Progressive tax policies Democrats need

ANNIE LOWREY, The Atlantic, Feb 5, 2018

Representative Alexandria Ocasio-Cortez wants to raise the top marginal income-tax rate to 70 percent; for every dollar a person earns over $10 million, Ocasio-Cortez suggests, he should be left with 30 cents. Senator Bernie Sanders, a likely 2020 candidate, wants to expand the estate tax. And Senator Elizabeth Warren, a definite 2020 candidate, has proposed an annual tax on wealth, taking 2 percent of fortunes over $50 million and an additional 1 percent of fortunes over $1 billion.

The shared idea here is to make the tax code far more progressive as the left makes the government far more redistributive. Such tax policies tend to please liberals concerned that the party has failed to curtail inequality and to blunt its political effects, and terrify conservatives who argue that such policies are confiscatory and would hurt long-term growth. But what about the tax nerds? What do they make of these ideas on how to soak the rich?

The green-eyeshade folks aren’t fond of short, easy answers. But, to start, experts said that there was nothing unusual or even that radical about what Ocasio-Cortez has in mind. Higher rates were common throughout the 20th century, with the top marginal rate averaging 78 percent from 1930 to 1980 and climbing up to 90 percent in the late 1950s and early ’60s.

“Ocasio-Cortez has done a great public service in just saying, ‘You know, we could have higher rates,’” said Mark Mazur, an economist at the Tax Policy Center, a nonpartisan think tank based in Washington, D.C. “In the past, we have had them, and they worked. And you don’t have to go all the way to 70 percent. But right now we’re stuck with this question of whether the top rate should be 39.6 percent or 37 percent—that’s a pretty narrow range. What she’s saying is you can imagine taking them up a lot higher.”

That said, if the goal is to raise more money for redistributive policies and to ensure that millionaires pay their fair share, Ocasio-Cortez’s proposal isn’t particularly efficient. It might not even raise that much money, instead discouraging employers from paying workers more than $10 million or workers from trying to earn more than that threshold. Imagine you were a lawyer who often earned in the high millions a year; if you hit the $9 million mark in the fall, you might work somewhat less, knowing that much of what you made over $10 million would get taxed away. The tax rate would, in effect, reduce inequality in pretax incomes, as well as in posttax incomes. (It would also encourage the very rich to hide income above $10 million.)

A better way to extract money from top earners would be to get rid of the loopholes, deductions, and exemptions they use to shelter income from taxation in the first place, economists said. “Broadening the tax base is generally more efficient than changing rates,” said Kyle Pomerleau of the Tax Foundation, a think tank in Washington, D.C. “That would include getting at what I would call the Big Three, which is the charitable deduction, the home-mortgage-interest deduction, and the state- and local-tax deduction.”

The charitable deduction allows very high earners to spend on nonprofit causes that they find interesting and valuable, as opposed to turning that money over to Uncle Sam for what the broad public wants and needs. (As the Trump Foundation so extravagantly shows, such charitable largesse is often anything but.) The home-mortgage-interest deduction prompts the rich to buy even fancier houses than they could otherwise afford. And the state and local deduction reduces the tax bills of rich families who happen to live in high-tax states. Together, the Big Three cost the government something like $100 billion a year.

There’s also a strong case for raising the country’s preferential, low tax rates on dividends and capital gains and getting rid of the carried-interest loophole—provisions that cost the government about $130 billion a year. Right now investors pay a top rate of 23.8 percent on long-term-investment earnings, versus 37 percent on ordinary income. The argument for keeping that rate low is that it encourages investment. But the carried-interest loophole is a straightforward tax dodge for hedge-fund managers. Investment income is income and should be taxed more like regular income, many tax experts think.

As for Warren’s wealth tax, that proposal comes from two of the world’s preeminent scholars on inequality, Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley. (The former is in part responsible for much of the data showing the rise in income inequality in the United States; the latter literally wrote the book on the role of tax evasion in widening inequality.) Their wealth tax would raise an estimated 1 percent of GDP a year, or about $200 billion.

“The main argument is that an annual progressive wealth tax is the most direct way to limit the increase in wealth concentration,” Zucman told me. “The wealth share of the top 0.1 percent has increased from 7 percent in 1980 to about 20 percent today. The wealth tax is the most powerful tool to catalyze wealth concentration—depending on the rate, to limit its increase or to make it shrink.” He added that a wealth tax would also “enable the government to tax people who have a lot of wealth, not a lot of income,” such as Jeff Bezos of Amazon. His 2017 salary: $81,840. His net worth: $135 billion or so, depending on the state of the stock market.

With a wealth tax, very high-net-worth individuals would tally up the value of their estates—property, racehorses, art, business holdings, licensing fees, you name it—and pay a small share of that sum to the government annually; the government could use land, investment, and asset registers, as well as audits, to ensure compliance. “It’s very important that there are no exemptions,” so that the rich do not just shift assets around into classes that are not counted, Zucman told me.

Still, tax experts said the wealth tax would be difficult for the government to administer. “If we all had all of our wealth in publicly traded securities, it would be easy, but we don’t, and that’s what makes it hard,” Mazur said. “People hold a lot of wealth in closely held businesses, like a car dealership or a ranching operation, or in partnerships that trade assets, like hedge funds. Those things are hard to value. What a wealth tax does is have the government say, ‘Rich people, raise your hands and tell us what your wealth is!’ They’re probably not going to give you a good answer.”

There might be other ways to get at the same pool of people and the same pool of wealth without asking so much of the Internal Revenue Service. Pomerleau said the government might focus on taxing events where wealth changes hands, rather than assessing and taxing 75,000 people’s net worth each year. “It is easier to tax a transaction or transfer than an asset—there’s a market, and transactions are tracked,” he said. One option would be to jack up the estate tax, as Sanders wants to do, in essence creating a big, one-off wealth tax on the rich people who happen to die in a given year. Financial-transaction taxes would also hit the same pocket of very wealthy Americans.
The minutiae of Warren’s, Sanders’s, and Ocasio-Cortez’s proposals aside, the tax code is riddled with provisions that let the richest Americans accumulate vast pools of wealth, worsening inequality and even fraying the country’s very democracy. There are better ways and worse ways to extract money from the rich, but Democrats have a strong argument that one way or another, the government ought to soak the rich.