Tax the rich

I've written a couple of posts on the mechanics of US government debt. Today I want to dive into whether, why and how we should manage that debt. If you want to jump right to the conclusion, just re-read the title of this post. If you'd like a more nuanced take, keep on reading.

In Money money money, I showed a FRED graph that plotted US debt as a percentage of gross domestic product over time.

Using GDP as the denominator is kind of how you manage your household debt. The amount of money you spend on your mortgage matters, but it also matters how big your income is. That tells you how affordable that mortgage is to you. Comparing federal debt to GDP does the same calculation for the nation.

Between 1966 and today, the federal debt hit its nadir of about 31% in the earliest years of the Reagan administration. It climbed steadily for three Republican administrations, fell during Bill Clinton's time in office, climbed during George W. Bush's eight-year tenure, skyrocketed during the sub-prime crisis of Obama's first term and then continued to grow during his second, and rocketed upward again during the COVID crisis of Trump's first term. Debt declined under Biden, ending at about 122% of GDP when he left office. Overall, debt as a fraction of GDP quadrupled over that time.

In personal terms, your mortgage quadrupled and your income stayed flat.

Modern Monetary Theory

There's a school of thought among economists called Modern Monetary Theory, or MMT. You can click through on the link to read a deeper explanation, but I'll summarize it this way: If governments can simply create money using quantitative easing whenever they want, it really doesn't matter how much they owe. They can always conjure new money out of thin air to pay their debts!

I disagree profoundly. Quantitative easing is inflationary, as I've explained. Creating new dollars makes the dollars you already have less valuable. More money chasing the same amount of goods and services drives prices up.

There's one thing that might make MMT attractive, though: If the interest rate you're paying on your debt is at or near zero percent, then more debt doesn't really hurt. You can just take out a new zero-percent loan to cover your old zero-percent loans, and any new debt you want to accrue this year.

The interest rate that the government pays on new debt fluctuates over time. From Richard Nixon through Bill Clinton, that rate was pretty consistently 5% per year or higher. There was a huge spike in the early 1980s when Paul Volcker, then head of the Federal Reserve Bank, pushed interest rates to almost 20% to tame inflation. Over that long period, though, it was always reasonably expensive for the government to borrow money.

Beginning in 2000, though, something happened to the interest rate. It fell to historic lows and stayed there for a quarter century. For much of that period, rates were actually zero percent. It costs nothing to roll over old debt when interest rates are at zero!

That period coincides exactly with the growth of MMT in popularity among economists and, especially, politicians. I view the MMT craze as a zero-interest-rate phenomenon. In recent years, as the Fed has raised interest rates to (once again) tame inflation and as policies of the second Trump administration have caused yields to climb, concern about the debt is becoming fashionable once again.

How much money do we have?

We've allowed the debt to grow almost four-fold, from 31% to 122% of our GDP, over the past 45 years. If we want to pay it off, a good first step is to figure out how much money we have, and where it is.

That's not the same as GDP, the number used for measuring the debt above. GDP is our gross domestic product, the total dollar value we produce every year. That's analogous to our annual income. What we want to measure instead is wealth.

American household wealth has long been concentrated among the richest of us. In 1990, the poorest half of America owned 3.5% of all household wealth; by 2023, their share had fallen to 2.6%. The top 1% of Americans went from 22.8% to 30% ownership of all wealth over that same period.

That concentration is even more stark among the very richest Americans. Between 1990 and late 2024, their share of all wealth went from 8.6% to 13.8%. Put another way, over about 34 years, the very richest tenth of one percent of Americans received 5 percent of all the wealth held by the 99.9% below them. (I won't include the extra FRED chart here, but the total wealth held by the top 1% of Americans in 2024 was 30.8%.)

In 2022, the wealth of all Americans totaled $199 trillion. Using that number and ignoring the two-year difference in the data sets, the top tenth of a percent of Americans hold $27.5 trillion in net worth. The top 1% holds $61.3 trillion.

So: How much money do we have? $199 trillion. Who has it? Mostly, rich people.

Interlude: Great wealth is a social ill

The concentration of wealth in America has fueled enormous resentment among the middle class and poor against the wealthy.

Besides that justifiable sentiment, I think that it's a larger social ill. For one thing, it discourages entrepreneurship. When you need to earn money, you do productive work – take jobs, start companies, make things. When you have a lot of money, you don't need to work, because your money does that for you. You can invest in businesses, rather than start them, and live on the dividends and growing stock prices. I used to be pretty entrepreneurial! I created computer programs and I started companies. But, having made money in the tech sector, I retired at 58 years old. Now I ride my bicycle, travel a lot and blog about politics and economics.

That destruction of entrepreneurial spirit can cross generations when great wealth is inherited. Young people who are handed a place among the 1% have as little motivation to work or to start companies as their parents did, who may have at least made the money in the first place.

I think that fiscal and social policies in the US should encourage entrepreneurship. I think we should reduce wealth and income inequality. Forty years ago, those views would have marked me as a fiscal conservative. Today, they make me a left-wing radical. The change is in what "conservative" means, though, not in my beliefs.

Paying your taxes

Government gets its income from taxes and debt. Debt has become a serious problem – in 2024, we spent 16% of our budget on interest on the debt, more than we spent on defense! In order to solve it, we have to fund the government with taxes and quit borrowing money.

Our tax income depends on marginal tax rates. You may have heard these called tax brackets. I'll walk through a quick example of how marginal tax rates work in the US. You can skip this if you have filled out a 1040 in the last decade.

Here are the marginal tax rates for 2025:

If you're a single filer who makes $105,000 this year, then you'll pay 10% on the first $11,925 (for $1,192.50 in taxes), plus 12% of the next $36,550 (that's $48,475 minus the $11,925 you already were taxed on, for another $4,386 in taxes), plus 22% on the next $54,875 ($103,350 minus the $48,475 you were already taxed on, for another $12,072.50 in taxes). You made $105,000, or $1,650 more than the $103,350 you were already taxed on. That income is taxed at 24% (another $396). You're in the 24% tax bracket, because that's where your total income lands in the table above. But you're only paying the marginal rates shown in the table on each chunk of income. Your total taxes are $1,192.50 + $4,386 + $12,072.50 + $396 = $18,047. Despite your 24% tax bracket, your effective tax rate is $18,047 / $105,000 = 17.2%.

These are called marginal tax rates because they apply only to the income at that tier. The dollars you earn below each tier are taxed at a lower marginal rate; the dollars you earn above each tier are taxed at a higher marginal rate.

In the table above, the top marginal tax rate is 37%. If you earn $626,351, you'll pay thirty-seven cents in taxes on that final dollar. If you earn a million dollars, you'll pay thirty-seven cents for your millionth dollar. And your billionth. And so on.

Marginal tax rates over time

Ronald Reagan took office in 1981 promising to shrink government (he didn't, really) and to cut taxes (hoo boy, did he!). He campaigned on the notion of "trickle-down economics" – if we cut taxes for the very wealthy, they'll invest and spend, and that money will trickle down to the population generally.

In fact, as the 45 years since and the charts in the previous sections show, tax cuts just led to ballooning debt, and trickle-down economics never worked. Wealth has concentrated steadily upward. The voter backlash that propelled Trump to office in 2024 was largely fueled by four decades of Republican policies of tax cuts for the wealthy, and the income and wealth inequality that those cuts fed.

Here's a chart that shows the top marginal tax rates for a number of categories over time:

The chart is from an economics course taught by Emmanual Saez, an economist at the University of California at Berkeley. It's information-dense and needs a little explanation.

The chart shows three tax rates: The rate paid by individuals on their income (the black dots), the amount of tax assessed on an estate when its owner dies and it passes to his or her heirs (the brown dots), and the rate paid by corporations on their income (the blue dots).

In each of those three cases, the chart plots only the highest marginal tax rate for that category.

The top marginal personal income tax rate spiked to pay for World War I and World War II. Even after WWII, though, it remained at 91%, and was 70% when Reagan was elected. He cut it to 50% during his first term, and 38.5% during his second. In the terms I used above: A rich person paid 91 cents of his millionth dollar in taxes in 1950, but only 38.5 cents on that dollar after 1987. And the same was true for every dollar the rich person earned above that.

Here's a plot of the effective tax rate paid by the wealthy, given Reagan's tax cut and tricke-down policies, over time. Note the crossing of the tax share and wealth share lines during the Reagan Presidency:

Note also the title of the chart – it's the share of wealth and taxes paid by the 0.01%, the very richest one hundredth of one percent of all Americans. As wealth has raced upward to them, their share of the national tax burden has held pretty close to steady. The increased wealth has come to them tax-free. That benefit compounds – you have more money, invest it to earn still more, and that new money is also tax-free.

Wealth inequality is a direct result of Reagan's tax policy and discredited trickle-down economics.

Corporate and estate tax rates

So far, I have talked mostly about income taxes on individuals. But the chart from Saez shows top marginal tax rates for corporations and estates, as well.

For corporations, the top marginal tax rate was around 50% for a long time, from WWII until near the end of Reagan's second term. Then it stayed in the 30s until Trump cut it to 21%. Since companies are disproportionately owned by the wealthy, this tax cut likewise benefits them.

Estate taxes are paid on large estates when their owners die, before their heirs inherit them. For many decades, the top marginal estate tax rate was 80%.

Estate taxes are an emotional issue for a surprising number of Americans! Republicans have branded the estate tax as the "death tax," and suggest that it penalizes working families and the middle class.

In fact, though, only a tiny fraction of American estates will ever be subject to estate tax. The vast majority of Americans will never pay any estate tax.

2025 tax law exempts the first $13.99 million of any estate from any tax at all. That means that you can pass almost $14 million to your heirs, without having to pay a single dollar of tax. The lowest marginal rate applies only above that $13.99 million. Each member of a married couple gets that exemption, so a couple may pass $27.98 million down, tax-free. There is a staircase of marginal rates for amounts above that. The top marginal rate is 40% (half the 80% historical rate), and applies only to amounts more than a million dollars above the exemption.

So unless you have $14 million bucks, or you and your spouse have $28 million, you don't have to worry about this. If your heirs are getting that much or more from you, they can tolerate some taxes in the service of society.

So tax the rich!

The wealthy are so wealthy precisely because Ronald Reagan and his economic policy heirs slashed their taxes. Reaganomics has failed. Trickle-down was a lie and the wealth and income inequality that he created have badly damaged American society.

No doubt many will argue that my proposal to tax the rich is "socialism" because it "redistributes wealth." But Reagan redistributed wealth! He just did so in a terrible direction. Our responsibility is to recognize his failure and to fix the problem he created.

In order to be among the top 1%, you need a net worth of $13.7 million and an annual income of $407,500.

We should restore the 70% top marginal tax rate on incomes of the top 1% – $407,500 using the cut-off number in the last paragraph, but maybe we keep the tiers in the 2025 tax brackets and only tax marginal incomes above $626,350 at that level.

We should restore the 80% estate tax rate on estates above $13.7 million, using the cut-0ff for the top 1%, or maybe we use the $13.99 million cut-off in the 2025 estate tax exemption. The estate tax rate will pay out over time, as wealthy Americans die and their estates pass to their children.

We should restore the 50% marginal rate on corporate incomes. This isn't even a hard question. The rate was in effect during years of innovation and fantastic economic growth.

What's the budgetary effect? I'll punt that question to the Congressional Budget Office, which can model the variables better than I. But the answer is: Substantial! Big enough to address our debt problems, even if we don't cut spending! (I do think we should cut spending, and spend smarter, but that's a different post.)

If the 1% hold $61.3 trillion in their estates today, and if that were all taxed at 80% on death (it wouldn't be – exemption level matters, but bear with me), it would generate $49 trillion in tax revenue over a generation. The US Federal debt as of this writing is $36.7 trillion, so there's the debt paid off! Total annual income of the top 1% is $2.6 trillion; at 70% (again, not realistic, but humor me), that's $1.8 trillion in revenue every single year. I won't try a back-of-the-envelope calculation on corporate taxes, but squint your eyes and annual tax revenues would double, because the marginal rate would more than double. That's new revenue, too.

Some will argue that raising taxes on the rich and on companies will cause them to flee to other countries. But the Congress already has tax treaties and agreements with other countries on corporate and individual taxes, and levies exit taxes on rich people who aim to renounce their US citizenship in order to escape taxes. Money flight is easy for the legislature to prevent.

I'm not trying to hold up a stagecoach, here. I'm a rich guy. I grew up in the 1960s and 1970s and benefited enormously from a society that invested in health care and education and public safety and the environment. I went to good public schools and a first-rate public university where I launched a lucrative career in the technology industry. I took the bus to my high school job in a thriving downtown where I learned how to work for a living. Guys like me absolutely ought to pay forward to future generations the opportunities that our parents gave to us. I would love to leave behind a world that lets my great-grandkids and yours do and build amazing things, just like I have been able to. I don't mind if my heirs and I die with a little less than we otherwise might.

We can make these changes, and the very wealthy will return to paying their fair share of taxes, and ninety-nine percent of Americans will not pay a single dollar more! This is not a politically difficult question; it's skewed only because the rich have used their wealth to buy disproportionate and unfair access to the political system.

We can fix that.