How Democrats' tax obsession could backfire
When Sen. Kamala Harris (D-Calif.) announced her candidacy for president, she promised a laundry list of new federal programs — Medicare-for-all, universal pre-kindergarten education, debt-free college — plus the "largest working-class tax cut in decades." How did she propose paying for that tax cut? By getting rid of President Trump's tax cut for "corporations" and the "top 1 percent." But there's a flaw in the plan: While repealing the Republican-passed tax cut in its entirety, including the parts of it that benefited neither corporations nor the top 1 percent, would save an estimated $2 trillion, Harris' big ticket items would undoubtedly cost trillions more. In other words, her grand tax plan just doesn't add up.
This is a problem not just for Harris, but across the Democratic 2020 presidential field. The candidates — and their voters — want a big increase in federal spending to support new social services. But they seem to have yet to realize that simply nudging the top marginal income tax rate back up won't pay for it all. Deficits are already spiking even without this new spending, and over the long term, Republican tax cuts only account for so much of the red ink.
And there's another downside to the idea of hiking the top marginal income tax rate: It could alienate affluent, college-educated suburbanites, which have become some of the Democratic Party's most valuable voters. Many of them used to vote Republican but refused to vote for Donald Trump. While many of them are in their peak earning years, they're not wealthy enough to absorb a major tax increase. In fact, such an increase could drive them back into the GOP's arms.
Nevertheless, freshman Democratic Rep. Alexandria Ocasio-Cortez (N.Y.) has suggested raising the top marginal tax rate all the way back to 70 percent, where Ronald Reagan found it 38 years ago. She wants the cut-off to be at the "tippy top" — people making around $10 million a year. That won't raise much revenue, but applying it to everyone who pays the current top rate would start dipping into valuable Democratic voters' pockets.
Sen. Elizabeth Warren's (D-Mass.) "wealth tax" is a little bit different, and may be a more viable option for Democrats. She wants to hit those Americans who have assets in excess of $50 million with a 2 percent tax, in addition to a 3 percent levy on those whose assets top $1 billion. Economist Emmanuel Saez estimated to The Washington Post that the tax would raise $2.75 trillion over 10 years.
That's still not enough. That amount won't cover the cost of expanding Medicare beyond senior citizens, for example. And the wealth tax faces constitutional hurdles. But it would bring in more money than repealing the Trump tax cuts, while taxing far fewer people.
Whatever the shortcomings of a wealth tax like Warren's — and there are several, which is why eight of the 12 European countries that imposed such levies in 1990 repealed them as of 2017 — such levies will become increasingly attractive to Democrats as a way to get more revenue out of the rich without hitting their own voters.
But if Democrats aren't careful, their tax obsession could be a gift to the GOP. Republicans lost their ironclad grip on the tax issue once they mostly found themselves arguing against relatively modest increases in the top rate. But if Democrats once again become the party of broad-based tax increases, their new suburban voters might start to have second thoughts about sending self-described socialists to Congress. Walter Mondale, the last Democratic presidential candidate who openly admitted he would raise taxes on the middle class, lost in a 49-state landslide.
Smart liberals are going to try to think of ways around falling into this trap without giving up on the idea of higher taxes in exchange for more government services. The current Democratic presidential field is the most progressive in years, and right now, even Republicans have cooled to $1 trillion deficits. Democrats will inevitably try to expand the American welfare state in a way that was unthinkable during the Bill Clinton years.
It will be a tall order. By some measures, the progressive wishlist adds up to $42 trillion — far more than any politically tenable proposal to pay for it.
The tax man cometh — and the Democrats aren't afraid. Maybe they should be.