The Inflation Reduction Act of 2022, recently signed into law by President Joe Biden, builds a fairer tax code by raising taxes on the rich in three ways: 1) it enacts a 15 percent minimum tax on all corporations with more than $1 billion in annual profits; 2) it funds greater IRS enforcement activities against tax cheats with incomes above $400,000; and 3) it imposes a 1 percent tax on stock buybacks made by corporations repurchasing $1 million or more of their shares each year.1 This new revenue will go toward fighting climate change, expanding access to health care, and decreasing the deficit by more than $300 billion.2 By reducing the deficit, the Inflation Reduction Act is expected to withdraw demand from the economy and modestly decrease inflation.3
Although these three changes are steps in the right direction, more progressive tax reform is needed. Unfortunately, the tax policy discourse often fixates on the federal income tax to the exclusion of the broader tax code, which includes multiple taxes on the working class and carve-outs for the rich. In fact, a new report by the U.S. Congressional Joint Committee on Taxation (JCT) highlights five regressive elements of the federal code.4 These include:
- Low-income Americans face higher payroll tax rates than rich Americans. Americans with less than five-figure incomes pay an effective payroll tax rate of 14.1 percent, while those making seven-figure incomes or more pay just 1.9 percent.
- Long-term capital gains and qualified dividends—both of which are forms of capital income that are taxed at lower, preferential rates—overwhelmingly accrue to the rich. The richest 0.5 percent of taxpayers receive 70.2 percent of all long-term capital gains and 43.3 percent of all dividends. Pass-through business income also overwhelmingly goes to the rich and benefits from an unjustifiable loophole.
- The state and local tax (SALT) deduction is extremely regressive. The SALT deduction benefits 75.1 percent of taxpayers making $1 million or more, compared with less than 1 percent of those making less than $30,000. Unsurprisingly, the average millionaire deducts $317 for every $1 deducted by the very lowest-income Americans.
- The mortgage interest deduction similarly is skewed toward the rich. The average amount deducted is $13,061 for those with at least a seven-figure income, $2,886 for those with a six-figure income, $274 for those with a five-figure income, and just $33 for those making a four-figure income or less.
- Progressive estate and gift taxes play a dwindling role in the tax code. Estate and gift revenues have averaged just 0.1 percent of gross domestic product (GDP) since former President Donald Trump’s Tax Cuts and Jobs Act of 2017, equivalent to just half the average revenue from recent decades and one-third of the average from the decades following the New Deal.
While the very richest Americans pay the highest marginal income tax rates—that is, the highest tax rates on their last dollar of income—this fact needs additional context.5 The very richest Americans pay lower payroll tax rates than ordinary workers, and when the richest Americans pay income taxes, they are often taxed on only a portion of their income. While the overall U.S. tax code is still moderately progressive, the figures below show that substantial elements of the code are regressive, thereby contributing to high and rising inequality.6 These regressive elements will need to be corrected even as the much-needed Inflation Reduction Act is being enacted into law.