Let's Return to a Progressive Income Tax System

by Philip Kotler

The Republicans are so busy today trying to reform the income tax system without any input from the Democrats. They want to make sure that the rich get richer. Note that their plan calls for a top rate rate of 33% which alone means that IRS loses the revenue difference between a 33% and a 39.6% tax rate on the rich.

It is another Republican case, like health care or immigration reform, that is designed to fail. 

Hillary Clinton’s stated that she will not raise taxes on the middle class. She will raise taxes only on the rich and super rich.

At what income does the middle class end and the rich class begin? Hillary defined the rich as starting with incomes over $250,000. Bryce Covert, in an article, claimed that the middle class ends at $206,568. Why? Because this is the income that defines the start of the top 5% of income earners. The top 5% is the rich class whose incomes grew substantially during this period. The middle and working class had falling real incomes since 1973.

The average income tax rate of the 400 wealthiest taxpayers has been falling over the years as their income has been rising. Most of the income of the rich is capital gains income and taxed lower than the tax on middle class Americans. Furthermore advisors to wealthy families find creative ways to use tax shelters and tax loopholes.

Add that rich families spend millions on lobbyists to get Congress to pass legislation favorable to the rich. The Koch brothers planned to spend $900 million to help their preferred presidential candidates win the 2016 election.

I propose that we consider setting the rich class as beginning at an annual income of $200,000. We will acknowledge that earning $200,000 a year in smaller cities or rural areas is a rich class income while in New York City or San Francisco is a middle-class income. But we need some number to start with.

The real question is how to distribute the tax burden between the rich and very rich. This calls for setting up a set of rising brackets where the marginal tax rate rises in each bracket. This is the essence of a progressive tax system. For example, the brackets and marginal tax rates can be:

Brackets, Marginal tax rate

$200,000-$500,000, 40% 

$500,000-$1,000,000, 42%

$1,000,000-$5,000,000, 44%

$5,000,000-$10,000,000 , 46%

Over $10,000,000, 50%

Observe that several income tax brackets were commonly used under the Eisenhower administration. The top rate was 90% in 1954. Subsequently they were finally squeezed down by the Republicans to a top bracket rate of 39.5%. As this occurred, the declining tax rate led to a redistribution of money from the poor to the rich!

Other taxes than the income tax need to be increased if we are to reduce the annual federal deficit and continue our welfare programs including Social Security and Medicare. Capital gains and carried interest should be taxed at the normal income rate, not the lower capital gains tax rate in existence. I would add two other tax programs to consider: (1) a small tax on stock buying and selling transactions to reduce the growing volume of speculative transactions, and (2) a tax on high-value luxury goods.

I would propose another tax feature: let persons with outstanding college loans cut their tax payment by some percentage (say 50%) of their outstanding college loan. As they repay their remaining college loan, they move toward paying the full required income tax on their income.

Conservatives will raise the following objections:

1. The government is practicing class warfare and this will change the economic behavior of the rich, leading them to work less hard, invest less here and move their capital abroad. (But the rich did not object when redistribution flowedt from the workers to the rich.)

2. The rich will increase their drive to replace labor with capital and this will seriously reduce the number of jobs. (There is little that can stop the continuing advances in technology).

The proposed progressive tax system is further justified to meet the growing consensus that income inequality keeps getting worse. Even rich citizens are beginning to press for some compression of the growing income gap between the poor, the working class, the middle class, the rich and the super rich.

The spirit behind this taxation system is captured in the remark of Oliver Wendell Holmes, Jr., “I like to pay taxes. With them, I buy civilization.”

What do you think? Join the debate. And please tell us what you think in the comments section below.

Philip Kotler is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Northwestern University Kellogg School of Management in Chicago. His most recent work is “Confronting Capitalism: Real Solutions for a Troubled Economic System.”

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