Mark Lennihan/AP Photo
Larry Summers, then White House chief economic adviser, in October 2009
In the fall of 2009, I attended the Tax Executives Institute meeting, where the tax directors of the largest U.S. corporations discuss ways to reduce their companies’ tax burden. The attendees were busy complaining about President Obama’s budget for 2010, which included several items that would increase their taxes. Suddenly, Daniel Mitchell, the co-founder of the Center for Freedom and Prosperity (a nonprofit organization that advocates for flat taxes, and offshore tax havens) announced wonderful news: He had met with Larry Summers (then the director of President Obama’s National Economic Council) in the White House, and Summers promised him that the biggest international tax revenue raiser in the Obama budget would not happen. And indeed, that provision, which would have cost U.S. multinationals $86 billion over a decade, disappeared from the Obama administration budget for 2011.
Now, the same Larry Summers would like to portray himself as a progressive. According to published articles, he and his former Ph.D. student (and frequent co-author) Natasha Sarin are both advising Joe Biden’s presidential campaign. It’s worth taking a close look at Summers’s prescriptions on taxes today.
In a January paper he co-authored for the Hamilton Project with Sarin and their research assistant Joe Kupferberg, they offer a “pragmatic approach” for making the tax system more progressive and reject the proposals of Sens. Bernie Sanders and Elizabeth Warren. They claim that their approach can raise over $4 trillion in 2020-2029. But a closer look at their proposals shows that theirs is not a progressive approach at all, and that it is unlikely to generate the revenues they claim. Here are some examples:
Summers and co-authors claim they can raise $1,165 billion from increased IRS enforcement. But they do not reveal how that would happen. Given that the IRS’s most recent estimate of the “tax gap” (the difference between taxes collected and taxes due) is $381 billion per year, or $3,810 billion over a decade, they think they can close over 30 percent of the entire tax gap. This is a much larger percentage reduction than any estimate I am familiar with. And the “black box” nature of the estimate means that nobody can look at the details.
Next, Summers and company want to raise $400 billion from raising the corporate tax rate from 21 percent to 25 percent. That sounds nice, but the rate before the 2017 tax act was 35 percent. Why not raise it back to 35 percent? As these authors know, most of the corporate tax falls on what the economists call rents, namely profits that are not subject to competition. As they also know, the economic literature on taxing rents is unanimous: They should be taxed at high rates because taxing them does not change behavior (as long as it goes with commonsense measures like taxing U.S. corporations on worldwide profits and ending their ability to use phony accounting to tax profits offshore or to expatriate out of the U.S. by using so-called inversions).
Summers and colleagues want to raise $350 billion from taxing capital gains at ordinary income rates. Fine, but that only works if the ordinary income rate is low. If it is set higher, then taxpayers will avoid selling capital assets and no revenue will be forthcoming from the tax on capital gains. This proposal is a trap designed to prevent true progressives from raising ordinary income tax rates on the rich. The only way to raise both ordinary income and capital gains rates is to adopt a “mark to market” system—taxing gains when they happen, rather than waiting until a sale, which Summers opposes.
Under current law, any capital gains tax owed is wiped out when an investor dies. Heirs inherit the stock or other asset at its current market value. The paper proposes to raise $250 billion by retaining the original tax basis at death. This is a good proposal, but a huge long shot. It was enacted in 1978 and repealed without going into effect in 1980 (and passed again in 2001 and repealed in 2010), partly because the loophole is popular with middle-class taxpayers who get to sell inherited homes without paying tax. We may, however, still need to do that for the super-rich, unless we can apply mark-to-market retroactively.
Like most Democrats, Summers and colleagues want to repeal the “carried interest” loophole, which allows hedge fund managers to pay capital gains rates on their profits, which derive from their labor. This is supposed to raise $20 billion, which is strange, since the capital gains rate in their proposal is supposed to be the same as the ordinary income rate. But in any case, good luck getting this proposal through, given Sen. Chuck Schumer’s resistance.
This is not to say that all of the SSK proposals make no sense from a progressive perspective. Some, like eliminating the preposterous lower rate for pass-throughs the Republicans enacted in 2017, make perfect sense. But it seems highly unlikely that we can raise anything like $4 trillion from this mix of centrist proposals.
Summers and colleagues’ capital gains proposal is a trap designed to prevent true progressives from raising ordinary income tax rates on the rich.
In fact, given the projected $3.7 trillion deficit for 2020, we are likely to need much more than $4 trillion over the next decade. And much of it must come from taxing the rich and large corporations, in order to reduce inequality. Instead of supporting truly progressive ideas of how to do this, Summers and Sarin launched a scathing attack on Sens. Warren’s and Sanders’s tax proposals, especially the wealth tax. They also sharply criticize a proposal advanced by Sen. Ron Wyden to tax capital assets on a mark-to-market basis.
In fact, none of the Summers-Sarin critiques of the wealth tax or of mark-to-market are convincing.
They claim that the estate tax experience shows that a wealth tax can be avoided. But many of the techniques used to avoid the estate tax, like family partnerships, cannot work to avoid an annual wealth tax, while others (donating assets to charities) have beneficial effects.
Summers and his co-authors claim that it is hard to value non–publicly traded assets (like art collections) for both mark-to-market and wealth tax purposes. That may or may not be true, but it is largely irrelevant, because most of the wealth of our richest taxpayers consists of stock in publicly traded corporations. (Think Bezos, Brin, Page, and Zuckerberg, as well as Gates and Buffett). In addition, non–publicly traded assets can be taxed upon sale with an interest charge to eliminate the valuation issue, as Sen. Wyden has proposed.
They further state that:
[w]e suspect most Americans would regard tax reform that halved the wealth of the nation’s 800 billionaires as being manifestly unfair and setting a worrisome precedent, both for those with less wealth and for those who might be successful in the future. Yet over 10 years, a 6 percent wealth tax does exactly that, even aside from the impact of current income and property taxes. The fact that this taking occurs over a decade rather than all at once does not strike us as all that meaningful a distinction.
But there is no reason to assume that most Americans would object to a wealth tax just because over a decade it reduces the accumulated wealth of billionaires by half, if that is what it takes to reduce inequality. Even most Republicans support taxing vast accumulated wealth. Among the 4,441 respondents to a Reuters-Ipsos poll:
64% strongly or somewhat agreed that “the very rich should contribute an extra share of their total wealth each year to support public programs”—the essence of a wealth tax. Results were similar across gender, race and household income. While support among Democrats was stronger, at 77%, a majority of Republicans, 53%, also agreed with the idea.
Moreover, the core premise of their argument is wrong, because it ignores the fact that the billionaires’ wealth will grow over the same decade. In fact, if $1 billion grows by 6 percent each year (a modest return for savvy investors), then a 6 percent wealth tax would leave billionaires at the end of the decade with the same wealth they started with. The same is true with an income tax added on top, if the rate of growth is higher.
The Summers proposal is not progressive at all, either pragmatically or otherwise. It is simply an attempt to quash truly progressive tax ideas like higher tax rates on both ordinary income and capital gains, mark-to-market taxation, and a wealth tax, and substitute proposals that are unlikely to either reduce inequality or generate the revenue we need to invest in health care, education, and infrastructure.
