Indiana Law Journal Indiana Law Journal

Volume 95 Issue 4 Article 5

Fall 2000

The Death of the Income Tax (or, The Rise of America’s Universal The Death of the Income Tax (or, The Rise of America’s Universal

Wage Tax) Wage Tax)

Edward J. McCaffery

University of Southern California;California Institute of Tecnology

, emccaffery@law.usc.edu

Follow this and additional works at: https://www.repository.law.indiana.edu/ilj

Part of the Estates and Trusts Commons, Law and Economics Commons, Taxation-Federal Commons,

This Article is brought to you for free and open access by

the Maurer Law Journals at Digital Repository @ Maurer

Law. It has been accepted for inclusion in Indiana Law

Journal by an authorized editor of Digital Repository @

Maurer Law. For more information, please contact

The Death of the Income Tax

(or, The Rise of America’s Universal Wage Tax)

a predictable mixture of shock, scorn, and support.

Yet there was nothing new in the

idea. AOC, as Representative Ocasio-Cortez is popularly known, was making a

suggestion with sound historical precedent: the top marginal income tax rate in

America had exceeded ninety percent during World War II, and stayed at least as

high as seventy percent until Ronald Reagan took office in 1981.

And there is an

even deeper sense in which AOC’s proposal was not as radical as it may have seemed

at first. For whether one likes, loves, hates, or fears it, one brute fact stands out about

AOC’s tax gambit: it would do nothing at all to change the tax burdens facing many

share of the overall tax burden be doomed from the start? The answer lies in a

surprising, and surprisingly hidden, fact: the individual income tax, as it was intended

to be, is dead. Out of its ashes, a new colossus has arisen: a universal wage tax that

is simple, formless, onerous, and inescapable. America taxes wages, not wealth.

Those few who have significant wealth can easily find ways to live off it, well and

tax-free. America’s many workers have no such choice. AOC’s increased tax rate

would fall on a few working millionaires

President Trump and Kushner, who have no reportable “income” under current law

on which AOC or anyone else can tax them.

style of contemporary politics. As with other markers of progressive social policy—

aims, to form a single “universal wage tax” providing the vast bulk of the

government’s revenue. A second tax, which I shall call the “ur-income tax,” persists

only for the wealthiest top 1%–5% of the population. This tax, the relics of a true

income tax, still nominally taxes wealth—that is, income from capital—in addition

to wages, as an “income” tax must in order to be an income tax. But this taxation of

wealth as opposed to wages is so porous that it is largely symbolic. Structural features

of the tax—loopholes—allow the wealthy to avoid its sting. Congress and the

executive branch continue to add rules and regulations to help the wealthy avoid tax.

Indeed, a cynic might suggest that the ur-income tax, the original and future tax that

applies to America’s wealthiest, persists only to feed the Wall Street financiers who

essentially voluntary due to basic tax planning available for those living off capital

alone. For the next tier, what Matthew Stewart has taken to calling the new American

aristocracy,

the ur-income tax continues to apply, as these citizens have a mix of

capital and labor with which to play tax-planning games. For the bottom 90%–95%

of the economic scale, however, the income tax is dead, replaced by the formidable

and inescapable universal wage tax. This is the tale told in the pages ahead.

A. The Trump Tax Cut, in Context

in fact continued a decades-long trend to transform the individual income tax into a

flat, or flattened, wage tax for the masses.

There is barely a need for most

Americans even to fill out forms to pay it. It has already long been the case that just

over one-half of Americans even pay the individual income tax;

around 150 million

individuals file returns each year.

Before the Tax Cuts and Jobs Act of 2017

of income taxpayers.

not need to fill out an income tax return at all or will be approaching the possibility

of a “postcard” return,

or even more simply, having the government fill out tax

forms for them.

income will be wages reported to the government by their employers. There will not

be any personal deductions to keep track of or show on a return. The typical

household will simply add up its wages as reflected on W-2s, subtract the standard

deduction, and look up the amount owed—most of which will already have been paid

through wage-withholding in paychecks. Indeed, millions of Americans will be

happy to get tax refunds on account of their overwithholding.

This is a tax with few or no forms to fill out, little or no variation among taxpayers,

falling only on wages, and automatically collected from paychecks. What should this

remind us of? For ninety percent or more of Americans, the individual income tax is

morphing into the second part of a universal wage tax system that simply adds higher

rate brackets onto the federal payroll tax. The payroll tax has long been a flat-rate

wage tax on the vast majority of American workers, kicking in on the first dollar of

wage income—that is, having no deductions, standard or otherwise. And this payroll

tax already is, for more than three out of four American workers, the major tax they

President Barack Obama’s payroll tax holiday—was undone after two years, when

the government needed to resolve a fiscal crisis of its own making, mainly on account

of reckless cuts to the individual income tax, as we shall consider further below.

no effort at all to tax income from wealth. It is not an income tax. The more the

“income” tax looks like a payroll tax, the less it is in fact an income tax. President

Trump’s tax cuts dealt a further death blow to what an income tax is supposed to be.

For most Americans, the income tax is dead.

B. The Seeds Planted

a tax system with “a single-rate tax, which taxes income one time,” as Norquist put

it.

Increasingly, since Norquist first set out the plan in simple written form, the “one

time” that “income” gets taxed is as it is earned from labor, just like the payroll tax.

holy grail of a flat tax, as championed by such conservative luminaries as Steve

Forbes, Richard Armey, Robert Hall, and Alvin Rabushka.

One can see the plot in

the details, such as in the conservative predilection for “Roth-style” treatment of

savings under the “income” tax—going so far as to label the movement

“Rothification” of the income tax.

earned, and never again. This is also true of the payroll tax: income is taxed as earned,

from wages, but the system makes no attempt whatsoever to track income from

wealth or savings. The simple reason for the parallelism is that an “income” tax with

Roth-style treatment of savings is a payroll tax—one that taxes wages and ignores

savings. Such a universal wage tax, of course, wildly favors those who do not actually

death tax, [2] abolish the capital gains tax, [3] expand IRAs so that all savings are

tax-free, [4] move to full expensing of business investment rather than long

depreciation schedules and [5] abolish the alternative minimum tax.”

proceeded incrementally, just as Norquist’s global strategy was meant to proceed

incrementally. In particular, the TCJA severely weakened the “death” tax (step 1)

as well as the alternative minimum tax (step 5),

while moving towards expensing

of business investment (step 4).

And as ordinary American wage earners continued

to search for the $4000 of benefits that Trump promised them from Tax Cuts 1.0,

talk of Tax Cuts 2.0 featured reductions to the capital-gains rate, even by executive

regulatory action (step 2),

and an expansion of IRAs—along the Roth model (step

3).

At the end of this line, when all five of Norquist’s steps have been taken in full,

there will be no income tax as we know it, or one that can properly be called an

“income” tax: we will have arrived at a universal wage tax.

C. The Normative Stakes at Issue

bent on a flat wage tax driving the policy changes. Liberals and progressives have

been especially wont to use the income tax as a vehicle for advancing social and

political ends—noble causes, perhaps, but ones that helped to make the income tax

unpopular and unwieldy.

Whatever the causes or benefits of the income tax’s

demise, some very important things have been lost in its passing: in particular, the

very possibilities for politics and progressivity.

politics and is not, and never has been, meaningfully redistributive. Indeed, there are

compelling reasons, in both theory and practice, why a wage tax ought not to be too

progressive or feature overly high marginal tax rates on the upper income: this is a

tax rates faces a plausible objection that it will deter high-end labor effort, while

doing nothing at all for those who are already wealthy and do not have to work for

wages in the first place.

wealth as well as on wages—means a deep, structural, and likely long-lasting loss to

America. To its advocates such as Grover Norquist, the death will be the crowning

glory in the systematic disarmament of the state’s tools of redistribution. Once cut,

complex, progressive taxes on capital and the rich will be hard to raise.

of the revenues (specifically, $1 trillion over a ten year period) to close a fiscal gap

created in large part due to President George W. Bush’s reckless income tax cuts.

As this all plays out, wealth will be systematically left off the hook for paying any of

the price of whatever civilization endures.

Like the story of the gift and estate, or so-called “death,” tax

the corporate income tax—two taxes meant to fall on wealth not wages—the ur-

income tax may persist largely as a fig leaf giving cover to a tax system

fundamentally set up to tax wages, not wealth. It will be more symbolic than real and

more fodder for keeping money—lots of money—in politics. Meantime, ninety to

ideas, such as AOC’s marginal-rate increase, Senator Elizabeth Warren’s recent

proposal for a federal wealth tax on fortunes in excess of $50 million

Vice President Biden’s proposal to repeal the “stepped-up basis” on death rule of

I.R.C. § 1014,

bear promise of different things to come—of a real attempt to get

the wealthy to pay a fair share of tax. But for progress to obtain and endure, it is best

to understand the failures of past and present tax policy. These recent progressive

proposals all work within an existing paradigm of taxing income-plus-wealth that

has existed on the books in America for over a century. It is not working, as this

Article argues. Sometimes paradigms must shift, and new tools need to be crafted for

old and intransigent problems. Furthering this intellectual project along is a main

goal of this Article.

they say.

truths—a major part of the reason that the murder can take place in broad daylight. I

will keep the main discussion as simple and welcoming as possible, for the technical

details tend to obscure the basic truths. More complexity can be found by following

sources in the footnotes.

two great factors of production in a modern capitalist economy. All wealth comes,

ultimately, from one’s labor or from one’s capital: people earn wealth either by

paint a picture of the state of capital and labor today.

The quick bottom line: capital

is winning. The world has more capital than ever, more unequally held. The Western

world is at, and is soon to exceed, levels of capital accumulation and inequality not

seen since the Gilded Age of the early twentieth century—a moment in time that

boded ill for Western civilization. Labor, meantime, has been losing: wages have

been stagnating for some time, and labor’s share of the national income has been in

household’s funds.

This is Norquist and company’s quest for a tax “which taxes

income one time.”

a “consumption” tax. One tax applies when income is first earned, and never again.

This type of tax has been called a “prepaid” consumption tax, but we can call it by a

simpler name: a “wage tax.” The second type of consumption tax falls when, and

only when, an individual spends money on herself. This type of tax has been called

a “postpaid” consumption or a “consumed income” tax, but again we can use a

practical politics and the possibilities for the sharing of government burdens between

capital and labor, wealth and wages. Consider how the different taxes affect wealth