While efforts to expand corporate disclosures along these dimensions are under way at the U.S. Securities and Exchange Commission (SEC), there is good reason why ESG disclosures also ought to include markers that reflect the market power of firms and competitive conditions in the markets in which they operate. Just as the economy relies on capital markets to allocate finance, it also relies on competition in product markets to incentivize adaptation and innovation. When product markets are competitive, higher rates of return are signals that firms are especially productive or that supply is insufficient relative to demand. Directing finance to higher-profit firms under these conditions would help to increase efficiency, which is socially beneficial and something that capital markets ideally would accomplish.

On the other hand, when competitive conditions are weak, firms that are protected by entry barriers earn supracompetitive profits. These returns are attractive to investors, result in high equity market valuations, and provide these firms lower cost debt finance. However, allocating capital on this basis, while individually rational for investors, is not optimal. As illustrated below, increases in the market power of firms occur alongside measurable and significant distortions in income distribution, operational efficiency, and capital investment.

Requiring that firms disclose markers of market power can serve several useful purposes. Socially conscious investors may well wish to avoid supporting such firms. Other investors may wish to avoid them because they are likely to experience economic shocks as antitrust enforcement becomes more vigorous. The recent introduction of antitrust legislation aimed at curbing the market power of large online platforms indicates that this is not idle conjecture.³

Moreover, because these markers make it easier for legislators, regulators, and antitrust agencies to identify firms and sectors where competition is weak, disclosure would also improve the overall functioning of capital markets.

This issue brief goes on to identify, using aggregate data, several statistical markers that, taken together, provide strong evidence of the existence of increased barriers to entry as well as declines in overall competition across the U.S. economy since the beginning of 21st century. While the data fluctuate because of business cycle changes and other shocks to the economy, the trends appear to signal increased market power and a decline in competition. Requiring the reporting of firm-level versions of these markers would mean minimal effort on the part of issuers but should lead to routine inclusion in the feeds of data aggregators. This would make analysis of market power easier and facilitate routine consideration of competition issues when capital market developments are discussed.⁴

Ratio of market value to replacement cost of capital

There is significant evidence that the competitive environment in the U.S. economy has changed dramatically since the late 1970s, with a significant share of corporations earning returns that exceed competitive levels.

Under competitive conditions—in which capital owners with funds to invest maximize their profits and there are no barriers that prevent these funds from flowing to the projects with the highest rates of return—it is expected that rates of profit on invested capital will converge across firms and industries to a common, equilibrium value. The logic behind this expectation is simple: Supranormal rates of return in any line of business create the incentive for their own elimination, since profit-maximizing investors will have extra incentive to enter that business, replicate the productive process used by incumbent firms, and earn some of the higher profits for themselves. Entry should continue until the effects of increasing supply reduce prices and eliminate rents—that is to say, the difference between competitive and supranormal profits.

However, data from financial markets reveal that, in the aggregate, the share of rents in corporate income is positive and has trended upward since the late 1970s. To visualize this, consider the ratio of the market value of corporations to the replacement cost of the physical and intangible capital stock that they employ. This ratio, called Tobin’s Q, should be equal to 1 under competitive market conditions. Otherwise, there is an arbitrage opportunity; a new entrant could buy a unit of capital and immediately earn a return equal to the difference between the cost of capital and the existing market value.

However, Q values for many nonfinancial corporations have been trending upward since the late 1970s and are now significantly greater than 1, as seen in Figure 1, which graphs average and 90th percentile Q values from 1975 to 2015. Over this period, there has been an upward trend in average Q and the 90th percentile value of Q.⁵

Figure 1

If publicly traded firms were required to disclose their average Q ratios over five years, observers would have an easy metric to help identify firms protected by entry barriers and possessing market power.⁶

Profit margin

A firm’s profit margin measures its ability to raise the price for a good above the marginal cost of producing it. The aggregate profit margin for nonfinancial corporations—measured as the ratio between unit profits (net of depreciation) and unit price—is graphed in Figure 2.⁷ From 1975 to 2001, the average value was 10.7 percent; and from 2001 to 2021, it was 12.5 percent. Since competition should push prices in the direction of marginal cost, this upward drift is consistent with a rise in market power in the past two decades.⁸ Requiring firms to report profit margins would provide another marker that could be used to distinguish firms that may be protected by barriers to entry.

Figure 2

Ratio of net investment to profits

Empirical research has shown that firms protected from competition by barriers to entry have diminished incentive to invest, which suggests that, in the longer term, innovation becomes less likely.⁹ With less competitive pressure, one would expect the ratio of capital investment to profits to decline for such firms: Why invest so much when few can contest your market? The aggregate value of this ratio for nonfinancial corporations trends downward after 2000, as shown in Figure 3.¹⁰

Figure 3

Requiring firms to report the annual ratio of capital investment to after-tax profit over five years would also help to identify firms that face limited competitive pressure.

Labor share in firm value added

The ability of firms to increase their returns above competitive levels is also reflected in the decline in share of labor in value added. As seen in Figure 4, there has been a long-term decline in labor’s share in the gross value added of nonfinancial corporations, beginning around the year 2001.¹¹ Although labor’s share began to recover somewhat after 2012, it still remains well below levels reached in the 1975–2000 period. Economist Simcha Barkai has shown that this decrease in labor share cannot be explained by the substitution of capital for labor in the production process and is therefore attributable to increased firm market power in either product or labor markets.¹²

Figure 4

Requiring firms to report the share of labor compensation in value added would help identify firms and markets where market power is significant.

Conclusion

There are well-established statistical markers that can help identify firms that have market power and are protected from competitive entry. Examining these markers using aggregate data illustrates how pervasive market power has become across the U.S. economy. If the SEC were to require disclosure of firm-level versions of these markers, the efficiency of capital markets would be improved, because standardized disclosures would make important information about structure of the economy more easily available and would make it easier for legislators, regulators, and competition agencies to identify markets where competition is inhibited. All of these outcomes are desirable and would place little burden on corporate filers.

Moreover, requiring these disclosures is consistent with the mission of the SEC and well within its legal authority. This is evident from the language of Securities Exchange Act of 1934:

Whenever pursuant to this chapter the Commission is engaged in rulemaking, or in the review of a rule of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.¹³

It also follows from sophisticated legal analysis of the scope of SEC rulemaking authority.¹⁴

It therefore seems useful and reasonable to include these markers of market power on the ESG disclosure agenda.

Marc Jarsulic is a senior fellow and chief economist at the Center for American Progress.

Endnotes

The post Integrating Antitrust Laws Into Environmental, Social, and Governance Disclosures appeared first on Center for American Progress.

The Biden administration’s first six months in the Middle East focused on limiting direct U.S. involvement in the region, instead prioritizing the COVID-19 pandemic response and the economic crisis at home while starting to address key global challenges such as climate change and competition with China and Russia. One common mantra among some members of the new Middle East team in the Biden administration is “no more failed states,” indicating modest and pragmatic goals for U.S. policy in the region. This new approach is more cautious than the previous administration’s efforts in the Middle East, which took risks in its policies on Iran and sent decidedly mixed signals about America’s overall posture in the region.

Looking ahead to the next six months and beyond, the United States is likely to face challenges on two main fronts. First, diplomacy with Iran over the revival of the nuclear deal has not produced a breakthrough at a time when Iran and its proxies continue to threaten U.S. troops and U.S. partners. These forces continue to undermine stability in key parts of the Middle East, including Iraq, Syria, Lebanon, Jordan, Israel, the Palestinian territories, and Yemen. Second, existing tensions between Israel and some of its neighbors, including Hamas in the Gaza Strip, Hezbollah in Lebanon, and a range of groups operating from Syrian territory, could erupt into a wider conflict. Navigating these two fronts—Iran and the Arab-Israeli front—in a way that produces increased stability and reduces threats from retrograde groups will be one central strategic challenge for the Biden administration in the Middle East.

But the biggest emerging challenge facing the region remains the chronic human security challenges that threaten to produce even greater violence and unrest. First among these is the unfinished COVID-19 pandemic. In addition, this summer witnessed record heat waves that led to widespread electricity shortages across key countries in the Middle East already experiencing poor services and governance hampered by endemic corruption. Furthermore, the looming climate crisis has already produced more acute challenges for water security in places such as Iran. Finally, broad deficits in freedom across most parts of the Middle East and North Africa—which remains dominated by autocratic governments—presents another overwhelming challenge to the goal of supporting democracy and human rights.

Early on, the Biden administration sought to put diplomacy first by working with European partners and other global powers to reengage Iran in diplomatic talks aimed at reviving the 2015 nuclear deal.¹ It also appointed special envoys tasked with ending conflicts in Yemen and Libya as well as one to address multiple issues in the Horn of Africa. Those efforts all engaged regional players such as Saudi Arabia, Egypt, Qatar, and the United Arab Emirates (UAE). This summer Biden hosted the leaders of Jordan, Iraq, and Israel.² In addition, Biden’s secretaries of State and Defense and their respective Middle East teams began engaging leaders and officials in Israel, Egypt, Saudi Arabia, and other key partners to coordinate a new approach on the region.

The Biden administration also signaled its intent to rebalance America’s military posture in the Central Command area of operations as it conducted a global posture review. The most significant move made by the administration in this broader area of operations was a complete troop withdrawal from Afghanistan, an effort that has come with major complications still being managed by the United States. In addition, the Biden administration repositioned military assets and equipment from key parts of the Middle East. And even as the administration sought to rebalance its approach, it conducted military strikes against adversaries threatening U.S. troops and partner countries across the region, including strikes against Iranian-backed militias in Iraq and Syria.³

The May conflict between Israel and Hamas drew the United States more directly into the Israeli-Palestinian issue than the Biden administration had initially planned. A prolonged political deadlock in Israel and continued divisions among Palestinians led this administration to adopt a restrained approach involving renewal of some U.S. aid stopped by the previous administration and the restart of diplomatic contacts with Palestinian Authority leaders.⁴ The crisis that erupted in May drew the United States into a role of working with key regional actors such as Egypt and taking practical measures to end the conflict.⁵ But the current environment on the Israeli-Palestinian front continues to face challenges from major gaps in basic human security, including the ongoing pandemic.

In sum, the conditions that produced popular uprisings across key parts of the Middle East and North Africa in 2011 remain present, as overwhelming economic, social, political, and human security demands could spark movements for change and generate instability. These challenges present an opportunity for the United States to recast its overall engagement with the Middle East to put a higher priority on diplomacy backed by a balanced security strategy, with a stronger focus on broader human security issues that will impact the region and inevitably affect the broader international system.

This brief offers highlights of the Biden administration’s actions in the Middle East and North Africa in its first six months on five key fronts: human security, conflict resolution, Iran, Arab-Israeli affairs, and overall U.S. military posture and engagement in the region. It provides an assessment of where the administration has had success thus far and where it’s fallen short. In addition, this brief looks ahead to the challenges the region will present moving forward.

Human security 

The Biden administration delivered targeted COVID-19 aid and other assistance aimed at helping the people of the region and supporting certain key governments. These initial moves were overshadowed by crises such as the spring conflict between Israel and Hamas and diplomacy and tensions with Iran. Still, the moves made by the Biden administration on the human security front represent important steps to engage the people of the region and address concerns that impact regional security and political dynamics. 

COVID response: A domestic and global policy priority with specific actions in the Middle East and North Africa

• More than 230,000 people across the Middle East and North Africa have died from COVID-19, with Tunisia, Iran, and Lebanon hardest hit as a proportion of their populations.⁶ Over 56.4 million people in the region have been fully vaccinated against COVID-19, with vaccination rates in the UAE, Qatar, Bahrain, and Israel at 60 percent and higher.⁷

• The United States has provided more than 3 million COVID-19 vaccine doses to nations in the region. Tunisia received 1 million Moderna doses via COVAX—the international vaccine distribution mechanism—as well as 200,000 Pfizer doses delivered under private contract with the Tunisian government; 500,000 Pfizer doses have been directly delivered to Jordan; 500,000 Pfizer doses have been delivered to Iraq via COVAX; 500,000 Moderna doses have been delivered to the West Bank and Gaza via COVAX; and 302,400 Johnson and Johnson doses have been delivered to Morocco via COVAX.⁸ In August, the U.S. State Department announced that it had provided 151,200 doses of the Johnson and Johnson vaccine to the people of Yemen.⁹

Economic and aid engagement: Restarting some programs and initiating new efforts

• The Biden administration restored more than $250 million in assistance to the Palestinians cut by the Trump administration; $183 million for the U.N. Relief and Works Agency; $150 million for economic assistance; and $15 million for emergency COVID-19 response.¹⁰

• The U.S. International Finance Development Corporation announced the launch of the Joint Investment for Peace Initiative, a new program created by the Nita M. Lowey Middle East Partnership for Peace Act that will focus on promoting investment in Palestinian-owned small- and medium-sized businesses that work with American and Israeli partners.¹¹

In early August, the Biden administration announced $100 million in additional economic support to Lebanon and $165 million in addition humanitarian aid to Yemen.¹²

Climate change: Planting the seeds for future cooperation

• Record heat waves struck the Middle East this summer, with temperatures reaching over 120 degrees Fahrenheit in Kuwait, Oman, the UAE, Saudi Arabia, Iraq, and Iran over the summer.¹³ Elderly and neglected power grids wilted under this hear, with electricity cuts and water shortages leading to protests in Iran, Iraq, and Lebanon.¹⁴

• Special Presidential Envoy for Climate John Kerry traveled to the region, visiting the UAE in early April to attend a regional climate forum in Abu Dhabi and traveling to the UAE, Saudi Arabia, and Egypt in June to discuss climate issues and renewable energy with all three countries. Egypt will host COP27, the next iteration of the U.N. Climate Change Conference.¹⁵

• The leaders of Israel, Saudi Arabia, and the UAE were invited to President Biden’s April virtual climate summit. At the summit, the United States and UAE agreed to create the Agriculture Innovation Mission for Climate—an initiative that will be formally launched at the COP26 summit in Glasgow and includes Israel—while Qatar and Saudi Arabia agreed to establish a Net-Zero Producers Forum along with the energy ministries of the United States, Canada, and Norway.¹⁶

Human rights: Voicing support as a priority, awaiting major actions

• During the Biden administration’s first six months in office, a number of repressive Middle Eastern governments released political activists and human rights campaigners from prison. Saudi women’s rights activist Loujain al-Hathloul, for instance, was released from prison in February, as were two other activists with American citizenship. In mid-July, Egyptian authorities released three activists and three journalists days after human rights criticism from the U.S. State Department.¹⁷ Quiet U.S. diplomacy were part of the efforts to gain these releases.

Conflict resolution

The Biden administration came into office seeking to lower tensions across the region, and it has been active in the diplomatic arena in Yemen, Libya, and the Horn of Africa. It has taken modest steps to engage on the Syrian conflict, with a focus on humanitarian aid delivery.

Yemen: Signaling peace as a priority but finding diplomatic pathways difficult to navigate

• The Biden administration appointed veteran diplomat Tim Lenderking as special envoy to Yemen and publicly stated that it was ending U.S. support for “offensive operations” carried out by the Saudi-led coalition in Yemen, though it remains unclear how this is defined. Lenderking has shuttled back and forth to the region multiple times in his efforts to end the fighting, notably observing in early June that the Houthis “bear major responsibility for refusing to engage meaningfully on a ceasefire.” However, these policy efforts have not moved the conflict closer to resolution.¹⁸

Libya: Working toward greater stability and renewed political engagement 

• The Biden administration appointed U.S. Ambassador to Libya Richard Norland as special envoy for Libya, while Secretary of State Antony Blinken participated in the Second Berlin Conference on Libya. The conference and subsequent bilateral discussions reaffirmed U.S. and international support for planned December national elections. While foreign mercenaries have yet to depart the country as stipulated under the terms of the 2020 cease-fire deal, other elements—such as the reopening of the coastal road between the towns of Misrata and Sirte—have gone forward.¹⁹ 

Horn of Africa: Engaging preventative diplomacy aimed at stopping broader tensions

• The Biden administration named former U.N. Undersecretary-General Jeffrey Feltman as special envoy for the Horn of Africa, tasked with mediating regional disputes over the Grand Ethiopian Renaissance Dam and the Tigray conflict.²⁰

• Secretary of State Blinken imposed visa restrictions on individuals involved in the fighting in Tigray as well as “wide-ranging restrictions on economic and security assistance to Ethiopia,” while the U.S. Agency for International Development announced the provision of an additional $149 million in humanitarian aid for the region.²¹

• The Tigray conflict continues to escalate, with the Ethiopian government mobilizing paramilitaries despite international calls for negotiation. Egypt and Sudan have both requested U.N. Security Council intervention over the Grand Ethiopian Renaissance Dam, saying negotiations with Ethiopia over the project have failed.²²

Syria: No major strategic shifts

• At the U.N. Security Council, the United States led a successful diplomatic effort to renew Syria’s cross-border humanitarian aid mechanism for an additional year. In addition, Secretary of State Blinken announced $436 million in additional humanitarian assistance to Syrians in Syria and neighboring countries. Syria remains divided between the Assad regime; an enclave around Idlib run by an al-Qaida-affiliated group; a Turkish zone along the northern border; and a U.S.-backed Kurdish zone in the country’s northeast.²³

Iran: Diplomacy and regional security tensions

The Biden administration has made rejoining the 2015 nuclear deal with Iran a central pillar of its approach to the Middle East and made some significant progress toward that goal in indirect talks earlier this year. However, it has also had to contend with Iran’s continued destabilizing security role across the region.

• Indirect talks to revive the nuclear deal started in Vienna on April 6. Though some progress had been reported by mid-June, Iran put the talks on hold until after the new Iranian president, Ebrahim Raisi, assumed office in August.²⁴

• In February and June, the U.S. military carried out two sets of airstrikes against Iranian-backed militias in Iraq and Syria in retaliation for rocket and drone attacks by those militias against U.S. military facilities in Iraq. More recently, the United States, United Kingdom, and Israel held Iran responsible for a lethal drone attack on an oil tanker off the coast of Oman.²⁵

• Secretary of State Blinken and National Security Adviser Jake Sullivan met with Iranian-American activist Masih Alinejad after the Department of Justice charged four Iranian officials with a plot to abduct her.²⁶

• Biden administration officials have warned that nuclear talks with Iran cannot go on forever, with Iran further violating the terms of the 2015 nuclear deal and barring inspectors from the key enrichment plant at Natanz.²⁷

Arab-Israeli affairs: Crisis management overshadows broader regional openings

Unlike its predecessors, the Biden administration entered office without ambitious plans on the Arab-Israeli front beyond undoing the negative policies of the Trump administration. Fighting in Gaza in May forced the administration to pay closer attention to the Israeli-Palestinian conflict, however, and the advent of a new Israeli government holds the potential for a reset of bilateral relations.

• The Biden administration announced some $388.5 million in aid to the Palestinians, including the resumption of funding cut by the previous administration. This funding includes $183 million for the U.N. Relief and Works Agency; $150 million for economic assistance; and $38 million for humanitarian assistance.²⁸

• During the most recent conflict in Gaza, the Biden administration engaged in quiet diplomacy with Israel and Egypt to bring about a cease-fire after 11 days of fighting. Biden consulted with Palestinian Authority Mahmoud President Abbas and dispatched Secretary of State Blinken to Israel, the West Bank, Jordan, and Egypt.²⁹

• The new Naftali Bennett-Yair Lapid government in Israel has taken steps to improve relations with Jordan, and Israeli courts have attempted to forge a compromise in the Sheikh Jarrah neighborhood of East Jerusalem—the flashpoint for last spring’s fighting. Palestinian Authority President Abbas faces renewed political challenges at home after the death of a West Bank dissident in the custody of Palestinian security forces.³⁰

• The August visit of new Israeli Prime Minister Naftali Bennett to Washington, D.C., to meet President Joe Biden was aimed at putting bilateral relations on a smoother track than they have been over the past decade. Immediately following this visit, Israeli Defense Minister Benny Gantz met with Palestinian President Mahmoud Abbas in an effort to improve ties and coordination between the Palestinian Authority and Israel. This meeting represents the type of step-by-step approach the Biden administration is likely to adopt in handling Israeli-Palestinian relations.

U.S. military: Beginning to reposition in the region while still engaged in threat response 

With widespread consensus in foreign policy circles that the Middle East lacks the strategic importance of Europe or the Asia-Pacific region, the Biden administration has made early moves toward reducing and rightsizing America’s military presence in the region. At the same time, however, it has launched strikes against Iranian-backed militias in Iraq and Syria while utilizing American bases in the Gulf to execute the evacuation airlift from Afghanistan.

• President Biden and Iraqi Prime Minister Mustafa al-Kadhimi agreed to formally end the U.S. military’s “combat mission” in Iraq by the end of 2021. However, few U.S. troops will leave Iraq and most will remain in the country on a training and advisory mission.³¹

• Secretary of Defense Lloyd Austin pulled at least 11 Patriot and THAAD missile batteries from Iraq, Kuwait, Jordan, and Saudi Arabia since the start of the Biden administration. At the same time, the U.S. military forged preliminary agreements with Saudi Arabia for access to bases in the country’s west.³²

• In February, Secretary Austin launched a broader global posture review to “to ensure the footprint of American service members worldwide is correctly sized and supports strategy.”³³

Conclusion

In its first six months in office, the Biden administration has shown a clear desire to limit direct American engagement in the Middle East in favor of a focus on higher foreign policy priorities such as Asia and Europe and the global challenge of the COVID-19 pandemic. Though it has made some high-profile moves such as starting talks to revive the Iran nuclear deal; renewing diplomacy to end the fighting in Yemen; and extending cross-border humanitarian access to Syria for another year, in general, the Biden team has adopted an approach that seeks to limit the costs of U.S. engagement. In so doing, however, it risks putting the United States in a reactive strategic position, beholden to events instead of seeking to proactively shape trends through diplomacy and other forms of engagement.

The Biden administration’s inclination toward a hands-off approach may end up placing the United States in a crisis management mode similar to the one that overtook the Obama administration from 2014 to 2016 in reaction to the rise of the Islamic State group. If the Iran nuclear deal cannot be revived—which seems more likely now than six months ago—tensions between Tehran and Washington will remain high. On a more fundamental level, though, the region’s basic human security problems will not go away, particularly those likely resulting from climate change. As a result, even the more modest and pragmatic goals the Biden team has set out for itself in the Middle East will require strategic reengagement in a region that’s been largely on the back burner during the administration’s first six months in office.

Brian Katulis is a senior fellow on the National Security and International Policy team at the Center for American Progress. Peter Juul is a senior policy analyst on the National Security and International Policy team at the Center for American Progress

The authors would like to thank Mara Rudman, Gordon Gray, and Rudy deLeon for their suggestions in helping shape up the issue brief.

Endnotes

The post Seeking a New Balance for U.S. Policy in the Middle East appeared first on Center for American Progress.

Unions help households by raising incomes, increasing benefits, and improving the quality and stability of jobs.³ All these things lead to both direct and indirect increases in wealth. When workers earn more money through union contracts, for example, they are able to set aside more of their paychecks and enjoy the additional tax incentives that come with saving.⁴ Moreover, benefits such as pension plans grow wealth, while others such as health or life insurance reduce the amount union members need to spend from their own savings during periods of illness or income loss. This helps cushion families’ savings against downturns like the recent COVID-19-induced recession, and additional savings can be put toward a child’s college education or the purchase of a home.⁵ Finally, strong union contracts create more stable jobs, with protections such as dispute resolution giving workers the ability to stay with a single employer for a longer period of time.⁶ Such stability leads to greater wealth generation, as finding a new job can be costly—and many benefits are not available to employees with shorter tenure in a position.⁷ Unions’ ability to increase household wealth may explain why they help boost economic mobility for future generations.⁸

A new Center for American Progress analysis illustrates how unions increase wealth for all households and help close racial wealth gaps. This analysis of 2010–2019 Survey of Consumer Finances data finds that:

• The median union household has more than twice the wealth of the median nonunion household.
• Black households with a union member have median wealth that is more than three times the median wealth of nonunion Black households.
• Hispanic households with a union member have median wealth that is more than five times the median wealth of nonunion Hispanic households.
• White households with a union member have nearly two times the median wealth of nonunion white households.

This analysis builds on previous Center for American Progress research into unions, wealth, and race. In particular, it echoes the findings of CAP’s 2018 analysis, which concluded that unions increase wealth for all workers and help narrow the racial wealth gap,⁹ while updating the survey end date from 2016 to 2019 to provide more recent data and increase the sample size to allow greater analysis of Black, Hispanic, and other or multiple race households. Additionally, the analysis takes a more detailed look at wealth composition, including the role that benefits such as defined benefit (DB) pensions play in narrowing the racial wealth gap. The 2018 analysis, for its part, built on a 2016 Center for American Progress Action Fund report that offered some of the earliest concrete evidence in the literature for the union wealth premium, albeit with a more constrained sample than that used in the current analysis.¹⁰

All told, unions have a significant impact on the financial stability of workers. This new analysis provides additional evidence that policymakers must take steps to strengthen unions in order to narrow the racial wealth gap and increase the economic power of the working class.¹¹

Methodological approach to the data and research

This analysis is based on highly detailed data on household wealth from the Federal Reserve’s Survey of Consumer Finances (SCF). This survey, conducted every three years, provides a nationally representative dataset that elaborates assets and debts for sampled families as well as demographic details and union contract coverage. The authors used these data to compare levels of wealth and wealth composition across both union coverage and race and ethnicity.¹²

The analysis is restricted to surveys conducted from 2010 to 2019, after the initial hardship of the Great Recession but prior to the onset of the COVID-19 pandemic. The sample only includes households with a head of household or spouse who is age 25 or older, not retired, and earning a wage or salary. This ensures that the nonunion families included are representative of workers who could enjoy wealth premiums if they joined unions; retired or self-employed respondents, for instance, could not join.

Union households

This analysis counts households as union if its respondent or spouse is covered by a union contract, regardless of whether that worker is a union member. Thus, the analysis may understate the role of unions because only one member of a household needs to be covered by a union contract in order for the entire household to be considered covered. For ease of language, the authors refer to the households included in the analysis as both “union households” and “union members.”

Wealth

The analysis measures wealth as the sum of all marketable assets—such as checking accounts, real estate, stakes in firms, and vehicles—less all debt, including mortgages, credit card debt, and student loans. The wealth figure also includes the net present value of the income stream that workers expect to receive from a DB pension, if they have one.¹³ These values are adjusted for inflation—as are all dollar amounts in this analysis—and reported in 2019 U.S. dollars. The analysis focuses on median wealth to convey outcomes of the typical household. Averages are often not as representative, as they are skewed by the top few percentages of households holding much more wealth than other households.

Demographic categories

The “other or multiple race” category reported in this analysis includes all SCF respondents who do not solely identify as white, Black or African American, or nonwhite Latino or Hispanic, resulting in a diverse group that also includes Asian, American Indian, Alaska Native, Native Hawaiian, Pacific Islander, and other race or ethnicity, as well as multiple race or ethnicity families. Despite the diverse universe of experiences in this category, the Federal Reserve must combine these households into one group due to sample size limitations before releasing their datasets to the public.

Furthermore, while the Federal Reserve reports Black or African American as the same category, for simplicity, the authors report it as Black; similarly, the authors use Hispanic to report survey data that combine nonwhite Hispanic and Latino into the same response.

Results of CAP’s 2021 analysis

Union membership is associated with higher wealth for the median household. As shown in Figure 1, the union wealth premium—or the ratio of median wealth for households covered by a union contract to the median wealth of those not covered—is 215 percent for all households in the sample. This means a typical union household is more than twice as wealthy as a typical nonunion household.

Figure 1

Some of the wealth benefits of unionization stem from increased wages, but unions also offer families access to more and better benefits, which themselves contribute to wealth. If the increase in wealth resulted solely from increases in wages, then median wealth-to-income ratios for union and nonunion members would be largely the same. However, the data indicate that households in the complete sample enjoy almost twice as much wealth relative to their incomes when they are covered by a union contract.

Much of this difference is explained by the fact that unions provide access to more and better benefits. Union members are more likely to have 401(k) benefits plans than nonunion members,¹⁴ and they are twice as likely to have a DB pension. The income streams promised by those DB pensions have a median net present value that is 1.7 times larger than DB pensions for nonunion workers. Not only do these high-quality benefits increase wealth directly, but they also reduce the amount that workers must save in other vehicles to cover their retirements. Union households can spend the additional income in a variety of ways, but quite a few—7.6 percentage points more than nonunion households—use their extra financial resources to purchase their own homes.

Black, Hispanic, and other or multiple race households enjoy much higher union wealth premiums than white households, making unions a powerful means of closing the racial wealth gap. The gulf between the wealth of white households and Black, Hispanic, and other or multiple race households in the United States is enormous: While the median white household in the sample possessed net savings and assets of $233,833, the median Black and Hispanic households had just $40,200 and $32,652, respectively, while the median household in the other or multiple races category held $104,699. CAP’s analysis confirms that because these households start from a lower base wealth, a larger union wealth premium compared with white households helps narrow the racial wealth gap. While higher median wealth is associated with union membership among all families, the increase is much larger for Black, Hispanic and other or multiple race households. (see Figure 2)

Figure 2

Union membership also makes it less likely that a family has no or negative wealth, which could occur if they have no savings, few valuable assets, and/or a large amount of debt. As shown in Figure 3, union membership reduces this likelihood for families of all races and ethnicities, but the decrease in the share of households with no wealth is especially large for Black households, from 20.2 percent to 12.5 percent.

Figure 3

No matter the measure, union membership multiplies household wealth by a much greater degree for Black, Hispanic, and other or multiple race households, shrinking the racial wealth gap. While median household wealth for white union members rises to 1.8 times the wealth of their nonunion counterparts, it is 3.5 times larger for Black families, 3.4 times larger for other or multiple race families, and 5.2 times larger for nonwhite Hispanic families. (see Table 1)

Not only can unions help Black, Hispanic, and other or multiple race families save more by helping them earn higher wages, but they can also help these families gain access to more and better benefits: Union Hispanic households, for instance, are almost five times as likely to have access to DB pensions than similar nonunion households, and the DB pensions themselves tend to be more valuable than those offered to nonunion workers. Hispanic families are also twice as likely to have access to a 401(k) benefits plan, while Black families are 54 percent more likely to have access to such a plan.

Families can put these additional assets toward important uses such as children’s education or, as demonstrated in Table 1, home ownership, which union contracts raise by 5.4 percentage points for Black families, 14.2 percentage points for Hispanic families, and 4.9 percentage points for other or multiple race families.

Table 1

Conclusion

CAP’s analysis finds that unions increase wealth for all families and narrow the racial wealth gap by offering greater wealth premiums for Black, Hispanic, and other or multiple race workers. Union contracts increase wages, which leads to higher savings and investment in home ownership and provides increased access to higher-quality benefits that further contribute to wealth. This fosters a virtuous cycle of saving to protect against hardship and investing to build a better future for American families. To help increase wealth for all workers and correct the injustice of the racial wealth gap, then, policymakers must consider union-strengthening legislation such as the Protecting the Right to Organize Act.¹⁵

Yet as the findings in this issue brief suggest, unions alone cannot close the wealth gap. They must be part of a comprehensive package of reforms aimed at correcting systematic biases against Black, Hispanic, and other or multiple race families that make it difficult for them to generate and keep wealth¹⁶—especially in recent years as Black¹⁷ and Latino¹⁸ families endured the lowest moments of the COVID-19 recession.

Still, unions are and will continue to be a vital tool in efforts to increase wealth for workers and to shrink massive racial wealth gaps. Higher wealth allows families to solidify any temporary gains they experience in social mobility, helping to narrow the racial wealth gap for future generations by giving parents the ability to invest financially in their children.

Aurelia Glass is a research assistant for the Economic Policy team at the Center for American Progress. David Madland is a senior fellow at the Center. Christian E. Weller is a senior fellow at the Center and a professor of public policy at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts Boston. 

Endnotes

The post Unions Help Increase Wealth for All and Close Racial Wealth Gaps appeared first on Center for American Progress.

Introduction and summary

Recent bombshell reports from ProPublica have confirmed what tax experts have long known and what many Americans have long suspected: Many of the country’s wealthiest people pay little or no tax because the U.S. system preferences income from wealth and offers the wealthy and corporations avenues to avoid tax that are not available to working people.¹ These fundamental flaws in the tax code existed many years before the 2017 Tax Cuts and Jobs Act (TCJA) took things from bad to worse by giving massive new tax cuts to the highest-income Americans and largest corporations.² These flaws have helped fuel the dramatic increase in inequality, leading to a less dynamic and less just economy.

For years, many policymakers have decried the tax code as being slanted against working people. They now have a rare opportunity to fix it, with a mandate from and the strong backing of the American people. Recent polls show that raising taxes on the rich and corporations is one of the most popular elements of President Joe Biden’s Build Back Better agenda, with the support of roughly 2 in every 3 Americans. Strong majorities believe that raising taxes on the wealthy and corporations helps, not hurts, the economy—and they are more likely to support investments when assured that they are paid for by taxes on the wealthy and corporations.³ It’s time for federal policymakers to act.

In doing so, the congressional majority can lay the groundwork for a stronger and more inclusive economy for decades to come. In the upcoming fiscal year 2022 budget reconciliation bill, Congress has a real opportunity to permanently cut child poverty nearly in half; ensure universal preschool and affordable child care; guarantee paid family and medical leave; expand home care and improve the quality of home care jobs; help millions of students afford college tuition and make community college free; lower health care premiums and extend coverage; expand affordable housing; dramatically reduce racial disparities in income and wealth; and forge the transition to a clean energy economy that produces new jobs and a healthier planet.

Given the urgency of these challenges and persistence of negative real interest rates,⁴ Congress need not fully “pay for” all of these priorities. But many members have expressed reservations about deficit financing, and the Senate’s rules prevent reconciliation bills from increasing deficits in the long term.⁵ Therefore, the more revenue Congress raises in the budget reconciliation bill, the more it will be able to invest. By the same token, if Congress falls short in fundamentally fixing the tax code, it will also fall short in making the investments the country needs.

This report explains the extent of income and wealth inequality today and how President Biden’s Build Back Better agenda addresses three fundamental problems with the tax code while raising $3.6 trillion in revenue to support investments in an inclusive, high-growth economy. These three problems have undermined tax fairness, increased inequality, and reduced revenues:

1. Billionaires paying virtually no taxes
2. Corporations not paying enough taxes, including by shifting profits and investment offshore
3. The rich and corporations not paying the taxes that they already owe

The report then suggests several options not included in the Build Back Better plan that Congress can consider to efficiently raise additional revenue from the wealthy and corporations. Given this surplus of options, there is no excuse for Congress to shortchange vital national investments in the reconciliation bill.

The past several decades in the United States have been characterized by increasing income and wealth inequality and slowing productivity and economic growth. The incomes of the richest 1 percent have skyrocketed in relation to those of ordinary Americans—and the very richest 0.1 percent have seen their after-tax incomes shoot upward even faster. (see Figure 1)

Figure 1

If the after-tax incomes of all Americans had grown together at the same pace since 1979, then by 2018, the total income of households in the richest 1 percent, after taxes, would have been $850 billion less.

Wealth inequality has also worsened. According to the World Inequality Database, the share of aggregate wealth held by the top 1 percent rose from 22.9 percent in 1979 to 34.9 percent in 2019, while the share held by the middle 40 percent declined from 33.3 percent to 27.8 percent.⁶ As Figure 2 shows, the top one-tenth of the top 1 percent of Americans now hold nearly one-fifth of the nation’s wealth—a number that has nearly doubled over the past 40 years.

Figure 2

This inequality has exacerbated the racial wealth gap. For example, depending on the measures used, white Americans are estimated to own at least four times and as much as seven times the wealth that Black Americans own.⁷ The racial wealth gap is the result of centuries of systematic oppression and discrimination, exacerbated by more recent trends in overall wealth inequality.⁸

Many of these trends have grown even worse over the past two years, during which the COVID-19 pandemic has disrupted tens of millions of Americans’ livelihoods and caused widespread financial insecurity. Low- and middle-income Americans have lost jobs and sources of income at much higher rates than the affluent. The actions taken by Congress in response to the pandemic have somewhat cushioned the blow, but many millions experienced and are still experiencing hardship.

The richest Americans’ fortunes, however, grew to new heights during the pandemic. The biggest driver of growing income and wealth inequality has been the large gains in asset prices, which have soared far above pre-pandemic levels. The wealth of the top 1 percent has grown by more than $7 trillion since 2019, by $11 trillion since 2017, and by an astounding $23 trillion since 2011.⁹

Many policy decisions over the course of decades are responsible for this explosion in inequality—including fundamental failings of the U.S. tax system. This report explains how President Biden’s Build Back Better plan would tackle three significant failings:

1. The failure of the tax system to tax income from wealth comparably to income from work—and most fundamentally, the fact that huge amounts of income from wealth escape tax altogether
2. The erosion of corporate taxes during an era of surging corporate profits
3. The weakening of tax enforcement, especially with regard to wealthy individuals and corporations, which has drained hundreds of billions from the U.S. Treasury

1. Billionaires do not pay taxes on trillions of dollars of capital gains

On June 8, the investigative news outlet ProPublica revealed that the 25 richest people in the United States paid a “true” tax rate of just 3.4 percent, on average. Three of the five richest people in the country—multibillionaires Jeff Bezos, Warren Buffett, and Elon Musk—paid even less.¹⁰

How is this possible? The extremely wealthy amass wealth not by earning paychecks, but from gains in the value of assets they own, such as stocks, other types of stakes in businesses, and real estate. Those individuals get richer and are better off because of those capital gains, yet the current tax system does not count these gains as income until they are realized—that is, when an asset is sold. That allows individuals to amass billions of dollars in wealth—and now even hundreds of billions—without reporting it on their tax returns and, thus, without paying a penny of tax on it. By contrast, regular working Americans have taxes withheld from their paychecks in real time.

ProPublica’s “true tax rate” measure includes unrealized capital gains in a person’s income—and therefore, gives a more comprehensive view than tax rate measures that only include income reported on tax returns. Taking unrealized gains into account illustrates just how little the superwealthy are paying in taxes in relation to their actual economic income.

The nontaxation of unrealized capital gains gives the wealthy an extremely valuable deferral benefit: Their wealth, plus the tax savings, compounds over time. And they can enjoy all the benefits of their wealth—including economic power and the ability to live extraordinarily lavish lifestyles—by taking loans that do not trigger capital gains tax.¹¹

Furthermore, if individuals never sell assets, they will never pay income taxes on their gains. Gains on held assets are not taxed as income due to a provision called stepped-up basis. Tax attorney Hank Gutman, the former chief of staff of the bipartisan congressional Joint Committee on Taxation, recently testified to Congress that stepped-up basis “is perhaps the most glaring loophole in the income tax—the complete exemption of the bulk of the wealth accumulation of the super-rich from income tax.”¹²

Economists Gabriel Zucman and Emmanuel Saez estimated in April 2021 that 63 percent of the total $4.26 trillion of U.S. billionaires’ wealth consists of unrealized capital gains that have never been taxed.¹³ Much of it will never be subject to income tax because of stepped-up basis.

Gains realized through selling assets, meanwhile, are generally considered income and taxed—but at preferential rates. The top capital gains tax rate is currently 20 percent, while the top ordinary income tax rate is 37 percent. When Medicare-related taxes are included, these rates are 23.8 percent and 40.8 percent, respectively. Congress should raise the top capital gains rate—but if policymakers are truly dedicated to ensuring that the tax system does not favor income from wealth over income from work, this step is not enough. The rate only matters if capital gains are taxed in the first place, which the existing system often fails to do.

Fully eliminating the tax advantages that capital gains have over ordinary income would require eliminating the deferral benefit, the stepped-up basis loophole, and special lower tax rates. In 2019, U.S. Senate Finance Committee Chair Ron Wyden (D-OR) proposed achieving this through an anti-deferral system, also known as mark-to-market, that would apply to the wealthiest Americans. Sen. Wyden’s plan would tax capital gains on stocks and other publicly traded assets annually, whether those assets are sold or not.¹⁴

The Build Back Better plan closes the loophole that allows capital gains to escape income tax

President Biden takes a more moderate approach, but one that still fixes the fundamental problems. His plan would repeal stepped-up basis, with protections for the middle class and family businesses, and equalize the capital gains and ordinary tax rates for income of more than $1 million.¹⁵ Under Biden’s plan, capital gains would still enjoy the advantage of deferred taxes until an asset is sold or transferred by gift or bequest—and in the case of family businesses and farms, as long as the business or farm remains owned and operated by the family. But Biden’s plan addresses the biggest problem by ensuring that the capital gains of the wealthy are eventually taxed.¹⁶

Biden’s plan includes a number of features that focus tax increases on the wealthy, not the middle class. A $1 million lifetime exemption ensures that only those who have more than $1 million of untaxed gains on assets, or $2 million for married couples, would see any tax change. This would come on top of the existing exemption for the appreciation of home values—which exempts the first $250,000 of gains for single individuals and $500,000 for couples. Biden’s plan also does not affect savings plans such as 401(k)s or individual retirement accounts (IRAs).

Because of these exemptions, only a small fraction of the population would be affected—and only those with very large untaxed gains. The Tax Policy Center estimates that together, all of President Biden’s major individual tax proposals would affect only 1.1 percent of taxpayers—those with very high incomes or more than $1 million in untaxed gains, or $2 million for couples.¹⁷

The Biden plan also makes a special exception for family businesses and farms, in addition to the $1 million general exemption and the home sale exemption. When a family business or farm is handed down to heirs, no tax is due. Only when the business is sold or otherwise ceases to be family owned and operated is the tax due on any gain. Despite claims to the contrary, then, no one who wants to keep a business or farm in their family would have to pay capital gains tax upon transferring it from one generation to the next.

The Build Back Better agenda also proposes other reforms that would raise revenue from high-income individuals:

• Restoring the top ordinary income tax rate from 37 percent to 39.6 percent, where it was before the 2017 TCJA
• Closing gaps in the law that enable high-income business owners to avoid paying Medicare-related taxes
• Closing the notorious carried interest loophole that enables Wall Street fund managers to convert their income into low-tax capital gains—though Biden’s plan to equalize the tax rates on capital gains and ordinary income of more than $1 million would almost fully close that loophole¹⁸

See Table 1 for a full list of Biden’s revenue-raising proposals and their estimated effects.

2. Corporations are paying less in taxes despite soaring profits

Corporations are owned overwhelmingly by high-income Americans through stock ownership: More than half of the corporate stock and mutual fund shares that Americans own belong to the richest 1 percent; the wealthiest 10 percent own nearly 90 percent.¹⁹ Foreign investors own roughly 40 percent of U.S. corporate stock.²⁰ These shareholders have been the primary beneficiaries of the gradual erosion of the corporate income tax.

The tax cuts that then-President Donald Trump signed into law in December 2017 slashed the U.S. corporate tax rate from 35 percent to 21 percent, among other changes. Under this rate and other changes, the net reduction in corporate tax revenue that will result over the law’s first decade has been estimated at $750 billion.²¹ Congress has also enacted additional corporate tax cuts since the TCJA.²²

Since the 2017 tax cut, the United States has collected less revenue from the corporate tax than at any time since the 1930s—averaging just barely more than 1 percent of gross domestic product (GDP) over the past three years.²³ The erosion of the corporate tax has contributed to the decline of overall revenues, which have been historically low and far below levels needed to support current levels of government services and investments, let alone the greater services and investments that are necessary for stronger growth and shared prosperity. In both 2018 and 2019, total federal revenues were 16.3 percent of GDP. By contrast, in 1999 and 2000—also the last two years of a long economic recovery—federal revenues were 19.3 percent and 20 percent of GDP, respectively.²⁴

Still, the U.S. corporate tax was eroding long before the TCJA. A key reason for this erosion has been the global phenomenon known as profit shifting, where large multinational companies artificially report their profits in tax haven countries rather than in countries where they have real business activity. By 2017, the United States was losing an estimated $100 billion annually from profit shifting.²⁵ And profit shifting has continued at a massive volume since the passage of the TCJA.²⁶

Corporate profit shifting is a problem faced by countries around the world and the focus of multilateral negotiations toward a coordinated solution. These negotiations are also aimed at preventing the global so-called race to the bottom—in which countries experience pressure to lower their corporate tax rates to match other countries’ rate cuts or to poach revenue from other countries by inviting profit shifting into their countries. This summer, 134 of the 140 countries involved in these negotiations signed onto a framework agreement under which countries would adopt a corporate minimum tax rate of at least 15 percent.²⁷ The agreement sets a floor that would substantially raise the corporate tax rates in tax haven countries, which currently are often effectively close to zero.

President Biden’s legislative proposals complement and reinforce this effort at international cooperation. Their adoption by Congress would greatly strengthen the United States’ hand in finalizing a global agreement. As explained further below, Biden’s proposals also advance the country’s interests in their own right by raising revenue for investments and addressing the existing tax code’s incentives for companies to shift profits and investment overseas. For those two reasons, Congress must act now to reform the U.S. international tax system rather than wait passively until the end of the multilateral process.

The Build Back Better plan makes large corporations pay their fair share

President Biden’s plan would raise slightly more than $2 trillion in corporate tax revenue, with more than half coming from reforming the United States’ system for taxing multinational corporations.

Under the Biden plan, U.S. corporate tax revenue would still be relatively low compared with other countries and with revenue levels in past decades. But it would increase substantially to support critical investments in America’s competitiveness, including infrastructure, research and science, education, and workforce development. American companies are the most successful in the world because they benefit from these kinds of public investments. Biden’s plan makes them pay their fair share in taxes to help fund those benefits. And it levels the playing field between the large multinationals that currently exploit tax havens to reduce their tax bills and their competitors, large and small, that do not.

The three largest components of Biden’s corporate tax plan are:

• Raising the corporate rate from 21 percent to 28 percent
• Implementing a strong minimum tax on overseas profits and removing specific provisions that can incentivize investment overseas
• Implementing a mechanism called Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD), which would protect the U.S. tax base, level the playing field for U.S. companies, and influence other countries to stop the corporate tax race to the bottom²⁸

Raising the corporate tax rate

increasing the corporate tax rate from 21 percent to 28 percent would reverse half of the rate cut from the TCJA. The United States’ corporate rate had been 35 percent for the 25 years before the 2017 law took effect—years during which U.S. corporations enjoyed surging profits both before and after taxes, gained preeminence in the digital economy, and were highly competitive in global markets.

Implementing a strong global minimum tax to prevent offshoring of profits and jobs

Biden’s plan would overhaul the United States’ weak corporate overseas minimum tax regime enacted in 2017, known as the tax on global intangible low-taxed income (GILTI). The Biden plan would ensure that U.S. companies pay at least a 21 percent rate on their overseas profits, compared with 10.5 percent under GILTI.³¹ Importantly, the new minimum tax would be calculated on a country-by-country basis rather than on a global average, which would prevent companies from exploiting tax havens to drive their average rate down to the minimum—and eliminate a potential incentive to locate operations in high-tax foreign countries, rather than the United States, if the companies’ average foreign tax rate is below the minimum. GILTI’s exemption for a 10 percent return on physical assets located overseas, known as qualified business asset investment—which can reward companies for locating such assets overseas rather than in the United States—would be eliminated.³² The Biden plan also prevents U.S. companies from claiming deductions against the proposed 28 percent U.S. corporate rate for expenses that generate income that is not taxed or taxed at a lower rate overseas.

Implementing SHIELD as a powerful backstop

One kind of corporate profit shifting is earnings stripping, where multinational corporations move earnings out of the United States by having their U.S. affiliates make tax-deductible payments to affiliates in foreign countries. When those foreign countries are tax havens or have much lower tax rates than the United States, earnings stripping is highly lucrative. This is likely the biggest reason that in past years, U.S. firms sought to invert so that their parent company would be based overseas. Under Biden’s SHIELD proposal, companies would not be able to claim tax deductions in the United States for payments going to affiliates in countries that have a corporate tax rate lower than the internationally agreed-upon minimum, which current negotiations have pegged at “at least 15%.”³³

SHIELD is an extremely powerful mechanism for achieving three goals simultaneously:

1. Protecting the U.S. tax base and leveling the playing field by preventing earnings stripping: By denying U.S. tax deductions for payments to corporate affiliates in tax haven jurisdictions, SHIELD shuts down a major form of corporate tax avoidance. That would stem the loss of revenue and level the playing field for multinational companies that do not engage in aggressive earnings stripping and for small and solely domestic businesses for whom offshore earnings stripping is not even an option.
2. Wiping out the financial incentive for U.S. companies to invert to low-tax countries. In addition to SHIELD, Biden’s plan also strengthens rules specifically aimed at preventing inversions.
3. Incentivizing low-tax countries to meet international standards. SHIELD would back up the United States’ diplomatic efforts toward multilateral coordination with the power the country derives from its giant consumer market. If the United States adopts SHIELD, low-tax countries will be highly likely to conform with international standards because multinationals based in those countries will pay much higher taxes in the United States if they do not. If other countries make these changes, global corporations will have nowhere to park their profits to escape taxes. And the concerns about the effects of taxes on U.S. multinationals’ ability to compete globally—concerns that have always been grossly overstated—will be alleviated.

3. A seriously weakened IRS results in trillions of tax dollars going uncollected

Perhaps the most glaring problem with the current tax system is its failure to collect what is legally owed. Without changes, an estimated $7 trillion in taxes will go uncollected over the next decade, and honest families and businesses will be left shouldering more of the load.³⁷ The decimation of tax enforcement has benefited high-income and corporate tax dodgers the most. Audit rates of millionaires and the largest corporations plummeted by more than 60 percent and nearly 50 percent, respectively, from 2010 through 2018, while decreasing by much less for other taxpayers.³⁸ The IRS has lost thousands of experienced and skilled enforcement personnel due to severe budget cuts and a nearly decadelong hiring freeze—leaving a dearth of agents able to thoroughly examine the complex returns of wealthy individuals and large corporations. The IRS has instead focused an increasing share of audits on low-wage workers who claim the earned income tax credit (EITC)—who are disproportionately African American and Hispanic—simply because it is relatively cheap to audit them and does not require the highly skilled auditors needed to audit the wealthy and large corporations.³⁹

New research indicates that the United States loses at least $175 billion per year to tax noncompliance by the richest 1 percent, largely because of offshore evasion and underreported income from pass-through business entities.⁴⁰ IRS Commissioner Charles P. Rettig has also identified the emergence of cryptocurrencies as a growing tax compliance problem.⁴¹ In its most recent analysis, the IRS estimated the net corporate tax gap to have been $32 billion per year from 2011 to 2013—but it has likely grown since then, and tens of billions more are lost to profit shifting and other aggressive avoidance techniques that are not criminal but often go unchallenged because the IRS is vastly outgunned in audits of and litigation against large corporations.⁴²

When sophisticated high-income and corporate taxpayers are able to evade or aggressively dodge taxes due to nonenforcement, it undermines the fairness and integrity of the tax system—to the disadvantage of the honest businesses and families who pay what they owe. It also worsens inequality along class and racial lines⁴³ and drains enormous amounts of revenue from the Treasury.

The state of tax enforcement in the United States is so bad that many Republicans and conservatives who are generally anti-tax agree that stronger IRS enforcement is needed. Unfortunately, in July, Republican senators negotiating the bipartisan infrastructure legislation backed away from a tentative agreement they had made to increase IRS funding to help raise revenue for infrastructure investment.⁴⁴ It therefore falls to congressional Democrats and President Biden to fix the broken system of tax enforcement through the budget reconciliation process.

The Build Back Better plan includes a comprehensive approach to improving tax enforcement

The Biden tax enforcement plan is focused on rebuilding and modernizing the IRS by giving it additional resources and tools and by directing enforcement resources toward wealthy individuals and corporations. The plan’s two main components are:

1. Funding the IRS: President Biden has proposed increasing the IRS budget by $80 billion over the next 10 years, with the bulk of funding provided on a mandatory basis so that the agency can reliably hire new enforcement personnel, upgrade its computer systems, and provide better service to taxpayers. New audit resources will be focused on high-income taxpayers and corporations, where the IRS can recoup the most revenue. The Biden administration’s initiative will reverse the disproportionate focus on low-wage workers claiming the EITC, improve racial equity, and help restore basic fairness for honest taxpayers.⁴⁵
2. Improving information reporting: The tax code requires employers to withhold income and payroll taxes directly from regular workers’ paychecks and to report all their wages to the government on W-2 forms. As a result, tax compliance on wage income is nearly 100 percent.⁴⁶ By contrast, business owners and wealthy individuals often receive income in forms that are not reported to the IRS by third parties—making it easier for the unscrupulous to hide or underreport income. To address this problem, President Biden’s plan would require banks and financial institutions to provide data on gross inflows and outflows from accounts to help the IRS spot indicia of potential tax evasion. Only gross annual flows, not any information about specific transactions, would be reported. Banks would likely report these flows on forms similar to the 1099-INT forms that they are already required to issue to account holders with $10 or more of interest income. Taxpayers would not have to do anything, but the information reported by banks would enable the IRS to better target audits, greatly leveraging the additional enforcement resources.

Under Biden’s tax enforcement initiative, overall audit rates would not increase for taxpayers earning less than $400,000 relative to recent years. With audits targeted more effectively because of better information reporting, regular, honest taxpayers would be audited less often—and they would have more confidence that others are not getting away with cheating while they pay full freight.

President Biden’s plan also includes several smaller but significant proposals that would help improve tax compliance, including a long-standing bipartisan proposal to clarify the IRS’ authority to set basic standards for paid tax preparers.⁴⁷

Table 1

Enactment of President Biden’s tax proposals would raise a combined $3.6 trillion in revenue and dramatically advance tax fairness. But they are not the only progressive revenue options available to Congress. Policymakers could adopt many other options in addition to the Biden proposals or as substitutes. All these options, shown in Table 2 and discussed in this section, would raise substantial revenue, and none would raise taxes on families or individuals with incomes of less than $400,000. This is not an exhaustive list.⁴⁸

Table 2

Phase out the pass-through deduction for taxpayers earning more than $400,000 in income

The TCJA added Section 199A to the tax code: a special new tax deduction for most pass-through business income, or income earned through partnerships, S corporations, LLCs, and proprietorships. Since pass-through income is very concentrated among the wealthy, and because the deduction cuts effective tax rates the most for people in the top tax bracket, 199A gives more than 60 percent of its benefits to the richest 1 percent.

Though the pass-through deduction was billed as a Main Street tax cut, its biggest beneficiaries are anything but mom and pop stores or any other kind of small business. A recent ProPublica expose revealed that the deduction’s largest benefits have gone to extremely wealthy owners of multibillion-dollar companies such as Uline and Bechtel. Some of these wealthy individuals played a role in lobbying for the provision to be enacted and for them to be included in it.⁴⁹

199A has created new avenues for tax avoidance by the wealthy—including CEOs recharacterizing their income to take advantage of the deduction.⁵⁰ It creates arbitrary disparities between taxpayers who derive their income from earning salaries and many of those who earn it through business entities. The deduction is another significant way in which the tax code favors income from wealth over income from work.

Ideally, the pass-through deduction should be repealed in its entirety. But short of full repeal, Congress could phase the deduction out at more than $400,000 of income, as President Biden proposed in his campaign plan. That would raise $143 billion in revenue through 2025, after which the deduction is scheduled to expire.⁵¹ Repealing it for high-income people now would also help ensure that the giveaway is not extended beyond 2025. Senate Finance Committee Chair Wyden has also proposed phasing out the deduction for those with incomes of more than $400,000 but removing limits on the deduction for some people with incomes below that threshold.⁵²

Implement a surtax on very high-income taxpayers

A relatively straightforward way of raising revenue exclusively from the richest households is to impose a surtax on very high levels of adjusted gross income (AGI). Such a surtax would not allow special deductions and would treat all reported income the same, whether from millionaires’ salaries, business profits, or investment income. A bill from Sen. Chris Van Hollen (D-MD), Rep. Don Beyer (D-VA), and others would implement a 10 percent surtax on AGI of more than $2 million for couples and $1 million for singles, raising nearly $700 billion.⁵³ Congressional proposals from several years ago that set the rate in the 5.4 percent to 5.6 percent range but applied to couples’ income of more than $1 million were estimated to raise amounts that were nearly as much if one adjusts for economic growth since then.⁵⁴

Limit tax expenditures for top-bracket taxpayers

Tax benefits that are structured as exemptions, deductions, or deferrals benefit people in higher tax brackets more than people in lower tax brackets. For example, a $1 deduction saves a high-income individual in the 37 percent bracket $0.37 in taxes but saves a middle-income person in the 10 percent bracket only $0.10. The effect is exactly upside-down: People in high tax brackets are least likely to need a deduction for mortgage interest to buy a home, the multiple tax benefits of health savings accounts to afford health care, or the tax deferrals in retirement accounts to save for retirement. Limiting such tax benefits to 28 cents on the dollar, as President Biden proposed during the campaign, is a relatively modest reform.⁵⁵ It would effectively give people in the highest tax brackets the same benefit per dollar of deduction or exemption as if they were in the 28 percent bracket.⁵⁶ It would raise roughly $270 billion over 10 years.⁵⁷

Congress could also restore the Pease limit on itemized deductions for high-income taxpayers, which was eliminated through 2025 in the TCJA. Because of its structure, the Pease limit was essentially a small addition to the top marginal tax rate.⁵⁸ Congress could also go further than President Biden’s proposal and simply raise the top marginal rate above 39.6 percent.

End the tax preference for stock buybacks

In recent years, policymakers in both parties have sought to curb stock buybacks out of concern that corporations are increasingly using them to distribute cash to shareholders and boost executives’ pay rather than invest in their business through capital investments or wage increases.⁵⁹ Tax experts have also emphasized that buybacks enjoy several tax preferences, including relative to shareholder dividends, and have proposed eliminating this preferential treatment. ⁶⁰ Sen. Sherrod Brown (D-OH) is developing legislation that would level the treatment of stock buybacks through an administratively simple means: requiring corporations to pay a low-rate excise tax on them. Given that the volume of stock buybacks has averaged about $500 billion per year in recent years, even a low-rate excise tax could raise substantial revenue.⁶¹

Repeal the FDII tax break without replacing it with new benefits for corporations

The 2017 tax law enacted an ill-conceived provision that allows multinational corporations to pay a 13.125 percent tax rate rather than the regular 21 percent rate on foreign-derived intangible income (FDII). This was ostensibly meant to encourage companies to invest in intellectual property that they could use and sell abroad, but its effects are merely to “subsidize monopoly profits and encourage exodus of physical capital,” according to Brookings Institution economist William Gale.⁶² The provision provides a needless windfall for companies that possess very valuable intangible assets rather than incentivizing innovation and research and development on the front end. Worse, under the way FDII is calculated, the more physical assets, such as factories, machines, or buildings, a company has in the United States compared with abroad, the lower its benefit from FDII—creating a perverse incentive to locate such assets overseas. President Biden’s plan repeals the lower tax rate on FDII but repurposes the resulting revenue for new tax incentives for innovation, which the plan leaves for Congress to design. The better way to boost U.S. innovation is to invest directly in research, science, and education, so Congress should simply repeal the lower rate on FDII, raising $217 billion that can be used for those purposes.

Expand limits on corporate deductions for executive compensation

Currently, corporations cannot deduct their top executives’ compensation exceeding $1 million per year. This limit, however, currently only applies to the top five officers in a company; companies are able to deduct more than $1 million for other highly paid employees, such as Wall Street traders. Executive compensation is a major driver of inequality, as corporate executives comprise a sizeable share of the top 0.1 percent of earners.⁶³ Deduction limits have not reduced corporate executive pay in the past, potentially because of their limited scope and the large exception for performance-based pay that existed before the 2017 tax law. Broader limits could be more successful in restraining executive pay—and to the extent they are not, they would simply raise revenue from large corporations with many millionaire executives or employees. Expanding the $1 million deduction limit to cover all executives or employees of public companies would likely raise about $20 billion.⁶⁴

Limit other corporate deductions

Congress has other avenues to raise revenue by broadening the corporate and business tax base. One option is to reform the tax treatment of advertising. Permanent tax rules allow businesses to fully deduct advertising costs in the year the costs are incurred. But the proper treatment under an income tax for an expense that creates value to a firm over multiple years—as advertising often does—is to treat the expense like an investment and require it to be capitalized with deductions spread over time. Congress has temporarily allowed full, immediate deductions for many other types of investments. But on a permanent basis, the Congressional Budget Office (CBO) estimates that the tax code gives more favorable treatment to brand-building advertising than to any other type of investment—inefficiently favoring advertising over other, potentially more productive investments.⁶⁵ Recent CBO estimates suggest that requiring businesses to capitalize half of their advertising expenses would raise revenue by roughly $75 billion to 150 billion over the next 10 years, depending on whether deductions would be spread over five or 10 years.⁶⁶

Congress could also further limit corporate interest deductions. The structure of the U.S. corporate tax favors debt financing over equity financing because interest payments to creditors are deductible while dividend payments to shareholders are not. The TCJA partially addressed this bias by strengthening limits on interest deductions. But Congress could raise revenue and further reduce the bias toward debt financing by tightening the interest deduction limits even more. Lowering the existing limit on interest deductions from 30 percent of adjusted taxable income to 20 percent would raise roughly $140 billion over 10 years, based on estimates by the Tax Policy Center.⁶⁷

The estimates of the revenue that would be raised from repealing the FDII deduction or limiting deductions for executive compensation, advertising, or interest are based on the existing corporate rate of 21 percent. The higher Congress raises the corporate rate, the more revenue it would raise from limiting these or other corporate deductions.

Strengthen the estate tax

Like the corporate tax, the estate tax has been repeatedly slashed and eroded over the years—to the point where less than 0.1 percent of estates pay any tax.⁶⁸ The first $11.7 million of an estate’s value, or effectively $23.4 million for couples, is exempted from the estate tax.

Congress could repeal the TCJA provision that doubled of the estate tax exemption. Better, it could raise about $250 billion by restoring the estate tax that was in place in 2009, with an exemption of $3.5 million, or $7 million for couples, and a top rate of 45 percent. Under those parameters, still far less than 1 percent of estates would pay the estate tax. Congress could raise an additional $100 billion by raising the rate higher for billion-dollar estates.⁶⁹

Congress must also close the large loopholes in the estate tax that allow the wealthy to avoid it with ease. These loopholes are the reason that former President Donald Trump’s top economic adviser, Gary Cohn, famously said, “Only morons pay the estate tax.”⁷⁰ Vehicles such as grantor retained annuity trusts and intentionally defective grantor trusts, as well as wealthy families’ ability to aggressively claim valuation discounts, enable these families to lowball the value of their estates for tax purposes when transferring them to heirs.⁷¹ Tax experts Daniel Hemel and Bob Lord estimate that shutting down these three vehicles and making some additional changes to protect the estate tax base would raise at least $65 billion in revenue over the next decade “and potentially much more.”⁷² Congress should also address so-called dynasty trusts, another vehicle for transfer tax avoidance.⁷³

Strengthening the estate tax and ending stepped-up basis are not duplicative. The estate tax is a tax on amounts transferred to heirs—and its purpose is to curb dynastic wealth. Closing the stepped-up basis loophole would ensure that the very wealthy are taxed on their lifetime income, just like everyone else.

This fall, Congress and President Biden have a historic opportunity to lay the groundwork for stronger and more inclusive prosperity for decades to come. That includes fixing the most fundamental problems in the tax code that undermine tax fairness and enable growing income and wealth inequality.

If members of Congress are serious about fulfilling the principle that the tax code should not favor wealth over work and that the wealthy and corporations pay their fair share, they will need to implement fundamental reforms, not tweaks around the edges.

At the same time, substantial tax reforms can offset the long-term cost of the truly transformative and expansive policies that Congress can advance this year: cutting child poverty nearly in half by making the expanded monthly child tax credit permanent; ensuring universal preschool and affordable child care; and guaranteeing paid family and medical leave. More revenue would also allow Congress to expand home care while improving the quality of home care jobs; make community college free and other higher education more affordable; lower health care premiums and extend coverage to millions more people; and recharge America’s engines for innovation. And among many other priorities, it would dramatically reduce racial disparities in income and wealth and enable policymakers to forge the transition to a clean energy economy that will produce new jobs and a healthier planet.

Seth Hanlon is a senior fellow at the Center for American Progress.

Galen Hendricks is a research associate for Economic Policy at the Center.

The post Addressing Tax System Failings That Favor Billionaires and Corporations appeared first on Center for American Progress.

In November 2011, a new law went into effect in Wisconsin that dramatically changed the state’s approach to public carry of firearms.¹ For the first time, individuals in Wisconsin were allowed to carry concealed firearms in their community after obtaining a concealed carry weapons (CCW) permit from the Wisconsin Department of Justice. The law established relatively minimal eligibility requirements for a permit: Applicants must be a state resident; be at least 21 years old; not be prohibited from gun possession under federal and state law; and fulfill minimal training requirements, such as presenting a hunter education certificate or a current or an expired CCW license from another state.² Permits are valid for five years and can be renewed without completing any additional training. Also, the law does not provide the state Department of Justice with any discretion in determining whether to issue a CCW permit: If an individual meets the minimum statutory eligibility requirements, the agency must issue the permit.³ According to data from Wisconsin’s Department of Justice, from 2011 through 2020, 706,575 applications for concealed carry permits were issued and only 14,575 applications were denied after the applicant failed a background check.⁴

Although the law passed roughly a decade ago, there is a dearth of research addressing its potential effects on public safety in Wisconsin, in part because the law includes limitations on access to such data.⁵ However, an analysis of publicly available data from local agencies, the FBI, and other national databases suggests that the CCW law has led to negative consequences for safety in the state. Three categories of violent gun-related crime have increased since its implementation: gun homicides, aggravated assaults that involve a gun, and gun-related homicides and assaults against law enforcement officers. In addition, gun theft in Wisconsin has increased dramatically. The law is also associated with a significant rise in gun sales, particularly handguns, in the state, suggesting that it may have incentivized more Wisconsin residents to become gun owners.

These data provide more than sufficient evidence for lawmakers in Wisconsin to take a second look at the CCW law and take action to strengthen it. Even as states across the country move to weaken laws related to carrying guns in public—with some going so far as to eliminate permit requirements altogether, whether for open or concealed carry⁶—Wisconsin’s experience provides an instructive example of the potential harms caused by such an approach.

Wisconsin has seen a dramatic increase in gun-related violence

While many advocates of concealed carry licensing laws that allow more guns in public spaces cite a desire for improved safety, there is no evidence to suggest that expanding public carry reduces violence. Nationally, gun usage in self-defense occurs in less than 1 percent of violent crimes; in fact, guns are often used offensively by CCW permit holders, such as by escalating arguments outside the home.⁷

Moreover, studies have shown that using guns for self-defense is no more effective than other defensive measures.⁸ On the contrary, recent studies have concluded that states with more permissive concealed carry laws—including “shall-issue” states⁹ such as Wisconsin—have higher rates of gun homicides than states with regulations that provide law enforcement agencies the discretion to deny CCW licenses.¹⁰ Similarly, a 2019 study concluded that the adoption of shall-issue or right-to-carry laws were associated with a 10 percent to 15 percent increase in violent crime rates a decade after implementation.¹¹

Analysis of violent crime data in Wisconsin since the enactment of the CCW law provides further evidence that weak public carry laws contribute to an increase in violent gun-related crime. Notably, trends in Wisconsin suggest that the passage of the CCW law was associated with a rise in gun homicides.¹² As shown in Figure 1, gun homicide rates in Wisconsin were on the decline before 2012. However, this trend changed between 2011 and 2012, during the time of the implementation of the law, and began to shift upward. In fact, the gun homicide rate from 2012 to 2019 was 33 percent higher than the gun homicide rate in the state from 2004 to 2011.¹³ The proportion of homicides perpetrated with firearms also increased considerably. While 62 percent of homicides from 2004 to 2011 were perpetrated with a gun, this percentage rose to 72 percent from 2012 to 2019.¹⁴ Furthermore, this increase in gun homicides was not accompanied by a similar increase in nonfirearm homicides in the state, suggesting that any changes that affected homicide trends beginning in 2011 were specific to guns.

Figure 1

Similarly, the rise in gun homicide rates after 2011 did not occur in other neighboring states, suggesting that this was a problem specific to Wisconsin. Minnesota’s gun homicide rate from 2012 through 2019 was only 3.7 percent higher than its homicide rate from 2004 through 2011, before the implementation of Wisconsin’s concealed carry law.¹⁵ In Michigan, the rate of gun homicides from 2012 through 2019 was slightly lower than from 2004 through 2011.¹⁶ This counters the possibility of regional factors affecting gun homicides after 2011 and suggests that abrupt changes in gun homicide trends in Wisconsin can be attributed to state-level causes such as the passage of concealed carry laws.

Furthermore, evidence indicates that the rise of gun homicides in Wisconsin after 2011 is not attributed to an increase in homicides classified as occurring in the context of self-defense.¹⁷ Although there was an increase in self-defense homicides—with 78 such cases from 2012 to 2019, compared with 27 cases from 2011 to 2004—Wisconsin saw an upward trend in overall gun homicides after 2011 even when these cases were removed from the authors’ analysis.¹⁸ (see Figure 1) The average annual rate of gun homicides from 2012 to 2019, excluding self-defense cases, was 2.4 per every 100,000 people—a rate 24 percent higher than the average annual gun homicide rate from 2004 to 2011.¹⁹

Gun-related aggravated assaults in Wisconsin also increased after the implementation of the CCW law. After a four-year decline in aggravated assaults with a gun from 2007 to 2011, trends shifted upward after 2011. (see Figure 2) While the annual average of aggravated assaults with firearms from 2004 to 2011 was 1,700, this increased to 2,600 aggravated assaults per year from 2012 to 2019, a 56 percent increase.²⁰ At the same time, while 21 percent of aggravated assaults were perpetrated with a gun from 2004 through 2011, this percentage rose to 25 percent from 2012 through 2019.²¹

Figure 2

Finally, the data demonstrate that gun-related homicides and aggravated assaults of police officers rose after the implementation of the CCW law. While three officers were killed with a gun from 2004 to 2011, seven officers were murdered with a gun from 2012 to 2019.²² Gun-related assaults against law enforcement officers also increased considerably. From 2004 to 2011, an average of 19 officers were assaulted with a gun in Wisconsin every year.²³ This figure rose to 31 officers assaulted with a gun per year from 2012 to 2019.²⁴ (see Figure 3) In other words, the number of gun-related assaults against police officers rose by 63 percent.

Figure 3

Gun theft increased significantly following the enactment of the CCW law

A 2017 study found that gun owners who carried their guns during the previous months were three times more likely to have their firearms stolen than other gun owners.²⁵ Data suggest that Wisconsin is not an exception: The state witnessed a rise in gun theft after the passage of the CCW law. FBI data compiled by independent researchers and analyzed by the Center for American Progress show that the annual value of stolen guns reported by police agencies in Wisconsin from 2007 to 2011, prior to the implementation of the concealed carry law, was $1.26 million. In contrast, the annual value of stolen guns reported by police agencies from 2012 to 2019 was $1.48 million—a 17 percent increase.²⁶

Figure 4

As reporting from police agencies can be inconsistent,²⁷ the authors analyzed the value of stolen guns reported only by police agencies from Milwaukee, Madison, Green Bay, Kenosha, and Racine. These local agencies represent the five largest cities in Wisconsin and, to the authors’ knowledge, provide complete data around the value of stolen guns from 2007 to 2019 through the FBI’s Uniform Crime Reporting Program. As Figure 4 shows, the annual value of stolen guns reported by these agencies is considerably higher after 2011. These local agencies reported a combined annual value of $295,000 in stolen guns from 2007 to 2011. They also reported a combined annual value of $443,000 in stolen guns from 2012 to 2019, a 50 percent increase. This suggests that the number of stolen guns in Wisconsin increased after the passage of concealed carry laws.

Wisconsin gun sales have increased

The CCW law in Wisconsin is also associated with a rise in gun sales—a particularly troubling trend given that higher levels of gun ownership correlate with higher rates of gun violence. A 2007 study by researchers from Harvard University, for example, found that states with higher levels of gun ownership have higher levels of homicide victimization²⁸—an association driven by gun homicides as opposed to homicides that did not involve firearms. Similarly, a 2015 study found that higher levels of gun ownership were linked to higher levels of firearm assaults as well as firearm robberies.²⁹ Another 2015 study showed that homicides of law enforcement officers were three times more likely in states with higher levels of gun ownership than in states with low levels of gun ownership.³⁰

Figure 5

Data indicate that after the passage of Wisconsin’s concealed carry law, the volume of firearm sales in the state increased significantly. Using the number of background checks completed through the National Instant Criminal Background Check System (NICS) as a proxy for gun sales, the authors found a considerable increase since 2011. As illustrated in Figure 5, while the annual number of NICS background checks conducted from 1999 to 2010 was close to 185,000, from 2011 to 2020, it rose to close to 340,000 background checks, an 84 percent increase.³¹ Even after excluding 2020, a year with a considerable rise in gun sales across the country, the annual number of NICS background checks conducted from 2011 to 2019 was 319,000 per year—72 percent higher than the annual average from 1999 to 2010.³² Furthermore, as illustrated in Figure 5, the rise in background checks was driven by handgun purchases. While handgun sales represented 25 percent of NICS background checks from 1999 to 2010, they represented close to 36 percent of NICS background checks from 2011 to 2020.³³

Recommendations for state policymakers

Given the overwhelming evidence and data showing the negative impacts of the Wisconsin CCW law on public safety, policymakers in the state should repeal, or at least improve, the existing law by:

• Allowing police agencies to analyze their own data around concealed carry permits and make the data available for researchers.
• Giving law enforcement agencies the discretion to deny permits, a measure that is associated with lower rates of gun homicides.
• Requiring all applicants for public gun carrying, whether they intend to carry concealed or openly, to obtain a permit specific to the firearm(s) they will carry in public.
• Improving training requirements to include a practical test demonstrating an understanding of the functionality of firearms and a proficiency in shooting those firearms. These must be conducted prior to the issuance of the permit and annually thereafter. Training requirements should also include a written test in which applicants demonstrate an understanding of the nature and limits of self-defense; state firearm laws; the risk of firearm suicide, homicide, and unintentional shootings associated with gun ownership; and the benefits of safe firearms storage.

Additionally, policymakers in Wisconsin should pass complementary gun violence prevention measures to ensure the safety of the state’s population. These include:

• Passing universal background checks and extreme risk protection orders, measures supported by 80 percent of the state population.³⁴
• Requiring gun owners to promptly report all stolen firearms to law enforcement officers.

Conclusion

While advocates of Wisconsin’s 2011 CCW law argued that it would promote public safety, the reality is that the lax legislation has contributed to higher rates of gun violence in the state. Policymakers should take steps to correct this by improving permit requirements and passing complementary measures. Furthermore, the overwhelming evidence out of Wisconsin is an important case study for why CCW laws are detrimental to public safety and why continued action on gun violence prevention remains critical.

Eugenio Weigend Vargas is the director for Gun Violence Prevention at the Center for American Progress. Jeri Bonavia is the executive director of WAVE Educational Fund.

Endnotes

The post Concealed Carry Is Linked to Increased Gun Violence in Wisconsin appeared first on Center for American Progress.

The Sixth Assessment Report³ from the U.N. Intergovernmental Panel on Climate Change (IPCC), released on August 9, 2021, paints a dire picture of climate change, with the U.N. chief referring⁴ to its findings as “a code red for humanity.” The report, which was written by 234 scientists and reviews thousands of existing scientific studies on climate change, states that it is unequivocal that humans are responsible for climate change, and—what’s more—that the increasing frequency and severity of specific extreme weather events can be attributed⁵ to climate change with a high degree of certainty.

The findings from this most recent IPCC report are also particularly alarming in part because they prove what reports from prior decades predicted: Climate change is happening now, and its impacts—especially in the form of extreme weather—are already having devastating effects on humans. The report concludes that many of these changes are now “locked in,” meaning that communities are likely to continue experiencing extreme events for decades into the future.

The increasing frequency and severity of these extreme weather events across the United States, explained in further detail below, underscore the need for urgent, major investments from Congress in climate action and environmental justice. This means delivering on the totality of President Joe Biden’s Build Back Better agenda through budget reconciliation,⁶ in addition to the initial steps taken in the bipartisan, Senate-passed Infrastructure Investment and Jobs Act.⁷ These investments in climate action, jobs, and justice will put the United States on the path to a clean economy that is both resilient to, and no longer fuels, the climate crisis.

With that in mind, this issue brief takes a closer look at extreme weather events by the numbers over the past four decades; explains the different categories of extreme weather that the National Oceanic and Atmospheric Administration (NOAA) catalogues, analyzing how each is exacerbated by the climate crisis; and recommends that Congress make significant investments to lessen the human and infrastructure costs that result from these catastrophic events, while transforming the nation’s economy to one that is 100 percent clean.⁸

Extreme weather in the United States has increased in frequency and severity

The United States’ experience with extreme weather over the past four decades—and just this summer alone—only serves to underscore the most recent IPCC report’s findings. In fact, since NOAA started tracking billion-dollar extreme weather events in 1980, there have been 298 events that met their threshold—exceeding a total of $1.975 trillion in damages and costs.⁹

Overall, the four decades of data collected by NOAA reveal two particularly concerning trends. First, the frequency¹⁰ of these major, damaging extreme weather events is increasing: All five top years for event frequency occurred in the past decade. With 22 events, 2020 had the most billion-dollar extreme weather events of any year—nearly one-third more than the second-worst year on record, 2016, which recorded 16 events.¹¹ From 1980 to 2020, the annual average is 7.1 events, but the annual average for the past five years (from 2016 to 2020) is 16.2 events per year. Similarly, the average annual cost per decade¹² is increasing at an alarming rate. (see Figure 1) These statistics are shocking when one considers that the four-decade total is almost certainly an undercount of the number of total events,¹³ as well as an average underestimation¹⁴ due to incomplete data because of a lack of insurance coverage information and data latency.

Figure 1

2021 is following the same trend and already looks to be even more devastating than previous years. For starters, this past June was the hottest June¹⁵ on record across the United States, and this past July was the hottest July worldwide.¹⁶ With recorded data from a little more than halfway through the calendar year, the United States has already experienced eight extreme weather events¹⁷ with costs greater than $1 billion each. The continental United States is still in hurricane season, and wildfires, exacerbated by droughts, are raging in the Western states. For example, the Dixie Fire¹⁸ has been burning since July 13 and has consumed nearly 725,000 acres of California—making it the second-largest¹⁹ wildfire in state history. Its costs are not yet calculated, but they will no doubt cause further significant economic impacts and damage to communities and livelihoods.

It is also important to note that extreme weather does not affect everyone equally. Historically marginalized communities are forced to bear the disproportionate²⁰ brunt of pollution impacts while also confronting concurrent crises resulting from the COVID-19 pandemic, its economic fallout, and fewer pathways for recovery. That means that as extreme weather events increase in frequency and severity, there is a higher likelihood that the impacts to already-vulnerable communities will be disproportionately worse and result in further suffering if Congress does not act.

How U.S. extreme weather events are exacerbated by climate change

The new IPCC report stated conclusively that specific extreme weather events, as well as their frequency and severity, are attributed to climate change caused by humans. Below are the different categories of extreme weather events that NOAA considers each year as part of its analysis of damages, along with a brief explanation of how each is being exacerbated by a warmer, wetter climate.

Hurricanes and tropical cyclones

Climate change is fueling more frequent, intense, and damaging²¹ hurricanes and cyclones. Warming ocean temperatures lead to more evaporation, creating wetter conditions perfect for heavier rainfall and stronger winds. Furthermore, climate change-induced sea level rise leads to more storm surge²²—when higher waters are pushed inland by wind—and flooding, which are often the deadliest²³ parts of hurricanes. As the country faces more and more of these storms at more frequent intervals, it is critical to protect at-risk communities through federal investments and comprehensive disaster planning. This is especially vital as COVID-19 continues to be a threat to the health of communities and their ability to adequately prepare and recover from these storms.²⁴

More than half of 2020’s historic number of billion-dollar disasters were hurricanes and tropical cyclones. Worse yet, NOAA forecasts that there will be between 13 and 20 named storms during the 2021 hurricane season, with a 60 percent chance of an above-normal season.²⁵ Since the official start of hurricane season on June 1, already there have been eight named storms. This category of extreme weather events accounts for the greatest cost of overall damage ($1.03 trillion) among all events, as well as the highest average event cost ($19.9 billion per event). Since data collection began in 1980, the total decadal cost of hurricanes has skyrocketed from $39.6 billion to $459.8 billion in the 2010s—a more than tenfold increase in damages, which is consistent with increased development in coastal areas that are often in the path of these storms. The past five years of hurricanes alone amassed a total cost of $401.8 billion. With more frequent, stronger, slow-moving storms coupled with the co-effects of sea level rise and other impacts of climate change, these numbers are expected to continue to increase significantly.²⁶

Flooding

Flooding and inland flooding (such as flash floods²⁷) are the third-most frequent²⁸ billion-dollar extreme weather event that the United States experiences, following severe storms and hurricanes or tropical cyclones, respectively. Inland flooding is the leading cause of death attributed to tropical cyclones.²⁹ Closely tied³⁰ to the rise in severe and more frequent hurricanes, sea level rise—caused³¹ by rapidly melting ice sheets and glaciers and thermal expansion of warming waters, again due to a global rise in temperatures—can significantly amplify the devastation caused by extreme weather events. Rising sea levels increase the frequency of flooding during hurricanes, tropical cyclones, and even previously less-destructive severe storms. Climate change often makes storms slower-moving and more moisture laden³² due to increased evaporation, resulting in lingering storms that can release a deluge of rain—and subsequent flooding—on a single geographic location unprepared to deal with the effects. For example, Hurricane Harvey³³ in 2017 intensified over the Gulf of Mexico before making landfall and slowing to 5 miles per hour, dumping as much as 60.28 inches of rain over a single area in four days.

Already in 2021, places such as Louisiana have experienced³⁴ widespread flooding and damage to infrastructure and homes due to torrential rainfall. The area around Lake Charles, in southwestern Louisiana, was inundated with more than 12 inches of rainfall in 12 hours, leaving thousands of residents without power, vehicles stranded, and more than 250 people in need of water rescues.³⁵ The impacts to the region’s communities are even worse since the area is still recovering from hurricanes Laura and Delta from the previous hurricane season nine months prior. And it is not just coastal flooding from climate change: Parts of the Midwest, including Michigan, have also experienced³⁶ an increased number of flooding events this year as a result of heavy rainfall over short periods of time that overwhelmed³⁷ the local sewage and water infrastructure.

In fact, in late August, catastrophic flash flooding in central Tennessee tragically took the lives of at least 21 people, with dozens more still unaccounted for.³⁸ The region was hit with a quickly formed weather system—propelled by warmer atmospheric temperatures holding more moisture—that dumped more than 17 inches of rain during a 24-hour period, breaking the previous state record of 13.6 inches.³⁹ The enormous amount of rain overwhelmed the network of creeks and streams that crisscross the region, resulting in a 1 in 1,000-chance event from which the community is still recovering.⁴⁰

Severe storms

NOAA’s severe storm category encompasses events in which instances of tornadoes, high winds, and/or hail⁴¹ may occur. The climate change forces that are driving hurricanes, tropical cyclones, and flooding to be more destructive are similarly worsening the impacts of severe storms and are driving more storms to be classified as “severe.” Severe storms account for 46 percent of all the billion-dollar extreme weather events that NOAA has ever recorded.⁴² In 2020 alone, these storms made up 59 percent of the year’s 22 extreme weather events and cost $34.8 billion, well above the average annual cost of $7.3 billion.⁴³ The powerful derecho⁴⁴ that swept across the central United States last year, with winds of 100 miles per hour, rain, and at least 15 tornadoes, was the nation’s second-costliest severe storm to date, totaling $11.5 billion in damages to homes, infrastructure, and crops.⁴⁵ As this makes clear, severe storms have the potential to cause widespread damage to areas they affect.

Drought and heat waves

Higher temperatures caused by climate change also result in more soil evaporation,⁴⁶ contributing to in-year and multiyear droughts across the country and further perpetuating extreme heat waves. Drought conditions are defined⁴⁷ as a lack of precipitation resulting in water shortages. These conditions can lead⁴⁸ to drier vegetation, which can act as fuel for wildfires; have negative agricultural impacts; decrease the amount of available snowpack; and cause extreme water shortages for wildlife, agriculture, and population centers alike. Heat waves, brought on by spiking temperatures⁴⁹ that are then trapped in the atmosphere by greenhouse gases, are also increasing in frequency and severity⁵⁰ across all 50 states, and are lasting an average of four days. Additionally, heat waves are happening both on land and in the ocean,⁵¹ with devastating impacts for the ocean economy, wildlife, and ecosystems.

Since 1980, droughts and heat waves together have cost an annual average of $6.4 billion and are the deadliest extreme weather event over a 30-year average.⁵² Texas, North Dakota, and Kansas are the three states with the highest costs⁵³ from droughts since 1980. Currently, 47.33 percent⁵⁴ of the contiguous United States is considered to be experiencing drought conditions. Furthermore, recent studies⁵⁵ warn that extreme heat events will worsen drastically in the coming decades if the United States does not curb greenhouse gas emissions. Record-breaking heat waves are expected to more than double in frequency in the Northern Hemisphere in the coming decades, posing increased threats to both people and the broader environment.

In addition to June 2021 being the hottest⁵⁶ June on record in the contiguous United States, that month saw the Pacific Northwest experiencing a record-shattering heat wave⁵⁷ that brought temperatures into the 100-degree Fahrenheit range—incredibly high for a region that averages 77 degrees Fahrenheit at that time of year.⁵⁸ That prolonged heat dome resulted in nearly 200 deaths,⁵⁹ more than 1 billion sea creatures getting cooked alive⁶⁰ in their shells, and drier vegetation⁶¹ with the potential to contribute to increased wildfire danger later this season. Furthermore, heat waves disproportionately affect vulnerable populations⁶² such as people experiencing homelessness, farm workers and laborers, the elderly, and people without access to air conditioning.

Wildfires

The Western United States is ravaged by wildfires year after year, and studies show that wildfires are only going to get more intense and destructive.⁶³ The 2018 wildfire season was the most catastrophic⁶⁴ on record in the United States, costing $25.7 billion and burning 8.7 million acres.⁶⁵ The three most expensive wildfire years occurred in the past four years: $25.7 billion in 2018, $19.6 billion in 2017, and $17.1 billion in 2020.⁶⁶ In comparison, the average annual wildfire season costs about $5.9 billion,⁶⁷ taking into account available data since 1980. The costs⁶⁸ associated with wildfires are mostly attributed to damage to infrastructure and firefighting services.

The increased frequency of drought and higher temperatures spurred by climate change result⁶⁹ in less snowpack and precipitation. The resulting drier vegetation, coupled with stronger winds, provides limitless fuel for more extreme⁷⁰ fires. For example, the Dixie Fire currently burning in northern California worsened significantly due to existing and long-term drought conditions and prolonged high temperatures. Even worse, experts forecast⁷¹ that it may continue to burn until late fall when rains are expected in the region. In addition to damage to property and loss of human lives, smoke from these wildfires poses health risks to those in the immediate area and, as many people on the East Coast experienced in July, as far as 3,000 miles away.⁷²

Like other instances of climate change-fueled extreme weather, damages from wildfires also tend to disproportionately affect⁷³ low-income people and people of color who often do not have the ability to recover from the impacts of wildfire. Black and Hispanic people are 50 percent more vulnerable to the impacts of wildfires than white people, and Native Americans are six times more vulnerable.⁷⁴ Additionally, wildfire smoke is often detrimental to public health. A recent study found that smoke from wildfires is directly linked to a surge in COVID-19 cases in Oregon, California, and Washington, where fires are currently occurring. Moreover, when inhaled, fine particulate matter—also known as PM2.5—can cause inflammation of the respiratory system, worsen existing conditions such as asthma, and result in worse outcomes from contracting the coronavirus.⁷⁵ The Centers for Disease Control and Prevention (CDC) recommends that those at higher risk of COVID-19 take extra precautions when the air quality in their community is rendered unhealthy by wildfire smoke.⁷⁶

Winter storms and freezes

Climate change does not just mean warmer weather; it also means wetter atmospheric conditions that can lead to supercharged winter storms.⁷⁷ The combined wetter atmosphere and warmer temperatures result in a greater rate of evaporation and the perfect conditions for increased snowfall in certain regions of the United States. (These regions tend to be different than those experiencing extreme drought.) The path of storms is increasing the frequency with which the United States experiences winter storms. Research also illustrates that winter storms are lingering longer due to the changing of the jet stream.⁷⁸ The weakening⁷⁹ of the jet stream can also lead to polar vortex⁸⁰ conditions with unusually frigid temperatures such as those that much of the central United States, including Texas, experienced⁸¹ earlier in 2021.

NOAA estimates that since data collection began in 1980, winter storms and freeze events have resulted in $2.5 billion in damages per year.⁸² The February 2021 Texas winter storm event alone caused a sustained average temperature drop 40 degrees Fahrenheit below normal; the temperature was 8 degrees Fahrenheit in Austin.⁸³ The storm resulted in power outages that affected 10 million people, and it cost⁸⁴ $20.4 billion total—the costliest superstorm ever recorded. Some researchers estimate the true costs⁸⁵ to be from $80 billion to $130 billion in direct and indirect economic losses. The events in Texas revealed vulnerabilities in the energy infrastructure of a state not prepared for this kind of extreme weather event—an event that will only become more frequent and potentially severe with climate change.

What’s next

Despite the most recent IPCC report’s conclusion that many of the changes in climate that are fueling extreme weather are “locked in”⁸⁶—meaning quick action now will not reverse their effects—there is still a window of time in which to take urgent action to transition to a 100 percent clean energy economy and stop additional worse effects from happening. As the foreword⁸⁷ of the IPCC’s Sixth Assessment states, “Every bit of warming matters.” Right now, Congress has a once-in-a-generation opportunity through budget reconciliation⁸⁸ to invest in meaningful climate action that has the power to transform the U.S. economy.

The Senate-passed budget resolution to begin the reconciliation process would fund a few key transformative programs, including a clean energy payment program and tax credits that would support additional deployment of clean energy and achieve 80 percent clean electricity by 2030; tax credits for electric vehicles and rebates for more efficient home appliances to make clean technology more affordable for American households; and the Civilian Climate Corps,⁸⁹ a jobs program that would put people to work fighting the climate crisis. Furthermore, the Biden administration’s commitment to delivering environmental justice would deliver 40 percent of the benefits of these investments to disadvantaged communities—many of them communities of color too long overburdened by a toxic legacy of pollution—through the Justice40 initiative.⁹⁰ Finally, Congress must continue to invest in climate science,⁹¹ research, and modeling to keep pace with the changes occurring in the physical world and help policymakers understand how to confront and adapt to them.

For those changes that are already locked in—the severity and increased frequency of extreme weather events, and the damage and destruction they cause—the United States must prioritize mitigation, preparedness, and resilience to protect communities from the worst effects and help them recover. To do this, Congress should appropriate higher levels of funding to federal programs such as the Weatherization Assistance Program. This program would help communities combat the grueling effects of extreme heat,⁹² including its effects on energy affordability, through improvements to energy efficiency and performance in the homes of limited-income residents. Additionally, investing $10 billion, through budget reconciliation, for coastal restoration⁹³ and resilience projects such as restoring blue carbon ecosystems, such as mangroves and coastal wetlands, can increase the ability of these natural systems to sequester carbon. Other forms of natural infrastructure, such as coral reefs and salt marshes, can further protect coastal communities vulnerable to the impacts of storm surge, hurricanes, and tropical storms. Additional funds for the U.S. Department of Housing and Urban Development’s (HUD) Community Development Block Grant Mitigation Program⁹⁴ would help support climate-ready community development, including resilient infrastructure and affordable, energy-efficient housing.

Finally, Federal Emergency Management Agency (FEMA) programs⁹⁵ such as Building Resilient Infrastructure and Communities, the Hazard Mitigation Grant Program, the National Flood Insurance Program, and the Flood Mitigation Assistance Program can be improved and further funded to advance mitigation and the preparedness of communities, especially low-income communities and communities of color, as well as post disaster relief. However, programs are only as good as their implementation, and the government must take intentional care⁹⁶ in administering these programs in ways that remove the racial biases that have consistently denied people of color the essential resources they need to repair and rebuild their homes and that maximize the benefits that climate-impacted and disadvantaged communities receive.⁹⁷

In addition to mitigating the worst effects of extreme weather and climate change that are already locked in, Congress should not miss this opportunity to make every fraction of a degree count. It should move swiftly to pass comprehensive reconciliation legislation that invests in a just and equitable economy of the future.

Conclusion

As the recent IPCC report underscores, climate change will only continue to exacerbate extreme weather disasters. The United States will continue to see an increase in frequency, intensity, and cost of these disasters if leaders do not take bold action. Congress has the opportunity to make a huge leap forward in addressing the planet-warming, storm-fueling greenhouse gas emissions that have spurred or worsened so many of these billion-dollar disasters. By enacting the full scope of President Biden’s Build Back Better agenda, Congress can make aggressive and meaningful investments in climate action. Science indicates that the international community only has a few years left for impactful action. The time is now.

Authors’ note: This issue brief does not include extreme weather events occurring after August 23 due to timing constraints associated with readying the piece for publication. Such events include Hurricane Henri making landfall as a hurricane in Connecticut—the first time this has occurred in 30 years, and causing record levels of flooding⁹⁸—and the explosive Caldor Fire in California, as well as many additional wildfires currently burning in the West. Tragically, Hurricane Ida made landfall in Louisiana on August 28, the anniversary of Hurricane Katrina, as a Category 4 storm with maximized sustained winds of 150 miles per hour. Ida’s destructiveness was magnified by warming water temperatures in the Gulf that allowed the storm to pick up more moisture.⁹⁹ These events, which occurred even as CAP moved toward publication, provide further evidence climate-fueled extreme weather is increasing in pace and severity and that Congress must act now.

Kat So is a research assistant for Energy and Environment at the Center for American Progress. Sally Hardin is the director for the Energy and Environment War Room at the Center.

The authors would like to thank Kelly Kryc, Mikyla Reta, Bianca Majumder, Cathleen Kelly, Jarvis Holliday, Shanée Simhoni, Keenan Alexander, Chester Hawkins, and Meghan Miller for their contributions to this issue brief.

Endnotes

The post Extreme Weather Cost U.S. Taxpayers $99 Billion Last Year, and It Is Getting Worse appeared first on Center for American Progress.

To pay for the transformative investments in his Build Back Better agenda, President Joe Biden has proposed tax reforms to close a capital gains loophole favoring the wealthiest Americans. This change is the most important way that Biden’s plan combats the tax code’s preferential treatment of income from wealth over income from work.

Under the American Families Plan (AFP), only a small fraction of Americans—those with very large untaxed gains—would be affected, mainly because the plan exempts the first $1 million of untaxed gains per person.² And while critics of the president’s plan have argued that it would harm family farms and businesses, these claims are unfounded. As this issue brief explains, many of these claims are based on flawed studies, including some that do not even analyze the actual Biden proposal.

The fact is that under the AFP, the vast majority of Americans—including family farmers and small-business owners—would be exempt from new taxes, since the proposal is targeted at those with large untaxed gains. Moreover, the proposal includes special protections for owners of family farms and businesses who plan to keep their enterprises in the family. Because of these protections, critics’ harshest claim—that the Biden plan would force families to sell their farms and businesses, thereby preventing transfers from one generation to the next—is simply not true.

The AFP closes a loophole that allows huge fortunes to permanently escape income tax

To support vital public investments, President Biden’s plan would raise $3.6 trillion in revenue from high-income Americans and corporations over the next decade, including nearly $350 billion from reforming the taxation of capital gains.³ Capital gains are the growth in the value of assets between when they are bought and when they are sold. Because of the extreme concentration of wealth in the United States, capital gains accrue overwhelmingly to the very rich. According to data from the Congressional Budget Office, households in the top 1 percent of the income distribution collect nearly $486,000 per year on average in realized capital gains; those in the bottom 20 percent make just $67.⁴ Central to President Biden’s tax reform is his proposal to repeal the stepped-up basis loophole—which shields these types of gains from income tax—while protecting the savings of ordinary Americans.

Figure 1

Stepped-up basis is one of multiple ways that capital gains receive favorable tax treatment. Under the existing tax code, gains on assets are generally not taxed until they are sold. If a wealthy person buys stock for $1 million and it rises in value to $11 million, they do not owe any tax as long as they hold the asset—even though they have become $10 million wealthier.⁵ If the person sells the asset, they would realize a $10 million gain and include that amount in their taxable income. Assuming the person has held the asset for more than one year, the gain would be taxed at the rates for long-term capital gains, which are significantly lower than those for other forms of income.⁶ Though the asset value grew over years, the tax is deferred until sale and is subject to much lower rates when it is taxed. By contrast, income derived from labor—such as wages—is generally taxed as it is earned and is subject to ordinary rates.

Moreover, stepped-up basis allows gains on assets to permanently escape income tax if the owner never sells the asset during their lifetime. If an individual holds an asset until their death, the gain is simply erased at that time. No one—neither the decedent nor their heirs—pays any income tax on the gain accrued during the decedent’s life.

As the ProPublica reporting illustrates, the wealthiest billionaires in the country pay hardly any income tax from year to year because they often sell little to none of their stock holdings.⁷ This means that some of the largest fortunes in human history will permanently escape income tax if Congress fails to change the revenue code before these billionaires pass their fortunes to their heirs.⁸

Biden’s tax reforms only affect a tiny share of Americans

The AFP does not repeal the stepped-up basis loophole entirely. Under the plan, up to $1 million in untaxed gains per person—$2 million per couple—would still be exempt from taxation. This would come on top of other capital gains carveouts, including the exemption of $250,000 of gain on home sales—$500,000 for couples—and the exclusion of sales of qualified small-business stock.⁹

Unsurprisingly, very few people would be affected by these tax hikes. Robert McClelland of the Tax Policy Center estimates that a miniscule 3 percent of households have unrealized capital gains greater than $1 million per person.¹⁰

Above the exemption levels, President Biden’s plan would repeal stepped-up basis by counting gifts and bequests of appreciated assets as realization events, requiring the original owner to include the appreciation of the asset in their taxable income. In the case of a bequest, this would fall on a decedent’s final income tax return.¹¹ Taxes on liquid assets such as stocks would be due that year, but taxes on nonliquid assets such as farms and businesses could be paid over 15 years.¹²

Moreover, the AFP allows heirs of family-owned farms and businesses to defer taxes indefinitely so long as the farms or businesses continue to be owned and operated by members of the family. Taxes are only owed on the original owner’s gain when the enterprise is sold or is no longer operated by the family.¹³ For this reason, no one inheriting and operating a family farm or business would be forced to sell it for the purpose of paying new taxes under the Biden plan.¹⁴

Critics of the AFP ignore its specific protections for family farms and businesses

President Biden’s proposals to tax the rich are overwhelmingly popular.¹⁵ Consequently, the president’s critics have been hesitant to attack his plan directly. For example, a recent CNBC profile of the business lobbying group America’s Job Creators for a Strong Recovery (ACJSR) noted the following:

The coalition [ACJSR] aims to turn the narrative away from a debate about taxing the rich and the biggest corporations to pay for roads and bridges. The organizers themselves acknowledge that that rhetorical battleground leans strongly in Democrats’ favor in public opinion polls.¹⁶

ACJSR has instead mischaracterized President Biden’s plan as a tax hike on families. Eric Hoplin, one of the group’s leaders, claimed that the Biden proposal would “enact record high taxes on America’s individually and family-owned businesses,” a phrase ACJSR has reiterated in multiple outlets.¹⁷

Other groups have similarly accused the AFP of harming family farmers.¹⁸ An article in the Northern Ag Network paraphrased Sen. Steve Daines (R-MT) as saying that the president’s plan would “destroy the generational handoff of farms and ranches.”¹⁹ Daines also said that  “[t]he only way Montana farmers and ranchers could get through this, would be to sell off part or even all of the family farm or ranch.”²⁰ Daines’ quote implies that income tax would be due on family-owned farms or ranches when they are handed down to another generation. But that is not true, for two reasons. First, most family farm and ranch owners would fall well under the exemption thresholds in the AFP. And second, even those with more than $2 million of gain will be able to defer their income taxes indefinitely so long as their farm or business continues to be owned and operated by members of their family.²¹

Critics of the AFP cite misleading and flawed studies

To make these tenuous assertions appear valid, President Biden’s critics have cited two studies: one from the Agricultural and Food Policy Center (AFPC) at Texas A&M University and another from the accounting firm EY, formerly known as Ernst & Young.²² Both studies dramatically overstate the impact on family farmers and business owners from repealing stepped-up basis, and neither directly examines the Biden plan. Nonetheless, the studies have gained attention because of the novelty of their conclusions, which greatly exceeds the strength of their evidence.

The AFPC study

On July 21, 2021, Sen. John Boozman (R-AR) claimed on the Senate floor that President Biden’s plan would “crush rural America.”²³ He highlighted a study that Republicans on the Senate Committee on Agriculture, Nutrition, and Forestry and the House Committee on Agriculture had requested from the AFPC.²⁴ Boozman asserted that if President Biden’s plan were implemented, 92 of the 94 “representative farms” selected by the AFPC “would be impacted with an average additional tax liability of more than $720,000 per farm.”²⁵ In a similar vein, House Agriculture Committee Republicans cited the study to claim that if combined with a wholly separate bill, changes that “mirror” President Biden’s plan would cost those 92 farms an average of $1.4 million each.²⁶ Finally, Sen. John Thune (R-SD) cited the AFPC study in a Fox News op-ed, writing:

But the Biden administration is targeting this longstanding part of the tax code [stepped-up basis] as it scrambles to pay for its far-left crusade to permanently grow the federal government and fund the massive tax breaks they’re proposing for wealthy Americans in blue states.

The Texas A&M Agricultural and Food Policy Center studied how this new tax would affect family operations, and it found that 98 percent of the representative farms in its 30-state database would pay a big price. How much? On average, the proposal would increase the tax liability by $726,104 per farm.

Nobody likes paying taxes, but this heavy additional burden – again, often on unrealized gains – has the potential to force families to sell off part of the farm or lose the farm entirely just to pay a tax bill.²⁷

For starters, policymakers should recognize that the AFPC study does not consider President Biden’s plan. Rather, the study focuses on an estate and gift tax bill—the For the 99.5 Percent Act—introduced in Congress and another proposal—the Sensible Taxation and Equity Promotion (STEP) Act of 2021—put forward as a discussion draft.²⁸

The For the 99.5 Percent Act, sponsored by Sen. Bernie Sanders (I-VT) and Rep. Jimmy Gomez (D-CA), would change the taxation of estates, gifts, and trusts in a number of ways, most notably by decreasing the exemption amount and introducing higher marginal rates for the estate tax.²⁹ President Biden’s budget, however, currently includes no estate tax changes.³⁰

Like the AFP, the STEP Act—sponsored by Sen. Chris Van Hollen (D-MD)—seeks to eliminate the stepped-up basis loophole. It also includes a $1 million exemption threshold—$2 million for couples—and allows new tax liabilities to be paid over 15 years.³¹ But unlike the president’s proposal, the draft of the STEP Act did not include specific protections for family farms and businesses. The reason that no protections are spelled out in the bill is precisely because it is a discussion draft, and its authors have invited outside input before introducing an actual bill.³² As noted above, President Biden’s plan guarantees that no taxes will be owed on family-operated farms and businesses until those farms or businesses are ultimately sold; this deferral of tax liability was not included in the STEP Act discussion draft studied by the AFPC.

More importantly, the AFPC study contains multiple methodological flaws. First, the AFPC’s selected farms are hardly “representative” of family farms nationwide. Although the word “representative” makes dozens of appearances in the AFPC report, there is little clarification as to who or what is being represented.³³ At one point, the authors briefly note that “AFPC’s representative farms and ranches are all assumed to be full-time, commercial-scale family operations.”³⁴

This means that the AFPC’s 94 farms are unrepresentative of family farms generally. According to 2019 data from the U.S. Department of Agriculture (USDA), just 8.2 percent of all family farmers own commercial farms. Moreover, these commercial farmers are far wealthier than the 91.8 percent of noncommercial farmers.³⁵ This skews the AFPC study toward the very wealthiest family farmers.

Second, even after limiting itself to commercial farms, the study gives disproportionate weight to large commercial farms. The most recent AFPC study does not discuss the selection criteria for the farms, but in a March 2021 AFPC study of the same 94 farms, the researchers noted:

AFPC has developed and maintains data to simulate 94 representative crop farms, dairies, and livestock operations chosen from major production areas across the United States. … Often, two farms are developed in each region using separate panels of producers: one is representative of moderate size full-time farm operations, and the second panel usually represents farms two to three times larger.³⁶

For AFPC farm households, median net worth was roughly five times the national median, and average net worth was nearly four times the national average.³⁷ (see Table 1) This discrepancy cannot be explained away by confounding factors. For example, even if one were worried about the USDA’s inclusion of small residential farms in its sample, this would not explain the large differences in net worth between AFPC commercial family farms and the commercial family farms surveyed by the USDA.

Table 1

The AFPC study exaggerates the burden of taxes in other ways as well. For example, consider the center’s assessment of the For the 99.5 Percent Act. The AFPC study highlights the act’s “average” tax increase for “impacted” family farmers, and those modifiers create two distortions.³⁸ First, by limiting its analysis to “impacted” farmers, the AFPC excludes all farmers who would pay zero estate taxes under the For the 99.5 Percent Act. Second, the use of an average greatly exaggerates the effect on most farmers. If 99 individuals each owed $1 in taxes and one person owed $99,901, it would be misleading to declare that the “average” person owed $1,000 in taxes. This problem arises in the AFPC study, where a large share of the estate tax burden is borne by a minority of extremely wealthy farmers.

The AFPC researchers determine that with the For the 99.5 Percent Act’s provisions in place, 41 of the 94 farms would pay the estate tax, with an “Average Additional Tax Liability Incurred for Farms Impacted” of just less than $2.2 million.³⁹ Using data from their March 2021 paper, the AFPC’s results have been replicated for this issue brief.⁴⁰ The authors follow the AFPC methodology of ignoring the increased deduction for Section 2032A special use valuation—an estate tax break for farms.⁴¹ According to this replication, an estimated 39 farms would pay estate taxes under the For the 99.5 Percent Act, and the average liability per affected farm would be $2.5 million.

The authors’ results show just how distortionary the words “average” and “impacted” are. The average estate tax for the 39 affected farms is $2.5 million, yet the average for all 94 farms is $1 million—just 41 percent as much. Moreover, the vast majority of the average tax would be paid by a small group of farmers. Fifty-five farmers would owe no estate taxes; 27 farmers would owe below-average amounts; and just 12 would pay more than the average per affected farm.⁴² These 12 estates—12.8 percent of farms in the survey—would be responsible for 65.8 percent of the total tax bill. And again, as noted above, these farms come from a sample that cherry-picks extremely large commercial farms.

Although the AFPC researchers published the net worth of all 94 farms in their March 2021 report, they have not made similar statistics available for each farm’s unrealized capital gains. If their data for unrealized capital gains are as dominated by a few rich farms as their data for estate values, then most of the STEP Act’s average burden will be borne by a small subset of AFPC farmers.

Finally, the AFPC study overstates the STEP Act’s impact on farmers by assuming that none of them are married, even though nationwide, roughly 4 in 5 farmers have a spouse.⁴³ That is important because the exemption for unrealized capital gains is $2 million per couple but only $1 million for single individuals. In assessing the impacts of the STEP Act, the AFPC researchers assume that the farms in their study would be allowed to use the stepped-up basis provision for just $1 million, effectively underestimating the true step-up threshold by 50 percent.⁴⁴

The EY study

Opponents of the AFP have also cited a study by the accounting firm EY. As with the AFPC study, the EY study has been used to attack the Biden plan even though it never comments on the president’s proposal.⁴⁵

The EY study has two component parts. In the first part, the researchers give examples of how five hypothetical family businesses would be harmed by taxation at the time of the owner’s death. With business resale values averaging $74 million and ranging from $20 million to $200 million, EY’s hypothetical businesses do not remotely resemble typical family businesses in the real world.⁴⁶

In the second part of their study, the researchers translate their hypothetical stories to real-world data. In that section, EY concludes that the economic cost of taxing capital gains at death would be just 0.04 percent of gross domestic product (GDP). Moreover, just one-third of the cost would be borne by labor.⁴⁷

As insignificant as that would be, it overstates the cost of the Biden plan for two reasons. First, the EY study—like the AFPC study—is not an assessment of the Biden plan. Rather, it looks at the effects of immediate taxation upon the death of a business owner. As such, the EY researchers do not account for how tax deferral would protect family businesses, nor do they account for the Biden plan’s exemption of $2 million per couple. When the EY researchers analyze a second proposal more akin to true tax deferral, they find that the total economic cost would be just 0.02 percent of GDP—exactly half of an already small number.⁴⁸ Critics who cite the EY study should be more forthright in noting both this point and that the $2 million exemption preserves stepped-up basis for the great majority of family farmers and business owners.⁴⁹

Second, EY’s analysis fails to account for the economic benefits of eliminating the lock-in effect associated with stepped-up basis.⁵⁰ With stepped-up basis, investors and business owners have an incentive to hold assets until their deaths even if they otherwise would have sold the assets. This harms economic efficiency and growth.⁵¹ Repealing stepped-up basis would make capital more liquid since there would be less incentive to hold assets indefinitely.

Extrapolating from the conclusions reached in the EY study, the macroeconomic cost of the Biden plan would be somewhere between trivial and nonexistent. Meanwhile, the $350 billion in revenue from reforming capital gains taxes would be invested in ways that enhance growth and support working families. The EY study also fails to analyze President Biden’s proposals on the spending side. Instead, it merely includes assumptions about generic government spending.⁵²

The AFP taxes the rich, not working-class families

While there would be no additional taxes under the Biden plan for farms and businesses that remain family-owned and -operated, taxes would go up substantially for wealthy individuals who are only passive business owners.

Consider family farms. The word “operated” ensures that tax deferral will only extend to actual farmers—not to wealthy individuals who happen to own farmland. According to 2014 data from the USDA, 31.1 percent of the country’s farmland is owned by nonoperating landlords—people who rent out the land but do not farm it themselves.⁵³ For example, before their recent divorce, Bill and Melinda Gates owned more farmland than any other couple in the country.⁵⁴ Because the Gateses do not operate their own farmland, they would not qualify for tax deferral under the Biden plan.

Moreover, the Gateses and their heirs are not an exception to the rule. Of the 283 million acres of farmland currently owned by nonoperating landlords, 53.8 percent were either inherited or gifted.⁵⁵ Had the Biden plan been in place when these nonfarmers inherited their land, they would have paid taxes on unrealized capital gains above the $2 million threshold.

The AFP protects genuine family farmers even as it taxes wealthy landlords. According to the USDA, 98 percent of family-owned and -operated farm estates would not incur any additional taxes when parents’ assets are passed to their heirs.⁵⁶ Under the Biden plan, such families would have their tax payments deferred so long as the farm remained in the family. The remaining 2 percent would pay higher taxes only on their nonfarm assets. For example, even if Bill Gates were to begin farming his own land and could thus take advantage of the Biden exemption for family-operated farms, he would still have to pay taxes on the gains from his Microsoft stock and any other nonfarm assets he owned.⁵⁷

Conclusion

Under the AFP, working-class parents could pass their farms and businesses to their children without having to pay any capital gains taxes at the point of transfer. Yet proponents of the tax code status quo are hiding behind family farmers and business owners to protect a far different group: the extremely rich.

Middle-class Americans generally do not have significant capital gains. Households in the middle fifth of the income distribution realize just $333 in capital gains each year.⁵⁸ If they accrue similar amounts of unrealized gains, it would take more than 6,000 years to surpass the American Families Plan’s $2 million exemption threshold. Although life expectancy is projected to rise in the future, it is unlikely that the Biden plan will raise taxes for ordinary working people.

Families who work their own land or operate their own businesses will receive similar treatment. Typical family farms are not worth $7.2 million, and normal family businesses are not worth $74 million. The studies reporting enormous tax hikes for family farms and businesses cherry-pick their examples from a few exceptionally wealthy estates—because that is who will pay taxes under the Biden plan.

Those affected by the Biden proposal will not be family farmers or family business owners, but rather the heirs of stockholders, bondholders, and landlords. The working class will be protected, even as the passive rich will not.

Nick Buffie is a policy analyst specializing in federal fiscal policy on the Economic Policy team at the Center for American Progress. Bob Lord is an associate fellow at the Institute for Policy Studies and tax counsel for Americans for Tax Fairness.

Endnotes

The post The American Families Plan Taxes Billionaires and Protects Family Farms and Businesses appeared first on Center for American Progress.

In a recent report,⁶ the Center for American Progress examined a range of issues pertaining to the health challenges that transgender adults experience, including disparate health outcomes, discrimination in health care, inadequate provision of care, and barriers with respect to cost and insurance.

Disparities in health outcomes

Compared with cisgender adults, transgender adults experience higher rates of adverse mental, physical, and behavioral health outcomes. According to a CAP analysis of 2019 Behavioral Risk Factor Surveillance System data:⁷

• Transgender adults report higher rates of smoking tobacco some days or every day compared with cisgender adults, at 59 percent and 39 percent, respectively.
• 22 percent of transgender adults report being informed they have asthma compared with 14 percent of cisgender adults.
• 60 percent of transgender adults report having poor mental health at least one day in the past month compared with 37 percent of cisgender adults.
• 54 percent of transgender adults report having had poor physical health at least one day in the past month compared with 36 percent of cisgender adults.

Additionally, according to TransPop⁸ data from the Williams Institute, transgender respondents were more likely than cisgender heterosexual respondents to be informed by a doctor that they had a sexually transmitted infection, at 7 percent and 2 percent, respectively. 81 percent of transgender respondents reported having contemplated suicide during their lifetime compared with 30 percent of cisgender heterosexual adults; 25 percent of transgender respondents reported using drugs other than alcohol at least twice per month compared with 10 percent of cisgender heterosexual adults; and 48 percent of transgender adults reported that they had been physically attacked or sexually assaulted at least once since the age of 18 compared with 36 percent of cisgender heterosexual adults.

Discrimination and mistreatment in health care

In addition to being more likely to experience poor health outcomes, transgender adults also face high rates of discrimination and mistreatment when interacting with health care systems and providers.⁹ These experiences manifest in a variety of ways, from providers declining to see transgender patients and refusing to provide general or gender-affirming care due to an individual’s gender identity, to engaging in abusive behavior, to lacking the training and knowledge about how to provide affirming care to transgender patients. These negative experiences can lead transgender people to engage in avoidance behaviors to circumvent discrimination and mistreatment in health care settings.

Key data points from CAP’s nationally representative survey of LGBTQI+ adults conducted in 2020¹⁰ include the following findings, which are also displayed in Figure 1:

• 28 percent of transgender respondents reported postponing or avoiding necessary medical care in the year prior to CAP’s survey for fear of experiencing discrimination, including 22 percent of transgender respondents of color.
• 40 percent of transgender respondents reported postponing or avoiding getting preventive screenings in the year prior to CAP’s survey due to discrimination, including 54 percent of transgender people of color.
• Nearly 1 in 2 transgender respondents, including 68 percent of transgender respondents of color, reported experiencing some form of discrimination or mistreatment at the hands of a health provider in the year prior to CAP’s survey, including care refusal, misgendering, and verbal or physical abuse.
• One in 3 transgender respondents reported having to teach their doctor about transgender people in order to receive appropriate care in the year prior to CAP’s survey.

Figure 1

Financial barriers to accessing care

Cost barriers present a significant obstacle to accessing care for transgender adults. Compared with cisgender adults, transgender adults experience greater financial insecurities¹¹ and economic hardships¹² such as higher rates of poverty and unemployment, workforce discrimination, and housing instability. While these disparities predate the pandemic, they have also been intensified by it.¹³ CAP’s survey data found:

• 40 percent of transgender respondents reported postponing or avoiding preventive screenings in the year prior to CAP’s survey due to cost, including 31 percent of transgender respondents of color.
• More than half of transgender respondents, including 60 percent of transgender respondents of color, reported postponing or avoiding necessary medical care in the year prior to CAP’s survey because they could not afford it.

Challenges with public and private insurers

In addition to having lower rates of insurance¹⁴ compared with cisgender people, transgender individuals encounter challenges¹⁵ with public and private insurers that deny coverage for gender-affirming care, leaving patients with large out-of-pocket costs:

• 46 percent of transgender respondents reported having a health insurer deny them gender-affirming care in the year prior to CAP’s survey, including 56 percent of transgender respondents of color.
• In the year prior to CAP’s survey, 48 percent of transgender respondents—including 54 percent of transgender respondents of color—reported that their insurance company only partially covered gender-affirming care or had no providers in network.
• In the year prior to CAP’s survey, 34 percent of transgender respondents—including 39 percent of transgender respondents of color—reported that a health insurance company refused to change their records to reflect their current name or gender.

Conclusion

In order to improve health disparities and reduce barriers to care for transgender patients, federal, state, and local governments must adopt both robust nondiscrimination laws, targeted funding, and in-practice policies that are affirming, inclusive, and culturally competent throughout the U.S. health care system. Policymakers should also pursue significant investments in programs that provide direct health and support services to transgender communities. Adopting these policies will be critical for improving health outcomes and the daily lives of the estimated 1.4 million adults¹⁶ who identify as transgender in the United States.

Caroline Medina is a policy analyst for the LGBTQ Research and Communications Project at the Center for American Progress.

Endnotes

The post Fact Sheet: Protecting and Advancing Health Care for Transgender Adult Communities appeared first on Center for American Progress.