End the Work Penalty!

Last night, ex-Senator John Edwards was the keynote speaker at a New School conference on the very broad theme of "fairness." Edwards spoke for about 45 minutes before opening the floor for questions, and focused his remarks almost entirely on tax reform. It’s often hard to keep an audience awake on this topic for very long–but Edwards kept them on their toes. Not much was said that we didn’t all hear during the 2004 presidential campaign, but he strung things together in a way I never heard during the campaign season. (Thanks, soundbite-happy media!)

The theme of his talk was that the Bush administration’s fiscal policy has had the effect of punishing work and giving a privileged tax status to wealth. Of course, this isn’t news to folks at Citizens for Tax Justice. As a May 2004 CTJ analysis noted, the wave of tax cuts pushed through by Congress and the Administration in recent years (and the reduced tax rates on capital gains and dividends in particular) have reduced the average tax rate on unearned income well below the average rate on wages. The CTJ analysis showed that total federal taxes on earnings now average 23.4 percent, while federal taxes on investment income average just 9.6 percent. Expressed this way, the administration’s tax agenda has transparently shifted the tax burden off wealth and onto work. And this was the point that Edwards hammered home quite effectively all night– that Congress and the Administration have effectively enacted a "work penalty."

As other speakers kept reminding the audience throughout this conference, fairness is a contested term. But there are some baseline definitions of fairness that almost anyone would agree to– and ensuring that earned and unearned income are taxed the same way is, I think, one such area of unanimity. As Edwards put it: "why should a wealthy stockbroker pay a lower tax rate than his secretary?"

For those of us who have opposed the regressive tax cuts of the past four years, one of the biggest difficulties is that the thing we are defending is pretty amorphous. It’s important to have a progressive personal income tax, not least because so many of the other taxes levied at the federal, state and local level are regressive. But how do you argue convincingly that the current overall tax system is "not progressive enough" when there’s no real benchmark? I know that the current system can be characterized as just "moderately progressive" overall, and I have the sense that it ought to be more so, but it’s hard to know what precisely the goal ought to be.
Well, the earned-unearned dichotomy is a pretty good way of getting a handle on what the benchmark for federal income tax fairness ought to be. The tax system shouldn’t discriminate in favor of some kinds of income and against others–and certainly shouldn’t discriminate against the wages and salaries that are the bread and butter of most low- and middle-income workers’ existence. So let’s end the work penalty!