Taxing the Rich: Issues and Options

Abstract

The U.S. economy exhibits high inequality and low economic mobility across generations relative to other high-income countries. The U.S. will need to raise more revenues in order to reduce these disparities, finance much-needed new services and investments, and address the nation’s long-term fiscal needs. This paper outlines policy options for raising a large amount of revenues primarily from the most affluent, first discussing potential incremental reforms and then focusing on four main options for more structural reform:

(1) dramatically increasing the top tax rates on labor and other ordinary income,

(2) taxing the wealthy on accrued gains as they arise and at ordinary rates,

(3) a wealth tax on high-net-worth individuals, and

(4) a financial transactions tax.

Although we summarize the relative advantages and disadvantages of these approaches, we generally conclude that they all merit serious consideration. Several options are also complementary to one another. In practice, however, the relative strengths of each of these policies will depend to a large extent on how each is designed after it has made its way through the legislative and regulatory process.

Keywords: individual taxation, wealth tax, accrual tax, mark-to-market, financial transactions tax

JEL Classification: D31, H20, H22, H24, H25, H26, H27, K34