The Great Tax Divide

The heart of income inequality

The Great Tax Divide Subsidized Businesses Penalized People

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The Great Tax Divide: Why Are Businesses Subsidized While Humans Are Penalized

In today’s economic system, the tax code treats businesses and individuals with a startling disparity, subsidizing the survival and growth of businesses while penalizing individuals for simply trying to live. This imbalance lies at the heart of income inequality and reflects a systemic bias that prioritizes corporate interests over human welfare.

Businesses Are Subsidized to Exist, People Are Not

Businesses operate under a tax system that allows them to deduct nearly all expenses deemed necessary for their operation—wages, rent, utilities, inventory, and even office coffee. These deductions ensure that businesses are taxed only on their net profit—the money left over after paying for their essential needs.

Contrast this with individuals, who are taxed on their gross income. Basic human needs such as housing, food, healthcare, education, and transportation are not considered “deductible.” The result is that individuals often pay taxes on money they need simply to survive, while businesses are shielded from taxation on their essential expenses.

The Root Cause of Income Inequality

This glaring discrepancy is a major driver of income inequality. When businesses receive tax breaks and write-offs while individuals do not, it creates a system where corporate profits are prioritized over personal livelihoods. Middle- and lower-income individuals are left with less disposable income, forcing them to bear the financial burden of basic needs and reducing their ability to save or invest in their futures.

At the same time, corporations and wealthy individuals, often operating through trusts and other tax-privileged entities, use these loopholes to preserve and grow their wealth. This disparity entrenches economic privilege and perpetuates inequality.

Modern Monetary Theory (MMT) and the Purpose of Taxes

Basic principles of Modern Monetary Theory (MMT) clarify that taxes are not primarily meant to fund government spending in a sovereign currency system. Instead, taxes are a tool to regulate inflation by removing excess money from the economy.

Under this framework, taxing individuals earning below a livable income is counterproductive. These earnings are not “excess” money but are crucial for survival and participation in the economy. Taxing them reduces economic activity, increases financial stress, and does nothing to curb inflation.

Conversely, taxes on excess corporate profits and high individual incomes align with MMT principles, removing surplus funds that could otherwise distort markets and drive inequality.

Where Did This Privilege Start?

The roots of this disparity can be traced back to the early 20th century and the rise of pro-corporate policies. Key milestones include:

• The Powell Memo (1971): This document by corporate lawyer Lewis Powell laid out a strategy for businesses to consolidate political and economic power. It encouraged lobbying for policies that favored corporate tax breaks and deregulation.
• Reaganomics (1980s): Ronald Reagan’s administration heavily reduced corporate tax rates and introduced policies that disproportionately benefited the wealthy, reinforcing the narrative that corporate growth equals national prosperity.
• Bush Tax Cuts (2000s): These policies further slashed taxes for corporations and high-income earners, exacerbating income inequality and placing a heavier tax burden on middle- and lower-income Americans.

A Broken Foundation: The Myth of Trickle-Down Economics

These policies were justified under the guise of “trickle-down economics,” the idea that benefits for businesses and the wealthy would eventually reach the broader population. Decades of evidence, however, have shown this to be false. Wealth has concentrated at the top, while wages for average workers have stagnated, and social safety nets have eroded.

A Fairer Tax System: Starting on an Equal Playing Field

To address these inequities, tax policies should at least place individuals and businesses on an equal footing:

1. Establish a Livable Income Threshold: Individuals earning below a certain threshold—determined by regional cost-of-living standards—should be exempt from taxation.
2. Deduct Basic Living Expenses: Housing, healthcare, childcare, and education should be treated as essential expenses, similar to business write-offs.
3. Progressive Taxation on Excess Profits and Wealth: Higher tax rates on corporate profits and ultra-wealthy individuals would reduce inequality and align with MMT principles.
4. Eliminate Corporate Tax Privileges: Remove unnecessary subsidies and loopholes that allow corporations to avoid paying their fair share.
5. Prioritize Human Welfare: Policies should shift focus from corporate profitability to ensuring all citizens can meet their basic needs.

Conclusion

The disparity between how businesses and individuals are taxed reflects a fundamental flaw in our economic and social priorities. By treating corporations as entities deserving of subsidized survival while ignoring the basic needs of individuals, the tax system has become a tool for perpetuating inequality. Correcting this imbalance is not only a moral imperative but an economic necessity. It’s time to reimagine taxation, starting with the principle that every person deserves the same opportunity for stability and growth that businesses are granted as a matter of course.

How tax policy disparity serves as a root cause of income inequality, we can analyze its systemic effects through both direct and indirect mechanisms.

1. Unequal Treatment of Resources

• For Businesses: Tax policies allow businesses to deduct operational expenses like wages, rent, utilities, and other costs from their taxable income. This ensures that businesses are taxed only on their net profits, shielding necessary resources from taxation.
• For Individuals: Conversely, individuals are taxed on their gross income without accounting for essential living costs like housing, food, healthcare, and education. This creates a system where those with low or moderate incomes lose a larger share of their limited resources to taxation, reducing their disposable income.

Impact: By allowing businesses to grow with untaxed essential expenses while forcing individuals to struggle with taxed essentials, the tax system structurally advantages wealth accumulation for corporations and wealthier individuals while keeping lower-income earners in a cycle of financial insecurity.

2. Amplification of Wealth Disparities

• Corporate Wealth Concentration: Corporations and wealthy individuals often use tax breaks, deductions, and loopholes to reinvest in assets, driving profit growth and enabling wealth accumulation.
• Erosion of Middle- and Lower-Income Wealth: Individuals without access to similar tax privileges must spend a disproportionate share of their income on basic needs, leaving little or nothing for savings or investment. Over time, this erodes their ability to build wealth.

Impact: These structural advantages funnel wealth upward, creating a system where corporations and the wealthy continually grow richer while average workers fall further behind.

3. Reinforcement of Privilege Through Policy

• Policies enabling this disparity often stem from lobbying by corporations and wealthy individuals who influence tax legislation to favor their interests. For instance:
  • The Powell Memo (1971) catalyzed corporate lobbying for pro-business tax policies.
  • Policies like Reaganomics and the Bush tax cuts institutionalized these disparities, benefiting high-income earners and corporations while cutting social programs that benefit lower-income groups.
• Trusts and tax shelters amplify the problem by allowing the wealthy to shield even more assets from taxation.

Impact: These policies reinforce systemic privilege, creating barriers for lower-income individuals to escape poverty while ensuring that wealth and power remain concentrated.

4. Mismatch with Modern Monetary Theory (MMT) Principles

• According to MMT, taxes should primarily serve to:
  1. Control inflation by removing excess money.
  2. Reduce income and wealth disparities.
  3. Fund essential public services.
• Current policies disproportionately tax the lowest earners, removing money they need for survival, while leaving corporate profits and wealth accumulation largely untouched. This increases economic inequality and does nothing to curb inflation.

Impact: The tax system fails to fulfill its role of redistributing wealth or regulating economic disparities, instead exacerbating the very inequality it should mitigate.

In the context of a fiat currency like the U.S. dollar, Modern Monetary Theory provides a more accurate framework for understanding government finance and economic policy.

5. Intergenerational Inequality

• Businesses and Wealthy Families: Wealthy individuals and businesses pass on untaxed or minimally taxed assets to their heirs, perpetuating privilege across generations.
• Working-Class Families: Families burdened by taxation on gross income have limited ability to build generational wealth, leaving their children at a significant disadvantage.

Impact: Tax policy not only perpetuates current inequality but also cements it into future generations.

Why Tax Disparities Are a Root Cause

A "root cause" is something foundational that creates and sustains a problem. Tax disparities qualify as a root cause of income inequality because:

1. Structural Inequity: The system inherently favors those with wealth and resources, enabling them to avoid taxation and further accumulate wealth.
2. Perpetuation of Privilege: Policies maintain and grow the wealth gap, with those at the bottom unable to escape the cycle.
3. Systemic Design: The disparity is not an accident but the result of deliberate policy choices, such as Reaganomics and lobbying-driven legislation.

To address income inequality, tax reform must focus on reducing this disparity, treating individuals and businesses equitably by:

• Recognizing basic human needs as deductible.
• Taxing excessive wealth and corporate profits.
• Removing loopholes that disproportionately benefit the wealthy.

Without such changes, the tax system will continue to serve as a foundational driver of inequality.