming out, so, in order to have someone see this Q&A before the zombie apocalypse, I am including a few of the more interesting questions, and my responses, here on this blog.

Question 3: Ultra Wealthy Taxes. Some taxes have been passed by Congress on the basis that they would largely target the ultrawealthy and then have gradually been expanded to include a larger set of taxpayers. Can you comment on this history?

Answer. Taxes are often aimed at the very wealthy initially, to get buy-in in a democracy, and then applied to more and more taxpayers. We have seen evidence of this buy-in seeking process recently with promises by politicians that they would not raise taxes on anyone making under $400,000, that a wealth tax would only apply to 75,000 households, or, that the tax on book income would only apply to only 45 companies. One of the main virtues of these taxes seems to be that someone else will pay them. As Senator Russell Long noted, a mantra of democratic tax reform seems to be “Don’t tax you, don’t tax me, tax that fellow behind the tree!

However, these taxes often expand to affect more taxpayers. This certainly happened with the income tax. Initially, less than a few percent of the population had an income tax liability, and the top rates were very low. Then, that rate creeped up and up as the government expanded, more and more activities fell into its scope, and, politicians realized they could spend more money. World War II dramatically exacerbated this effect, turning the tax from a class tax, into a mass tax. Another example is the individual AMT, which started as a tax aimed at only the very rich, but, which ended up affecting millions of taxpayers each year until 2017 (before it was changed by the TCJA, which dramatically reduced the number of taxpayers affected).

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