00:00We recognize what we need, but that none of us enjoys paying.
00:03And so we end up in an endless back and forth about whether we're paying enough,
00:07whether we're paying too much, and whether everyone is paying their fair share.
00:13A subject that's very close to my heart and close to your wallets.
00:17That old jalopy of our tax system.
00:19Some say my tax plan is too big. Others say it's too small.
00:22Send me these tax reforms and I will sign them right away.
00:26In this act, we have officially made the Trump tax cuts permanent.
00:31The debate's been raging since the time of the Gilded Age over 100 years ago,
00:35when a constitutional amendment was needed to have any U.S. federal income tax at all.
00:40The introduction of the income tax in this country and its sort of history,
00:44which I've been interested in of recent,
00:47you can kind of trace its roots back to concerns about inequality in the first Gilded Age.
00:54You know, concerns that there was wealth that was being concentrated in these American oligarchs.
01:01Natasha Saron is a law professor at Yale, where she co-founded the Budget Lab.
01:06It was exactly in response to the needs of the FISC to finance itself
01:11and concerns about inequality and its rapid growth in society.
01:15From the outset, the federal income tax was designed to do two things.
01:19Make sure the government had the money it needed and address extreme inequality in income and wealth.
01:25Flash forward to today, and the federal government certainly does not collect nearly the amount that it seeks to spend
01:31each year.
01:32The Congressional Budget Office now projects federal deficits growing from $1.9 trillion this fiscal year to $3.1 trillion
01:40in 2036.
01:41We have a terrible fiscal situation.
01:43Steve Ratner is chairman and CEO of Willett Advisors,
01:46which invests the personal and philanthropic funds of Bloomberg founder and majority shareholder Michael Bloomberg.
01:52The only way we're really going to solve it is partly by raising revenue.
01:55We're not going to cut spending. There's no political appetite to do it.
01:58I don't even think it would be economically or socially wise.
02:02So, yeah, taxes have to go up.
02:04The second part of it is the question of who should pay the taxes and is the current system fair?
02:09And what you see going on, including in this California referendum that they're trying to get through,
02:15is a deep perception, which I share in this country, that the tax system is not fair,
02:20that the wealthy are simply not paying their share.
02:24One simple example is capital gains taxes.
02:27The current capital gains tax rate is 23.8 percent, as I'm sure you well know.
02:31From the late 60s till the late 90s, the capital gains rate was somewhere between 28 and 35 percent.
02:38And yet, so it's lower now than it was then.
02:40I'm not sure what the argument for that is, given that government is being asked to do more and more.
02:45The problem that the California referendum is pointed at, which is a tough one to solve,
02:50is the problem of unrealized capital gains,
02:52that you have people like Elon Musk, Mark Zuckerberg, Jeff Bezos, pick your near trillionaire.
02:57Charging less in taxes for income off of capital gains, as opposed to income off of labor,
03:03is based at least in part on the idea that it's not fair to tax income twice.
03:08Income that accrues to sort of owners of stakes in corporations, let's say, is taxed at two levels.
03:16It's taxed when the corporate tax rate is coming in and taxing the corporate revenues that have accumulated to a
03:24company.
03:24And it's taxed when those dollars are paid out, for example, in the form of dividends to shareholders.
03:31But it's one thing to say we shouldn't be taxed twice on our income.
03:34It's another to say we should never be taxed on some gains at all.
03:39There has been a dramatic uptick in the share of that type of capital income that's really never taxed by
03:47the tax system at all,
03:49because it's held by individuals and then passed down to their heirs,
03:53such that when it is passed down, any tax liability that accumulated in your or I's lifetime
04:00is actually erased from the perspective of the tax system.
04:03And that like potential for erasure, if you look at the top one percent of distribution, about 40 percent of
04:12their wealth.
04:13So a very significant amount of what Elon Musk or Jeff Bezos has in terms of what makes them have
04:21these staggering amounts,
04:22hundreds of billions of dollars, 20s of dollars in wealth is exactly in those unrealized assets.
04:27That way around ever paying taxes on gains on investments is called stepped up basis,
04:33where the value of an asset is deemed to be what it's worth when inherited,
04:38even if it's gained enormously in value while being held by the one passing it down to the heirs,
04:43which means that trillions of dollars worth of assets may forever be outside the reach of Uncle Sam.
04:49And what's more, the wealthy owner of the investment can enjoy the benefits without selling and paying taxes
04:54by simply borrowing against the asset and pledging it as collateral.
04:58If we take people at the top, what they have the capacity to do that regular people frankly don't have
05:04the capacity to do
05:05is say instead of consuming based on my wages or something, I'm going to have a loan from a bank,
05:14let's say,
05:14and as collateral for that loan, I will hand them my stake in my business and then they'll hand me
05:21some money
05:22and I will consume out of what I have borrowed from the bank.
05:26The fisk never hits, the tax system never hits this activity in any way.
05:32So essentially, I am being able to consume out of pre-tax income and that advantages me relative to someone
05:41who is not being able to get access to those same loans to be able to finance their consumption.
05:46There's no real doubt that the current tax system can benefit the very wealthy,
05:51but some say this is the wrong focus.
05:54It's not whether some people end up with much, much more than others.
05:57What matters is how they got there.
05:59Do you think that the most wealthy in the American society pay their fair share of taxes?
06:05I think that any time you're thinking about whether anybody's paying a fair share
06:10or redistributing anything in accordance with fairness,
06:12it's a mistake to think that we would know the answer to that question by looking at the end output,
06:17by looking at the total result at the end of how it was distributed.
06:21Jessica Flanagan is professor of leadership studies at the University of Richmond.
06:26And if they're investing it or how they're using it, whether it's a fair outcome for them to be taxed
06:32or not.
06:33And so when people say, oh, this person's not paying their fair share,
06:36I think a lot of times they think that there's some end state of fairness where we'll know,
06:41oh, this is the correct distribution.
06:43What's more, Professor Flanagan takes issue with the idea of changing the tax system
06:47to deter the investments the very wealthy are making.
06:50If you care about the well-being of everybody in the society, but especially the worst off,
06:54isn't how the pie is distributed, but how much pie there is, how big the pie is.
06:58And so in some cases, if you're very progressive in your tax system, the highly regulated economy,
07:06we see that that's going to shrink the size of the pie.
07:09And that's going to mean that there's less up for distribution for everybody in the society.
07:12And everybody's missing out on the benefits from economic growth.
07:15And so I think we should be wary about increasing the progressivity of taxation for that reason,
07:21because you really don't want to mess with economic growth.
07:24That money is already doing work for the public good by being invested in the market.
07:31And so taking that money out and putting it into the government,
07:35I think would be, in a lot of cases, a much less efficient allocation of resources,
07:41because let's just think about what the government is spending the money on,
07:45a very inefficient health care system, a basic income for older people.
07:50So we fixate on these people as if taxing them will solve all of our economic problems.
07:55It wouldn't. There's just not enough.
07:57But are there specific things that could be done to change the current tax system to raise more revenue
08:01and reduce some of the national deficit and debt,
08:04and not take away the incentives for hard work and innovation?
08:08There's both revenue and there's the perception of fairness here.
08:11There are three or four things that I would do if I could wave my magic wand.
08:14I would raise the capital gains rate, maybe not all the way to the 37 percent of ordinary income,
08:18because there have been studies that suggest if you raise it too much, you actually lose revenue
08:22because people don't sell things because they don't want to pay the taxes.
08:25I would eliminate the step-up in basis of death, whereby people can pass this stuff on
08:31and pay their estate taxes but not pay any capital gains taxes on what was made.
08:36I would make interest used to borrow against stock like that not deductible.
08:43I would eliminate the carried interest special tax loopholes.
08:46Again, not huge amounts of revenue, but there's such a perception that the rich get away with stuff out there
08:52and some accuracy to that perception.
08:55I have a set of proposals with my co-author, Kim Klossing, that don't engage with some of the more
09:01novel tools
09:01like wealth taxes or the mark-to-market taxation of capital gains,
09:07but instead, say, if you do the more sort of traditional ideas that have been in this space,
09:14things like eliminating the preference for capital income that is passed to heirs by getting rid of stepped-up basis
09:22and doing realization at death and increasing capital gains rates slightly,
09:27you are able to raise something like $400 billion over the course of the next decade.
09:32And I think there is deep logic to that.
09:34In some sense, I think the idea that we should be thinking about tax tools that allow us to tax,
09:42people often say or I often say that we should have a tax system that taxes Paris Hilton, not Conrad
09:49Hilton.
09:50You know, so thinking about tools for, like, inheritance taxes that can be relatively simply administered and levied
09:57to be able to do better about encouraging not just the taxation of capital income at the top,
10:03but also the transfer during one's lifetime of capital to its most productive use.
10:08Whatever the better system might be for taxation,
10:11it comes back to that basic question of what we pay for a civilized society and what makes it civilized.
10:17Is it that people are roughly equal?
10:19Or is the real challenge making sure that the least fortunate have enough?
10:24If, as a society, would we be better off with less inequality, all other things being equal,
10:31recognizing all things are never equal, but that, you know, is that a cost for our society in having extreme
10:37inequality?
10:39That's a great question.
10:40There's a philosopher that I love who recently died, Harry Frankfurt,
10:44and he talks about something called the doctrine of sufficiency.
10:47And when he's talking about the doctrine of sufficiency, he says,
10:50it's very easy to point to a distribution and to say,
10:53oh, look, that distribution is very unequal, and to think that there's a kind of problem there.
10:57But most people, when they're looking at inequality, they think there's a moral problem there.
11:01The real thing that they're tracking is that some people don't have enough.
11:05And if we focused on making sure that everyone who doesn't have enough has enough,
11:10then the sufficientarians and the egalitarians will walk that path together for a long time.
11:14And if we focused on making sure that there's a lot of people who don't have enough,
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