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Why “tax the rich” isn’t working

Summary:
There are lots of people in Washington who claim to want to tax the rich. But it’s worth looking past the rhetoric and focusing on the actual policies being enacted. Here’s the NYT: Accounting firm brochures and websites are peppered with headlines like “Using opportunity zone investment to super charge estate planning” and “Investing in Qualified Opportunity Zones with Irrevocable Grantor Trusts.” In the trade press, a tax lawyer explains how to combine the opportunity zones tax break with a pre-existing tax break for selling stock in small businesses. On a popular opportunity zones website someone asks: “How can I combine cryptocurrency mining while taking advantage of the opportunity zones tax incentive?” Another site advises how best to combine the benefits of

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There are lots of people in Washington who claim to want to tax the rich. But it’s worth looking past the rhetoric and focusing on the actual policies being enacted. Here’s the NYT:

Accounting firm brochures and websites are peppered with headlines like “Using opportunity zone investment to super charge estate planning” and “Investing in Qualified Opportunity Zones with Irrevocable Grantor Trusts.” In the trade press, a tax lawyer explains how to combine the opportunity zones tax break with a pre-existing tax break for selling stock in small businesses. On a popular opportunity zones website someone asks: “How can I combine cryptocurrency mining while taking advantage of the opportunity zones tax incentive?” Another site advises how best to combine the benefits of opportunity zones with the Historic Tax Credits.. . .

Those tax returns showed that 84 percent of the zones got no opportunity zones money at all. Half the money went to the best-off 1 percent of zones. That’s hardly surprising. With so many zones to choose from, much of the money flowed to those that were already rising or those that governors chose foolishly. Some 25 percent of New York State’s opportunity zones are in booming Brooklyn. The city government in Austin, Texas, one of the fastest-growing metro areas in the nation, asked for four opportunity zones. The governor allotted it 21.

The best way to reduce this problem is to move to a tax system with lower marginal rates and fewer loopholes.  Unfortunately, we are moving in the opposite direction.  For instance, there are indications that Congress may bring back the SALT deduction, which primarily benefits wealthy people.  And marginal tax rates are likely to increase, which will encourage even more wasteful tax dodging:

During his campaign, President Biden vowed to “reform opportunity zones to fulfill their promise,” but so far the administration hasn’t proposed anything or used its regulatory muscle. And its proposed capital-gains tax increase and other tax increases would only make opportunity zones even more attractive to the tax-averse rich.

The efficiency gains of the 1980s and 1990s are gradually being undone.

PS.  I did a podcast with David Beckworth discussing my new book.  Here is the transcript.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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