Trump’s State of the Union Ignored the Root Cause of Affordability Problems
Rising inequality hurts families, but taxing the ultra-rich can help. On Tuesday night, Trump steered clear of advocating this effective solution to our economic emergency.
Josh Bivens
During President Donald Trump’s State of the Union address on Tuesday, he claimed to be working to improve affordability for U.S. families. Speaking of the Democrats, Trump said: “Their policies created the high prices. Our policies are rapidly ending them. We are doing really well.”
But Trump didn’t talk about the root cause of these affordability problems: the long-running rise in inequality. And he didn’t call for the single most-effective way to reverse this inequality: raising taxes significantly on the ultra-rich families and corporations. In a new Economic Policy Institute report, I highlight how we got here and offer meaningful solutions to tackle growing inequality through wealth taxation.
The link between inequality and affordability is clear: Affordability improves when incomes (mostly wages and public benefits for typical families) grow faster than prices. Rising inequality means that the economy’s average growth rate is buoyed by stratospheric growth at the top and hence no longer maps onto what is available to typical families to help them afford a secure and decent life.
And the data shows clearly that inflation-adjusted incomes for most families have grown more slowly than the economy’s average income growth for decades. The wedge between typical families’ income growth and the average is basically an “inequality tax” that has grown year after year. This tax takes well over $20,000 each year from middle-income families — money that could drastically improve affordability if it had stayed with these families.
The main driver of this inequality was an intentional policy campaign of wage suppression. Policymakers steadily dismantled the institutions and policies that allowed typical workers to claim a fair share of the income generated by U.S. businesses for the generation after World War II. Growing employer hostility and labor law policy failures effectively destroyed workers’ right to form unions and bargain collectively, policymakers allowed the federal minimum wage to wither in the face of steady inflation, and they tolerated long periods of excess unemployment. This policy-induced wage suppression starved typical families of the incomes they needed to afford the basics of a secure life, and it also made owning the biggest businesses far more profitable. These higher profits in turn boosted the valuation of these companies and saw wealth values explode. Given that business ownership is always and everywhere concentrated at the very top, this process led to rising wealth inequality.
Getting to a more equal economy where fewer families suffer from the problems of affordability will require a sharp change in this policy path. One of the most powerful changes would be raising taxes significantly on the ultra-rich. These tax increases could finance increased public benefits — like expanded Medicaid and food stamps — that would help ease affordability for lower-income families.
Additionally, higher taxes on the ultra-rich would improve pre-tax inequality. Put simply, if the profits resulting from wage suppression faced significantly higher tax rates, the incentive to engage in this wage suppression would be reduced and typical workers could claim more of the income generated by the businesses that employ them. And because the value of deductions increase as tax rates rise, employers have a strong incentive to raise wages (which are deductible) to offset higher taxes.
The key to effectively taxing the ultra-rich is raising taxes on wealth (or the income derived from wealth). That’s because the ultra-rich make most of their money through accumulated wealth, not work. Current tax law imposes far lower rates on income derived from wealth (like capital gains) compared to income derived from work. Besides being obviously unfair, this gap also saps the ability of tax policy to push back against inequality. Further, this gap in tax rates invites tax evasion from those among the ultra-rich who do make some of their money from work. A rising share of income earned by CEOs, for example, is being classified (incorrectly) as capital rather than labor income because these CEOs want to face a lower tax rate.
The most ambitious tax policy to restrain the incomes of the ultra-rich and redirect them towards the rest of us would be a direct tax on wealth holdings over a large threshold — say $50 million. A modest progressive wealth tax (say 2-3%) would provide a steady stream of revenue to fund public goods and keep deficits lower in perpetuity. A higher tax (say 5% and above) would lead to wealth deconcentration—steadily eroding the value of wealth over the threshold. Eventually, this deconcentration would lead to less money being collected through the wealth tax, but that would be an unequivocally good thing. An analogy is taxes on pollution — if such taxes change behavior and lead to an end to pollution, they have done their job even if no more revenue is collected.
Finally, the benefits of finally standing up to the ultra-rich would be good for democracy and the quality of future economic debates. Today, many policymakers have convinced themselves that the public is broadly anti-tax. However, most Americans think paying taxes is a patriotic duty and a moral obligation. They just don’t want to feel like suckers paying their fair share while others far richer than them evade their responsibilities.
Trump couldn’t bring himself to admit it, but raising taxes on the ultra-rich would do many good things for our economy — while convincing Americans broadly that the system isn’t completely rigged for the rich.
