Don’t you just love this time of year? The leaves are changing colors, the air is crisp, and Washington is fighting another fiscal battle. Unfortunately, the annual signs of autumn are now accompanied with the Democratic vs. Republican budget showdown. Republicans voted to defund Obamacare, the president has refused to negotiate on raising the debt limit, and our government shut down Tuesday. How can anyone doubt that the ever-elusive “grand bargain” will never happen?
What gets lost in all this political posturing is the fact that the United States is in desperate need of deficit and tax reform. The last time Congress enacted a comprehensive tax reform, Top Gunwas still in theaters. For those of us too young to remember, the year was 1986, and the president was Ronald Reagan. Democrats and Republicans in Congress worked together with President Reagan to pass the Tax Reform Act of 1986. In today’s Congress that sort of compromise and bipartisanship is unheard of. The Tax Reform Act of 1986 helped propel the American economy forward, paving the way for the boom of the 1990s. Our nation needs a tax code for a 21st century economy.
My goal is to borrow ideas from both sides of the political spectrum in order to find common areas where compromise can be made, and the Tax Reform Act of 1986 will be my main reference for policy ideas.
President Reagan and Congress raised the maximum long-term capital gains rate from 20% to 28% and lowered the maximum ordinary income tax rate from 50% to 28%. They did this based on the principle that equal incomes should pay equal taxes. This principle should play a major role in any current discussion of tax reform. Is it fair that Warren Buffet pays a lower effective tax rate than his secretary? A majority of Americans do not think so. Recall the uproar during the 2012 election over the revelation that Mitt Romney paid an effective tax rate of 14%. Since the wealthy receive most of their income from capital gains, and not ordinary income, it is only sensible they pay a similar rate.
Today, the top capital gains rate (20%) is about 20% lower than the top income tax rate (39.6%). Many economists may argue that this is necessary to encourage investment by the wealthy. This may be true, but there is definitely room for Congress to raise capital gains taxes while still creating incentives for investment. One way to promote investing is to revive a 1985 proposal to index capital gains to inflation, which would provide a tax break to investors. For example, if inflation is 10% during the time one owned an asset, then the first 10% of capital gains would be tax-exempt. This is just one of the numerous strategies that Congress could use to promote investment while closing the gap between capital gains and income taxes.
Increasing the capital gains tax serves as a positive step towards bringing more equality into our tax code. For those deterred by rhetoric about the battle of the 99% versus the 1%, a higher capital gains tax is a more sensible, moderate way to reduce some of the tensions created by this perceived income inequality. Currently, the long-term capital gains rate is the same 20%, whether you make $1,000 or $1,000,000 in gains. A progressive capital gains rate (maybe one that mirrors the income tax brackets) may be another innovative policy Congress should consider.
For generations the Statute of Liberty greeted millions of immigrants on their journey to the land of opportunity. Whether it was for life, liberty, or the pursuit of happiness, individuals throughout the world traveled to our nation in search of the American Dream. It was and is a simple dream: the promise that you will be judged on the basis of your character, and not on the basis of your race, religion, class, or creed. It is the promise that through hard work and determination you can achieve a better life for you and your family. This promise is what motivates immigrants, legal and illegal, to come to the United States. Today, it seems as though the American Dream is slipping away, but we as a nation can fight to reclaim it, and the first step is to pass immigration reform.
For those who do not believe economic inequality is increasing (and surprisingly, 58% of Americans do not), here are a few key statistics to help illustrate the gravity of our nation’s problem. Income inequality, as measured by the Gini index, has been on the rise since the start of the new millennium. Relatively stable during the 1990s boom years, the United States' Gini index has risen significantly since the Great Recession (1.6% in 2011 alone, compared to 5.2% in the prior 17 years combined).
Our economic “recovery” exceedingly seems to benefit the richest Americans, while the poor and middle class are left behind. The top 1% received 93% of the income gains in the first year of the recovery. Poor and middle-class wage stagnation is a major reason for this. Deregulation, privatization, globalization, erosion of the social safety net, and the destruction of unions have all contributed to an economy that values corporate profits over rising middle-class wages. Corporate profits are 22% above their pre-recession levels, while employee compensation is 3% lower. The result of these trends is the dreadful fact that 80% of American adults will face joblessness or reliance on some sort of government welfare program.
So you may be asking, what does all of this have to do with immigration reform? Organizations from across the political spectrum, from conservatives to progressives, claim that immigration reform will benefit the American economy, and low-wage Americans in particular. Illegal immigrants and low-wage workers are in perpetual competition for jobs. When an illegal immigrant can work for less than the federal minimum wage, this puts poor Americans at a distinct disadvantage. According to the Cato Institute, legalization of low-skilled immigrant workers would increase the U.S. GDP by 1.27%, or $180 billion, largely because immigrants are more likely to start businesses than non-immigrants. A Small Business Administration studyfound that immigrant-owned businesses tend to have higher sales and are more likely to export good and services than non-immigrant-owned businesses.
The United States of America is a nation of immigrants that was built upon the millions of individuals who traveled here in search of a better life. We need to change our immigration system to one that can fulfill the requirements of a 21st century economy. Reform will not solve all of our nation’s problems, but it is a start. It will renew a promise: the promise that together we all prosper, the promise of a thriving middle class, and the promise that America will always be home to the hardworking, the tired, and the poor, yearning for an opportunity to succeed.