"I believe that we should be asking the very wealthiest people in this country to start paying their fair share of taxes. That way, we will not only lower the deficit, but we will bring in enough revenue to invest in our economy and create the millions of new jobs we desperately need."
"My vision for Medicare-for-All does not include a middle-class tax hike. I’m not prepared to do that."
"If we have enough money to pay for tax breaks for corporations. We have enough to invest in Medicare-for-All, Green New Deal and cancel student debt."
Politicians claim that agendas costing approximately $40 trillion over 10 years can be financed mostly by taxing wealthy families and corporations. Essentially, they promise a European-style welfare state without Europe’s burdensome taxes on middle- and lower-income earners. This is not possible.
Combining popular proposals to tax the wealthiest Americans and corporations would likely raise $3.9 trillion over the decade. This revenue could not even eliminate half the $15.5 trillion budget deficit that is already projected over the next decade, much less pay for $40 trillion in more spending. The overwhelming majority of new tax revenue to finance such expenditures would have to be raised from the middle- and lower-income earners.
- Leading presidential candidates are proposing a combined $40 trillion in new federal spending, yet the combined proposals to tax wealthy Americans and corporations would raise $9.3 trillion under the best-case, rosiest scenario and, more realistically, $3.9 trillion.
- Even annually seizing 100% of all income earned over the $1 million threshold could not generate more than $8.9 trillion in additional revenues.
- Funding $40 trillion in new spending would require raising the payroll tax by 38 percentage points or imposing an 88% national sales tax—even after cutting defense spending to European levels.
- Depending on the choice of taxes, the median American household’s $5,000 federal tax burden would double or even triple.
- Were Americans to accept all the taxes to finance this spending spree, it would still leave an escalating $15.5 trillion baseline budget deficit over the next decade under current policies.
On the Record
“This presidential campaign is replete with economic proposals that are extraordinarily unrealistic. Facing an overall deficit that is already projected to total $15 trillion over the next decade, politicians are promising $40 trillion in new spending. Vague ‘tax the rich’ rhetoric cannot obscure a cold mathematical reality: that even 100% tax rates on the wealthy could finance only a fraction of this spending. Paying for these things will require doubling—at the least—the typical American family’s total tax burden.”
—Brian Riedl, Senior Fellow
Adding Up the Check
The federal government is on an unsustainable fiscal path toward consistent $1 trillion budget deficits. Annual Social Security and Medicare shortfalls will rise from $440 billion to $1,656 billion over the next decade, pushing annual budget deficits above $2 trillion under current policies. These shortfalls are the predictable result of 74 million retiring baby boomers, which will produce benefits that far exceed the payroll taxes (collected from younger workers) and Medicare premiums (from seniors) flowing into the two systems each year. Overall, the Congressional Budget Office (CBO) forecasts $15.5 trillion in total budget deficits over the next decade under current policies.
Nevertheless, presidential candidates promise a dramatic increase of federal spending. Medicare-for-All has been estimated to cost at least $32 trillion in its first decade—although Bernie Sanders has admitted that his recent addition of broad, long-term-care coverage could bring the federal cost to $40 trillion. The combination of student debt cancellation, free public college tuition, and forgiveness of future private-college debt would cost $3 trillion over the decade. Climate-change plans have totaled approximately $2 trillion in federal funds (while Sanders’s would cost $16 trillion, and some congressional plans would cost more). Other typical candidate spending promises include Social Security expansion ($2 trillion), infrastructure ($1 trillion), universal child care and family leave ($1 trillion), affordable housing ($2 trillion), and K–12 education ($300 billion). Sanders has proposed a government jobs guarantee that would cost nearly up to $30 trillion over the decade, and Andrew Yang would likely distribute $30 trillion over the decade in Universal Basic Income grants.
While not all candidates have endorsed each of these policies, the campaigns of leading presidential candidates are typically promising new spending over the decade on the order of $40 trillion. Sanders’s tab is as high as $97 trillion. To put these figures in context, the entire GDP over the next decade is projected by CBO to be $262 trillion, and current federal spending is projected at $60 trillion.
Who Will Pay?
Candidates claim that they can finance their proposals without burdening middle- and lower-income families. Kamala Harris has proposed a $3 trillion tax cut for non-wealthy families, on top of her spending plans. Sanders concedes that some middle-class taxes must rise but insists that wealthy families and corporations will bear most of the burden. Elizabeth Warren emphasizes proposals to tax “billionaires and corporations” while deflecting questions about middle-class taxes.
As the table nearby shows, the most common proposals to increase taxes on wealthy Americans and corporations would struggle to raise $5 trillion over 10 years.
The cumulative effect of these proposals likely approximates the revenue-maximizing tax rates on the wealthy. The payroll tax increase would raise the combined marginal tax rate (payroll, federal income, and state income) to approximately 60% (depending on the state) on upper-income earners, which is within the range of the consensus revenue-maximizing rate. In fact, a top 70% income-tax bracket described above would produce combined rates over 90% for the highest-income earners. The 37% capital-gains rate is in the range of what economists consider the revenue-maximizing rate. Both CBO and the Tax Policy Center estimate that a financial transaction tax above 0.1% would not significantly add revenues. The corporate tax increases described above would push those revenues far higher than their pre-2017 tax-cut levels. The proposed estate- and wealth-tax rates are at levels that would generate massive tax avoidance, and therefore higher rates would generate little to no additional revenue.
The combined proposals would generate $9.3 trillion over 10 years, according to the most optimistic, static scores—meaning without consideration of macroeconomic effects or many behavioral changes and often relying on inflated estimates produced by the campaigns themselves. More realistic, dynamic scores that account for economic effects and that use third-party estimates when possible yield a combined $3.9 trillion in revenue. Even that total may be too high because it estimates each policy in isolation, without accounting for the negative economic effects of layering new taxes on top of other new taxes—bringing some combined marginal tax rates past 90%. While the 2017 tax cuts are not directly addressed, these steeply higher tax rates would more than reverse most of the law’s provisions that benefit wealthy families and corporations.
Regardless of the estimate used, taxing the rich and large corporations cannot even close CBO’s projected $15.5 trillion budget deficits by 2029 (which are based on current policy), much less finance new spending.
Even if the full $40 trillion could be paid for in new taxes, it would still significantly worsen the federal budget outlook. This is because the underlying budget deficit is already close to surpassing $1 trillion, on its way to $2 trillion within a decade and 9% of GDP within 30 years. Applying nearly all plausible taxes to today’s new spending would leave few, if any, taxes to close this escalating baseline deficit, or address any new fiscal needs that arise down the road.
Some question the $32 trillion Medicare-for-All price tag by claiming that the law would reduce health costs. This confuses the effect of the program on national health expenditures (NHE) with its effect on the federal budget. Regardless of whether NHE slightly rises or falls (and even liberal economists believe that it would rise), Medicare-for-All would shift approximately $32 trillion of the health economy from the private sector (and state governments) to the federal government’s ledger. This means that Washington would have to create a $32 trillion “single-payer tax” to capture the money that would have been paid in private premiums, out-of-pocket expenditures, and state taxes to fund Medicaid.
To date, no politician has figured out how to design and defend a tax this large. Sanders includes no taxes in his Medicare-for-All legislation and instead offers on his website a menu of $16 trillion in possible single-payer taxes. Harris has suggested that the middle class will pay no health premiums or new taxes for Medicare-for-All, implying that their health care will be free. But any Medicare-for-All proposal that does not include a $32 trillion tax to replace today’s premiums and out-of-pocket costs should not be considered a serious one.
Blood from a Stone
Even those who support higher taxes on the rich should acknowledge that high-income households do not earn anywhere near enough to fund even a fraction of the welfare-state expansions on offer this campaign season. Income for the top-earning 5% of families and pass-through businesses (including capital gains and dividends)—which begins at a family-size-adjusted cash income of $172,205—currently accounts for only one-third of the national total. That means that two-thirds of the tax base comes from those below the top 5%. The top 5% already pay 48% of all federal taxes, including 69% of all federal income taxes, which leaves less room for additional taxes from them.
If Washington seized all the currently untaxed income earned over the $1 million threshold, it would raise $8.9 trillion—not enough to balance the existing budget (lowering the threshold to $500,000 brings the total take to $12.3 trillion). Such figures implausibly assume that those affected continue working and investing despite facing 100% tax rates. In reality, individual income-tax revenues in the U.S. have historically remained between 7.0% and 9.5% of GDP, even as the highest tax bracket fluctuated between 28% and 91%. There has been no long-term correlation between income-tax revenues and the top income-tax rate (the performance of the economy more strongly correlates with tax revenues).
If America wants to spend like Europe, it must tax like Europe—and that means large payroll and value-added taxes on the middle class. First, closing the underlying $15.5 trillion baseline budget deficit would require an across-the-board 17-percentage-point income-tax rate hike (e.g., the median household’s top income-tax bracket would rise from 12% to 29%).
From there, suppose that the goal were to raise $34 trillion: the $40 trillion in proposed new spending, less $3 trillion from hypothetically reducing defense spending to European levels (a popular goal for which there is no plausible blueprint), and another $3 trillion from reducing state-level Medicaid costs with Medicare-for-All. A CBO analysis shows that raising $34 trillion in tax revenue would require creating a new 38% payroll tax (on top of the current 15.3% combined Social Security and Medicare tax rate) paid by all workers from their first dollar earned, or imposing an 88% value-added tax (i.e., nearly doubling the cost of all consumer purchases).
- Bernie Sanders, “Ten Fair Ways to Reduce the Deficit and Create Jobs.”
- Glenn Kessler, “Bernie Sanders vs. Kamala Harris on Taxes for Medicare-for-All,” Washington Post, July 30, 2019. For consistency, this paper spells out the single-payer proposals as “Medicare-for-All.”
- Ilhan Omar, Twitter, Aug. 5, 2019.
- Medicare and Social Security shortfalls are defined as the annual program benefits that must be funded from general revenues because payroll taxes, Medicare premiums, and other dedicated revenues are insufficient. They include the interest cost of expanding the national debt. Social Security and Medicare shortfalls are calculated using Congressional Budget Office (CBO), “2019 Long-Term Budget Outlook,” June 25, 2019, summary tables 1 and 6, at https://www.cbo.gov/system/files/2019-07/51119-CBO-2019-06-ltbo.xlsx. The $2 trillion current-policy budget deficit estimate within a decade is from CBO, “The Budget and Economic Outlook: 2019 to 2029,” Jan. 28, 2019, table 5-1, p. 109. The 2017 tax cuts, if extended (they are set to expire at the end of 2025), are expected to “cost” approximately $250 billion per year over the next decade. Meanwhile, higher discretionary spending levels that recently resulted from raising statutory spending caps mean approximately $200 billion in additional spending per year over the next decade. Both figures include the resulting interest costs of higher federal debt.
- CBO, “The Budget and Economic Outlook: 2019 to 2029,” table 5-1, p. 109. This reflects the current-policy baseline, which assumes extensions of expiring tax cuts and discretionary spending increases.
- For a summary of Medicare-for-All cost estimates, see Committee for a Responsible Federal Budget, “How Much Will Medicare-for-All Cost?” Feb. 27, 2019. Sanders told the Washington Post on July 16, 2019, that he believes that his proposal will cost the federal government $30 trillion–$40 trillion over the next decade. His latest version of the bill includes a much more comprehensive long-term-care benefit than previous versions, which will raise the cost.
- Over the decade, universal student-loan forgiveness would cost about $1.7 trillion and free public college another $1.2 trillion; renewing private school loan forgiveness would cost approximately $200 billion over the decade.
- For example, see Chris Mills Rodrigo and Miranda Green, “Biden Unveils $5 Trillion Climate Plan,” The Hill, June 4, 2019; Alexander C. Kaufman, “Elizabeth Warren Adds $2 Trillion and a Green Marshall Plan to Climate Vision,” Huffington Post, June 4, 2019; Dareh Gregorian, “Bernie Sanders Unveils $16 Trillion Climate Plan,” NBC News, Aug. 22, 2019.
- Several of these proposals are explored in Brian Riedl, “America Might Be Ready for Democratic Socialism. It’s Not Ready for the Bill,” Vox.com, Aug. 7, 2018.
- Kyle Pomerleau, “Does Andrew Yang’s ‘Freedom Dividend’ Proposal Add Up?” Tax Foundation, July 24, 2019; Jeff Stein, “Bernie Sanders to Announce Plan to Guarantee Every American a Job,” Washington Post, Apr. 23. See also Brian Riedl, “The Unaffordable Candidate: Bernie Sanders’s $97 Trillion Agenda Would Impose Incomprehensible Costs,” City Journal, Oct. 15, 2019.
- In addition to his single-payer health plan and government job guarantee, see Gregorian, “Bernie Sanders Unveils $16 Trillion Climate Plan,” and Riedl, “$97 Trillion.”
- See the July 30, 2019, Democratic presidential debate transcript, minutes 16 and 17.
- Kyle Pomerleau and Huaqun Li, “How Much Revenue Would a 70% Top Tax Rate Raise? An Initial Analysis,” Tax Foundation, Jan. 14, 2019. Sanders has proposed a top income-tax rate of 52% at “Options to Finance Medicare-for-All.”
- See “Expanding Social Security,” ElizabethWarren.com. While this tax proposal has not been scored, the estimate above is based on the Social Security Administration’s Office of the Actuary score of applying the 12.4% Social Security tax beginning at the current $132,900 cap. Sen. Warren’s tax would impose a higher rate (14.8%) yet not begin until a higher wage ($250,000), which would likely show a roughly similar score. For the dynamic score, this report modestly assumes a 10% feedback revenue loss, given the size of the tax rate increase on upper-income taxpayers.
- Several candidates have proposed taxing capital gains as ordinary income. See Politico, “Candidates’ Views on the Issues: Capital Gains Taxes.” For a score, see CBO, “Options for Reducing the Deficit: 2019 to 2028,” Dec. 13, 2018. CBO states that every 2-percentage-point rate increase produces revenue of $69.6 billion over 10 years, so a 17-percentage-point increase (raising the top rate from 20% to 37%) would raise $592 billion over the decade. Yet many economists believe that the revenue-maximizing tax rate for capital gains and dividends is well below 40%, so this report modestly assumes a 33% feedback effect that brings a more realistic revenue estimate of $396 billion.
- Jeff Stein, “Bernie Sanders to Propose Dramatic Expansion in Estate Tax on Richest Americans, Including 77% Rate on Billionaires,” Washington Post, Jan. 31, 2019. Sanders’s $315 billion revenue estimate seems to assume few to no maneuvers to avoid this tax. Yet the current estate tax loses as much as 60% of its potential revenue to leakage, according to Lawrence H. Summers and Natasha Sarin, “Be Very Skeptical About How Much Revenue Elizabeth Warren’s Wealth Tax Could Generate,” Washington Post, June 28, 2019. This report’s more realistic score of the Sanders proposal modestly assumes one-third revenue leakage. Also see Scott Eastman, “Sanders’ Estate Tax Plan Won’t Likely Raise the Revenue Intended,” Tax Foundation, Jan. 31, 2019.
- Tara Golshan, “Bernie Sanders’s Wealth Tax Proposal, Explained,” Vox, Sept. 25, 2019. Sanders—using data by economists Emmanuel Saez and Gabriel Zucman—claims that the tax would raise $4.35 trillion over the decade. There is reason to believe that this is a large overestimate. A previous Saez-Zucman revenue estimate (in a letter they sent to Warren) settled on $2.75 trillion over the decade. In response, economists Lawrence H. Summers and Natasha Sarin wrote in “A ‘Wealth Tax’ Presents a Revenue Estimation Puzzle,” Washington Post, Apr. 4, 2019, that actual revenues would approximate 13.3% of the Saez-Zucman estimate. Applying that 13.3% percentage to the $4.35 trillion Sanders figure yields $579 billion over the decade.
- Kyle Pomerleau, “An Analysis of Senator Warren’s ‘Real Corporate Profits Tax,’” Tax Foundation, Apr. 18, 2019. Alternatively, increasing the corporate tax rate by 10 percentage points would raise revenues by $963 billion over the decade (on a static basis) and roughly 10% less under a modest dynamic score. See CBO, “Options for Reducing the Deficit: 2019 to 2028.”
- This tax has been proposed by Sanders and Harris. See “Can The Sanders Financial Transactions Tax Raise Trillions and Cut Speculation?” Tax Policy Center, July 1, 2019; Andrea Riquier, “2020 Candidate Kamala Harris Wants Wall Street to Pick Up the Tab for Her ‘Medicare for All’ Plan,” MarketWatch, July 30, 2019. For a static score, see CBO, “Options for Reducing the Deficit: 2019 to 2028.” For a dynamic score, see Leonard E. Burman et al., “Financial Transaction Taxes in Theory and Practice,” National Tax Journal, March 2016, table 4, p. 201.
- Brian Faler, “Kamala Harris Proposes Big New Middle-Class Tax Break,” Politico, Oct. 18, 2018. For a score, see CBO, “Options for Reducing the Deficit: 2019 to 2028.”
- The Sanders proposal is at “Options to Finance Medicare for All.” For a score, see CBO, “Options for Reducing the Deficit: 2019 to 2028.”
- This would consist of a 37% federal income-tax rate, 17.7% payroll-tax rate, 0.9% additional Medicare tax, and state income-tax rates as high as 13.3% in California. See also Dylan Matthews, “Where Does the Laffer Curve Bend?” Washington Post, Aug. 9, 2010.
- CBO, “Options for Reducing the Deficit: 2019 to 2028.” This report states that “doubling the tax rate would not double the amount raised by the option.… With even higher tax rates, revenues could actually fall.” See also Burman et al., “Financial Transaction Taxes in Theory and Practice,” table 4, p. 201.
- The corporate portion of the 2017 tax cuts—generally Titles II and III—was scored as costing $329 billion over the decade. See Joint Committee on Taxation, “Estimated Budget Effects of the Conference Agreement for H.R.1, the ‘Tax Cuts and Jobs Act,’ ” Dec. 18, 2017.
- As stated in note 16 supra, the current 40% estate tax loses as much as 60% of its potential revenue to leakage and tax avoidance. Thus, a 77% tax rate would surely encourage even more significant tax planning, such as charitable giving, spending down wealth, and sheltering wealth. The wealthiest Americans—with teams of tax lawyers—are unlikely to passively accept a 77% estate tax.
- Single-payer health care could reduce NHE only if one assumes unsustainable payment cuts to health providers. Thus, the Urban Institute projects that single-payer health care would raise NHE. See John Holahan et al., “The Sanders Single-Payer Health Care Plan: The Effect on National Health Expenditures and Federal and Private Spending,” Urban Institute, May 9, 2016.
- Sanders, “Options to Finance Medicare-for-All.” These options include middle-class taxes, and their promised revenues have not been verified by a neutral third party.
- Kyle Pomerleau, “Analysis of Sen. Kamala Harris’s “LIFT the Middle-Class Act,” Tax Foundation, Oct. 24, 2018. Harris claims that families earning under $100,000 would see no taxes or premiums under her Medicare-for-All plan. See Kessler, “Bernie Sanders vs. Kamala Harris on Taxes for Medicare-for-All”: “Harris, by contrast, would eliminate the need for anyone to pay any premiums until they make more than $100,000.”
- U.S. Treasury Office of Tax Analysis, “2019 Distribution of Tax Burden, Current Law,” April 2018. Income is defined as “wages and salaries, net income from a business or farm, taxable and tax-exempt interest, dividends, rental income, realized capital gains, unrealized gains at death, cash and near-cash transfers from the government, retirement benefits, and employer-provided health insurance (and other employer benefits). Employer contributions for payroll taxes and the federal corporate income tax are added to place cash on a pre-tax basis.”
- Calculated using IRS, “SOI Tax Stats—Individual Statistical Tables by Size of Adjusted Gross Income,” table 1.4. In 2016, the amount of income earned over the $500,000 threshold approximated 7.0% of GDP. An estimated 2.3% of GDP was paid in federal and state taxes on this income, leaving 4.7% of GDP in available take-home pay. The amount of income earned over the $1 million threshold approximated 5.0% of GDP. An estimated 1.6% of GDP was paid in federal and state taxes on this income, leaving 3.4% of GDP in available take-home pay.
- Office of Management and Budget, Historical Table 2.3. Between 1950 and 2019, the correlation between income-tax revenues as a share of GDP and each year’s highest marginal income-tax rate is -0.19.
- CBO, “Options for Reducing the Deficit: 2019 to 2028.” Each percentage-point increase in income-tax rates (across the board) raises $905 billion over the decade. These static estimates do not incorporate any lost revenues due to the macroeconomic effects of large tax increases.
- The current-policy baseline projects $8.0 trillion in defense spending over the next decade. Cutting this to
- CBO, “Options for Reducing the Deficit: 2019 to 2028.” See also the pullout from this report, “Impose a 5 Percent Value-Added Tax.” Over 10 years, each percentage-point increase in the payroll tax rate raises $898 billion. A 5% value-added tax rate (using a European-style narrow tax base) raises $1,920 billion (which means $384 billion for each percentage point). These static estimates do not incorporate any lost revenues due to the macroeconomic effects of large tax increases.
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