How to tax the top 1% with Natasha Sarin

Episode Summary

Executive Summary: The episode examines how the U.S. should raise more revenue, especially from the top 1%, as debt rises and major tax provisions expire. Natasha Sarin argues the richest are undertaxed because capital income is opaque and poorly enforced, while wealth taxes face major legal and implementation hurdles. She favors reforming capital gains, improving IRS enforcement, and increasing third-party reporting.

Main Topics: Why U.S. tax rises are unavoidable (Priority: 5/5): Sarin argues the U.S. needs substantial new revenue because debt-to-GDP is projected to rise sharply, trust funds are running down, and the country is a relatively low-tax OECD economy. The case for taxing the rich (Priority: 5/5): The richest households receive a disproportionate share of income from capital gains and other opaque streams that are often under-taxed or not collected, creating both fairness and revenue problems. Wealth tax: appealing in theory, difficult in practice (Priority: 4/5): Sarin says wealth taxes expand the policy debate, but valuation problems, volatility, and major constitutional uncertainty make them hard to implement effectively. Taxing unrealized capital gains (Priority: 5/5): She sees serious merit in taxing unrealized gains, noting it could raise substantial revenue and improve fairness, but warns about valuation issues for private assets and possible distortions. Better capital gains reform (Priority: 5/5): Sarin prefers a package of higher capital gains rates, realization at death, and potentially treating inherited gains as taxable income to heirs, rather than relying on one isolated reform. Closing the tax gap through IRS capacity and reporting (Priority: 5/5): A major near-term opportunity is collecting taxes already owed by improving IRS resources and expanding third-party reporting, especially for opaque income streams like rental or partnership income.

Key Arguments: The U.S. will need more revenue because debt-to-GDP is projected to reach about 130% and major entitlement trust funds will be depleted. The U.S. is relatively low-tax compared with other OECD countries, ranking around 31st out of 38 on revenue collected through taxation. The rich are more likely to earn income in forms that are difficult to tax, especially capital gains and other opaque income streams. Compliance is far higher for wage income than for opaque income streams, so the tax system is structurally tilted toward salaried earners. Wealth taxes are conceptually attractive but face serious valuation, volatility, administrative, and constitutional problems. Mark-to-market or unrealized-gains taxes could raise major revenue, but they also create new valuation and transparency problems for private assets. A higher capital gains rate should be paired with realization at death and reforms to inherited wealth taxation to reduce lock-in and fairness distortions. The U.S. loses huge sums to taxes owed but never collected, so strengthening the IRS and third-party reporting may be the fastest route to more revenue. Congress has partly undercut the IRS funding boost from the Inflation Reduction Act by rescinding part of the money, reducing enforcement capacity.

Data Points: Projected debt-to-GDP ratio: about 130% - Sarin says U.S. debt is expected to rise to this level over the next decade. OECD tax-revenue ranking: 31st out of 38 - She cites this as evidence the U.S. is a low-tax jurisdiction. Compliance rate for wage and salary income: 99% - Income is automatically withheld, so compliance is very high. Compliance rate for income without third-party reporting: under 50% - Applies to some proprietorship, rental, and partnership income streams. Unrealized-gains minimum tax revenue estimate: about $500 billion over a decade - Sarin cites the Biden administration’s billionaire/centi-millionaire minimum tax proposal. Net worth threshold for unrealized-gains minimum tax: over $100 million - She notes the proposal applies to centi-millionaires, not just billionaires. Annual tax gap from uncollected owed taxes: 3% of GDP / about $600 billion a year - Sarin says the U.S. loses this amount from taxes owed but never collected. IRS funding in the Inflation Reduction Act: $80 billion - Sarin references this as the funding boost given to the IRS. IRS enforcement allocation for individuals: $40 billion - Part of the IRA funding was earmarked for individual enforcement efforts. IRS funding rescinded in debt-ceiling deal: about $20 billion - She says this reduced the resources available to the IRS. Public opinion on fairness: 60% of Americans - Sarin cites this share as believing the tax code is rigged against them.

Pivotal Quotes: "taxes are the price we pay for a civilized society" — Oliver Wendell Holmes (quoted by Natasha Sarin): Used to frame the fairness argument for better tax compliance and enforcement. "The reality is like there are people on all sides of this, but let me articulate the constitutional objection" — Natasha Sarin: Introduces the legal uncertainty around wealth taxes under the Constitution's direct tax clause. "we are going to find a way, we as a country are going to find a solution to the problem that exists" — Natasha Sarin: Her forward-looking view that capital-income taxation will be reformed over the next decade.

Implications: The likely policy path is not a single wealth tax, but a mix of higher capital gains taxes, estate/realization reforms, stronger IRS enforcement, and better third-party reporting. For taxpayers, the richest are the most likely target of future reform.