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The “Tax the Rich” Delusion of the Democratic Left


The “Tax the Rich” Delusion of the Democratic Left

The Daily Beast December 1, 2018

Ever hear anyone on the left spell out exactly how they're going to pay for Medicare for All, free college, and all the rest? Didn't think so.

The Democrats’ incoming House majority—and its Senate caucus of presidential wannabes—are about to face fiscal reality.

When confronted with how to pay for their extraordinarily expensive policy agenda, the answer of liberal lawmakers, analysts, and advocates is nearly always the same: tax the rich.

How to close the $12 trillion baseline budget deficit over the next decade (a figure that already assumes the 2017 tax cuts expire)? Tax the rich.

How to pay for the $42 trillion Democratic socialist agenda that includes single-payer health care ($32 trillion), a federal jobs guarantee ($6.8 trillion), student loan forgiveness ($1.4 trillion), free public college ($800 billion), and infrastructure ($1 trillion)? Easy. Tax the rich.

For those keeping score, that is $57 trillion to be financed mainly through tax hikes on the rich, even after ending the 2017 tax cuts. It would mean more than doubling the $44 trillion in projected federal tax revenues over the next decade.

It is telling that “just tax the rich” almost never extends beyond talking points. Advocates never specify the $12 trillion tax hike that would balance the budget. Sen. Sanders’ “Medicare for All Act” contains none of the promised $32 trillion in offsetting tax increases.

When incoming-Rep. Alexandria Ocasio-Cortez was asked how to finance the $42 trillion Democratic agenda, she came up with just $2 trillion in tax increases. Other spending proposals recycle the same tax increases, such as repealing the $2 trillion in tax cuts from 2017.

The “just tax the rich” rhetoric remains empty because the numbers simply do not add up. Wealthy families and corporations are not a bottomless ATM available to finance a socialist utopia.

In fact, America’s federal tax code is already the most progressive in the OECD, even adjusting for income inequality. The Congressional Budget Office reports that the top-earning 20 percent of taxpayers earn 53 percent of the income, yet pay 69 percent of all federal taxes, including 88 percent of all income taxes. The bottom 40 percent of earners earn 14 percent of the income while collectively paying no income tax, and less than 5 percent of all federal taxes. Tax code regressivity is not the problem.

So let’s dive into the tax proposals.

Even if the 2017 tax cuts and 2018 defense spending hikes expire, the CBO projects a baseline budget deficit rising to 5 percent of GDP over the next decade. Additionally, the far-left wish list described above totals 18 percent of GDP. That brings a staggering budget deficit of 23 percent of GDP, or the current equivalent of $4.6 trillion per year.

In closing that massive budget gap, tax scores from CBO’s “Budget Options” report show that upper-income tax increases are plausibly limited to one or two percent of GDP.

Let’s begin with income taxes. Imagine 100 percent tax rates on all income earned over the $1 million threshold. That’s politically impossible, but for the sake of argument, imagine it. Even that would add just 5 percent of GDP in revenues—until people quickly stop working at that income. Slightly more realistically, doubling the top two tax brackets, to 70 percent and 74 percent, would raise at best 1.6 percent of GDP, and that’s probably optimistic.

Alternatively, the popular liberal Social Security solution of eliminating the payroll tax wage cap of $128,400 would close barely half of the system’s long-term shortfall of 1.5 percent of GDP. It would also bring marginal tax rates (including state taxes) above 60 percent in some states, thus leaving little room for additional income taxes to close the much larger Medicare shortfall or finance new spending.

Nor can corporate tax hikes save the day. America’s total corporate tax revenues (2 percent of GDP) are only slightly behind other developed nations. Even doubling the federal corporate tax rate to 42 percent would raise less than 1 percent of GDP while incentivizing more companies to relocate abroad.

Popular proposals to impose a 30 percent minimum tax on “millionaires” and to more aggressively tax banks, hedge-fund managers, and oil and gas companies would raise a combined 0.1 percent of GDP, according to CBO. A carbon tax of $25 per metric ton would raise 0.4 percent of GDP, until the necessary rebates for low-income households negate those revenues. Returning to the aggressive pre-2000 estate tax policies would raise less than 0.2 percent of GDP.

In short, closing the 5 percent of GDP projected budget deficit from taxing the rich is nearly impossible—even before the liberal spending wish list is added. The temptation to mix and match various upper-income tax increases must be limited by the cumulative economic and revenue effects of pushing combined marginal tax rates well over 70, 80, or even 90 percent.

And those praising the 91 percent income tax bracket under President Eisenhower should note that only eight taxpayers actually paid taxes in that bracket in 1960. Furthermore, income is much more internationally mobile today, and will not stick around to pay punitive tax rates.

As for other popular offsets, slashing defense spending to the European target of 2 percent of GDP would save just 0.6 percent of GDP relative to the CBO budget baseline. Nor has any single-payer health care advocate figured out how to convert all family, business, and state health spending into a “single-payer tax.”

In reality, spending like Europe requires taxing like Europe. This means, in addition to federal and state income taxes, a value-added tax (VAT)—essentially a national sales tax—that affects all families. CBO data estimates that raising 15 percent of GDP would require imposing an 86 percent VAT rate, or hiking the payroll tax from 15.3 percent to 56.5 percent. No wonder many spenders prefer the “just tax the rich” fairy tale.

Surely some large companies and wealthy individuals are escaping their “fair share” of taxes. There may be room to close some loopholes or modestly hike some rates. Yet it is an illusion that American can finance socialism—or even balance the budget—mainly on the backs of the rich. But don’t take my word for it. Just note the lack of specific, scored budget blueprints showing otherwise.

This piece originally appeared at The Daily Beast


Brian M. Riedl is a senior fellow at the Manhattan Institute. Previously, he worked for six years as chief economist to Senator Rob Portman (R-OH) and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Follow him on Twitter here. This piece was adapted from Economics21.