AP Photo/Matthew Putney, File
Candidates generally avoid talking about new taxes without tying them closely to new programs, and even then they mostly emphasize how limited the taxes will be. But this year three of the Democratic Party's leading progressives have called for substantial new taxes on the rich. Senator Elizabeth Warren has put a new wealth tax at the center of her presidential campaign, Senator Bernie Sanders has advocated an increase in the estate tax, and Representative Alexandria Ocasio-Cortez has proposed nearly doubling the top income tax rate to 70 percent.
Those proposals have not only broken a taboo but shown that higher taxes on the rich are popular. A Politico/Morning Consult poll found 76 percent of registered voters generally in support of raising taxes on the rich and 61 percent specifically in support of Warren’s wealth tax. The numbers on Ocasio-Cortes’s proposal weren’t as strong but still positive—45 percent for, 32 percent against. Other surveys, even one by Fox News, have also found that Americans believe the rich should pay more.
The key feature of the progressive tax proposals, which helps explain their popularity, is that they focus exclusively on the rich. Warren's wealth tax would apply only to households with more than $50 million in net worth—the top .1 percent. While Sanders would raise estate taxes, he would still leave the first $3.5 million tax-free. Ocasio-Cortes’s top income tax rate would apply only to incomes over $10 million.
In a political party whose base includes college-educated professionals, there's a clear political logic to these proposals. Democrats would find it hard to support taxes that heavily burden middle or upper-middle-income groups. But taxing income and wealth at the top is a different story.
You can see that political logic at work in the tax increases proposed in Social Security legislation that Democrats recently introduced in Congress. As of this year, the Social Security tax of 12.4 percent applies to earnings up to $132,900, an amount that is annually adjusted for inflation. Under the proposed Social Security 2100 Act—which would increase benefits and put the program on a firm foundation for the rest of the century—the tax rate would rise over the next 24 years to 14.8 percent.
But, for the first time, that tax would also apply to earnings over $400,000 a year. In other words, while increasing taxes on top earners—indeed, increasing those taxes substantially—the legislation would create an untaxed “donut hole” for earnings between $132,900 and $400,000.
I have my doubts about the Social Security 2100 Act, mainly because I'd like to see some of that revenue used for other priorities such as child care, Medicare expansion, and affordable housing. (For another approach to long-term Social Security reform, see Henry Aaron, “How to Keep Social Security Secure.”) But the donut hole makes political sense.
If Democrats win the presidency and Congress in 2020, they're going to need sources of new revenue to take major new initiatives.
This time around, Democrats are less likely to be constrained by concerns about balanced budgets than they were under Bill Clinton or Barack Obama. They don't want to be put in the position of just cleaning up the mess left by Republicans, and they have a far better case for deficit financing of infrastructure and investments in human capital than Republicans did with their 2017 tax bill. But more generous social programs will require new taxes. Reversing the 2017 Republican tax giveaways to corporations and raising taxes on top incomes are the best ways of raising that revenue for the policies they campaign on in 2020.
Still, there are major policy and strategic questions about which of the progressive taxes to pursue. Warren's wealth tax—2 percent annually on net worth above $50 million and an additional 1 percent on net worth above $1 billion—has the merit of being well targeted at the superrich, the class that has seen its wealth grow spectacularly while most families' wealth has stagnated. It would help counteract the tendencies toward oligarchy in American society and politics.
But the wealth tax presents two kinds of problems that suggest Democrats might need to rely on the established federal taxes to raise revenue on a progressive basis. According to a traditional adage of public finance, “An old tax is a good tax.” A tax long in effect has well-established administrative mechanisms and legal foundations. That is the case for the income and estate taxes. The United States has successfully enforced both of them at high levels, and their constitutional grounding is secure. But neither of those things are true of a wealth tax.
Many countries have had difficulties carrying out wealth taxes, as a recent report from the Organisation for Economic Cooperation and Development explains in detail. In 1990, 12 OECD countries had net wealth taxes, but by 2017 that number was down to four, and one of those (France) has since eliminated its wealth tax. “Decisions to repeal net wealth taxes,” the report observes, “have often been justified by efficiency and administrative concerns and by the observation that net wealth taxes have frequently failed to meet their redistributive goals. The revenues collected from net wealth taxes have also, with a few exceptions, been very low.”
Warren's wealth tax is designed to meet these objections, and the economists consulted by Warren, Emmanuel Saez and Gabriel Zucman, project that tax avoidance and evasion can be kept to a modest level. But they may be underestimating the ingenuity of the lawyers, accountants, and lobbyists who make up the wealth-defense industry.
Still, the administrative problems don't seem to me dispositive; a wealth tax might be worth enacting even if its enforcement was incomplete. The more serious problem is the potential for a wealth tax to be overturned by the Supreme Court. In a recent law review article, Dawn Johnsen and Walter Dellinger make a compelling case for the constitutionality of a national wealth tax. Their view would almost certainly prevail if the Court did not have a far-right majority, but because it does, the Court might well strike it down.
So, if you're in Congress and you agree that higher taxes on the rich are justified, do you vote for a wealth tax that might be overturned? Or do you work within the framework of the income and estate taxes to achieve the same purpose? It seems to me the answer is clear.
In the future, Democrats could come back to a wealth tax when liberals have a majority on the Court. They should try to avoid enacting that tax at a point when a conservative majority might establish a historic precedent against it.
In the long run, a generous system of social protection cannot be fully financed with taxes on the rich, especially if those taxes are successful in reducing extreme inequalities. The more egalitarian countries with extensive and stable welfare states rely on broad-based taxes, particularly value-added taxes, and eventually the United States will need to adopt a mechanism of that kind too. That, however, is an even bigger taboo. For now, it's a good thing Democrats are talking about higher taxes on the rich.
