Why Democrats Like Taxes Again

Tax reform is rarely a stirring political subject, but there have been times in the past when the question of what citizens owe to our collective good—or, conversely, how much they should keep to themselves—has ignited a real national conversation and a change of direction. The 2020 presidential race looks likely to be one of those moments, since it’s already clear that overhauling the tax code is going to be a central part of the political debate, at least on the Democratic side.

Unlike past cycles, this time Democrats won’t be content to propose higher tax rates simply as a vehicle for realizing other policy aspirations. Raising taxes has become an end in itself, a way to radically reorder our economy and even the structure of power. Some Democrats have realized that taxes can be wielded to reduce income inequality and, in the process, take power out of a few private hands and invest it instead in the democratic collective. This marks a dramatic change—and a very necessary one.

Already, one Democratic presidential candidate, Senator Elizabeth Warren, has made a big splash with a new tax plan. In January, she proposed a new wealth tax that would charge 2 percent on Americans with assets of more than $50 million and an additional 3 percent on those with $1 billion or more. Her campaign staff estimate that this proposal alone will raise $2.75 trillion in revenue over a decade. That would be an extra $210 billion a year, equal to 1 percent of the US’s entire GDP. But she has argued that it’s about more than just filling government coffers, saying it “will help address runaway wealth concentration.” As she told MSNBC’s Chris Hayes:

The consequence of [the ultra wealthy] having amassed that much wealth is bad for our economy—a tiny group of people making decisions that always tend to favor a lot of big corporations—and bad for our democracy. Because it means… it’s now a democracy that is influenced by the wealthy, the well connected, and it’s not working for the people.

Those advising her put it in even starker terms. “Democracies become oligarchies when wealth is too concentrated,” said the economist Emmanuel Saez, who, together with his colleague Gabriel Zucman, helped her craft the proposal. “A progressive wealth tax is the most direct policy tool to curb the growing concentration of wealth in the United States.”

Another 2020 contender, former Congressman Beto O’Rourke, has jumped on Warren’s bandwagon, telling HuffPost that he, too, supports a wealth tax. And again, for him the point is not just to raise money, but to achieve a larger goal:

I think fundamental to this experiment of America and democracy is ensuring we don’t have princes and princesses, kings and queens, a concentration of wealth and power and privilege, and that’s exactly what we have in this country right now. So both for reasons of generating the revenue that we need and reasons to achieve the political democracy by having an economic democracy, some part of that wealth that has been built up and continues to be built up and receives favorable preferential treatment in the tax code must be taxed for our common benefit.

Nor is Warren the only 2020 Democratic candidate with a specific plan to address this problem of intensifying inequality through the tax code. Senator Bernie Sanders released a proposal that would dramatically increase the estate tax, which is levied on inheritances and other assets passed down from the ultra-wealthy to their heirs. The tax was first instituted, as long ago as the Civil War, partly to ensure that our country wouldn’t wind up with ossified social classes and a plutocracy.

Today, though, less than 0.1 percent of Americans face paying, at most, a 40 percent estate tax, an anemic version of what it used to be after Republicans succeeded in lowering the rate over the years while raising the threshold above which it hits. Sanders would create new brackets, starting with a 45 percent rate on estates worth $3.5 million to $10 million, and ending up at a 77 percent tax on those with more than $1 billion. His plan would bring the tax back in line with what it was from 1941 to 1976—and that would still affect only the richest 0.2 percent of families.

Sanders’s proposal isn’t just concerned to help fund some of his priorities with the $315 billion his staff calculate the revised estate tax would raise over a decade. In January, his aides told The Washington Post that it’s also “designed to help reverse the skyrocketing share of the national wealth controlled by the richest Americans,” as Jeff Stein reported. Reversing yawning inequality is the aim: “From a moral, economic, and political perspective our nation will not thrive when so few have so much and so many have so little,” said a press statement quoting Sanders.

Democrats are also talking about changing the federal income tax code. In January on 60 Minutes, Anderson Cooper asked Representative Alexandria Ocasio-Cortez how she would raise taxes to pay for her Green New Deal proposal to cut carbon emissions. “You look at our tax rates back in the ’60s: when you had a progressive tax rate system… once you get to the tippy tops, on your $10 millionth, sometimes you see tax rates as high as 60, 70 percent,” she responded. “As you climb up this ladder, you should be contributing more.” (Currently, the highest marginal rate on wealthy Americans’ income is 37 percent.) While her exchange with Cooper wasn’t the same as providing a concrete proposal, she has subsequently argued that “a system that allows billionaires to exist” while so many people still live in poverty is “wrong.”

Ocasio-Cortez’s particularly high public profile has helped put a political spotlight on income taxes. As Saez and Zucman pointed out shortly after her 60 Minutes interview, the point of such progressive and steep taxation on the rich is not just to raise revenue. “It is about regulating inequality and the market economy,” they wrote in a New York Times op-ed. “It is also about safeguarding democracy against oligarchy.”

This way of thinking about taxes is unusual, even for Democrats. Typically, they have adhered to “tax and spend” policies, proposing tax increases mostly in order to fund pet priorities such as universal preschool or infrastructure initiatives. Since the 1980s, while trying to make the code fairer to lower-income payers, Democrats have largely acceded to the neoliberal consensus that taxes should be kept as low as possible provided that the government remains adequately funded. The new conversation about changing the tax code focuses instead on the way taxes can shape the bedrock of who has influence in our economy and society and how it is wielded. Because taxes are not just about raising revenue. Taxes are about power.

From the 1930s to the 1980s, the top income tax rate on the highest earnings averaged about 79 percent. During the same period the type of income inequality we’re now accustomed to scarcely existed. Between 1946 and 1980, according to research by Saez, Zucman, and the French economist Thomas Piketty, income for the bottom 90 percent actually grew faster than for the richest 10 percent. After 1980, though, as the top tax rate started to plummet thanks to the policies of the Reagan administration, and was then held down by subsequent administrations, incomes for the bottom half of the country more or less stagnated even as the economy and its fruits kept growing.

Incomes for the top, on the other hand, have swelled, more than doubling in that period for the top 10 percent and tripling for the 1 percent. By 2014, the top 1 percent of earners captured 20 percent of all of the country’s income, up from 12 percent three decades earlier. Since the 1980s, “Taxes did not hamper the upsurge of income at the top,” Piketty, Saez, and Zucman bluntly note.

With money comes power. A vast body of research demonstrates that elected officials are far more responsive to the desires and priorities of the wealthy, for example, than to everybody else. And greater wealth tends to beget even greater wealth through investments, inheritances, and the ability to pay for creative ways to dodge taxes, such as misclassifying income or dumping it in offshore accounts. In other words, allowing so much wealth to be amassed at the very top creates an ever more powerful plutocracy that fights to entrench and maintain its economic privileges.

“An extreme concentration of wealth means an extreme concentration of economic and political power,” Saez and Zucman wrote in their recent op-ed. Heavily taxing those with the most money is the best way to fight this maldistribution because it “restrains all exorbitant incomes equally,” no matter how they were generated. It also funnels their bloated finances into a pot of money democratically controlled by the government, made up of our elected representatives, which then decides where and how it gets spent for the benefit of society. True progressive taxation takes financial power out of a few private hands and gives the popular majority the ability to redirect it.

The rich understand this. When Dell founder Michael Dell was asked to react to Ocasio-Cortez’s proposed 70 percent top rate, he responded that he would rather keep that money and spend it philanthropically as he chooses. “I feel much more comfortable with our ability as a private foundation to allocate those funds than I do giving them to the government,” he said. “So no, I’m not supportive of that.”

The seeds of this renewed interest in redistributive fairness were sown during the Great Recession, which wiped out income and wealth for large swaths of Americans in the middle and lower classes. As the country climbed out of that hole, it became clear that the rich were doing better than anyone else, recovering more quickly and hoarding the fruits of the economic rebound. These trends undermined the idea of trickle-down economics: the idea popularized by “Reaganomics” that if things are going well for those at the top of the income scale, the rest of us will do better, too. A rising tide that lifted yachts would also lift the schooners and dinghies. President Reagan succeeded in drastically lowering the top income tax rate, by 1986 all the way down to 28 percent.

In the 1990s, President Clinton pushed the top rate back up, to 39.6 percent—the same level to which President Obama later returned it. Obama also called for a “Buffett Rule,” intended to ensure that billionaires couldn’t get away with paying lower taxes than their secretaries, in order to “[pay] down the deficit and [invest] in our future.” But even this measure would have done little to nothing to staunch burgeoning income inequality, let alone the structures that determine who does and does not hold power, and Obama never went so far as to call for top tax rates above 50 percent. Neither man questioned whether taxes needed to be dramatically higher to curb the creation of a new Gilded Age oligarchy. 

In the meantime, the trickle-down theory has now been comprehensively debunked. Saez and Zucman’s research has shown that in the decade since the Great Recession, the rich continued to use their lower rates of taxation to stockpile wealth.

Donald Trump may have intuited the changing mood of the country when he ran for president in 2016 as a populist, promising to end tax breaks that flow to “hedge fund guys” and pledging under a Trump administration “the very rich are going to end up probably paying more.” “Everybody’s getting a tax cut, especially the middle class,” he vowed, a middle class “who have just been absolutely forgotten in our country.” That stood in stark contrast to the actual details of his own campaign’s tax plan, but no matter. Then the reality, of course, turned out to diverge even further from his campaign rhetoric. The signature legislative achievement of the Trump administration so far is the 2017 Tax Cuts and Jobs Act, a huge package of reductions that have boosted corporate profits, while the benefits trickling down to employees appear to be dammed up.

Economic populism was also making its presence felt on the Democratic side. By the end of Senator Sanders’s primary challenge in 2016, the party’s nominee, Hillary Clinton, had borrowed his idea of raising the top estate tax rate to 65 percent and also called for a 4 percent “surtax” on incomes over $5 million. Even so, while Clinton backed a more progressive code, under her proposals the top 1 percent would have seen their tax burdens increase by less than 7 percent. Both Obama and Clinton talked about raising taxes on the rich as a way to make them “pay their fair share”; it wasn’t about shifting the balance of power.

For this more radical agenda to succeed among Democratic candidates, the party will have to resist describing its big tax proposals as merely a means to pay for priorities like a Green New Deal or Medicare for All. It’s notable that not all candidates have caught on; Senator Cory Booker is calling for a higher estate tax and higher taxes on investment income purely as a way to pay for his signature baby bonds proposal.

Revenues from higher taxes would, of course, be best used to fund important investments. But if Democrats fail to make the argument for higher taxes on the rich as a social good, a public benefit in itself, they will once more play into the Republican smear of “tax and spend Democrats.” Never mind the hypocrisy that Republicans spend their time out of power decrying the economy-killing, existential threat of soaring federal debt and then once back in power, spend where they please and rarely deign to pay for it. The big tax cut package congressional Republicans pushed through in 2017 is a prime example of their fiscal irresponsibility and has already failed to magically pay for itself, instead contributing to a ballooning federal deficit. When Democrats propose taxes to pay for their policy priorities, they are simply playing by rules the other side never follows.

The country urgently needs them to turn away from that tactic and toward a more radical approach to taxation that can reverse income inequality and America’s gradual drift toward plutocracy. If not, inequality will continue to hamper the economy’s growth and ensure that, even as jobs multiply and profits climb, most Americans remain on financially unstable ground. If Democrats succeed, however, we could return to a previous era where prosperity was more widely shared and the rich didn’t make off with virtually all the economic good fortune.

Without the megaphones of a few ultra-rich people drowning out the healthy din of democracy, more voices could be heard in the halls of power—which, in turn, could boost a more progressive political agenda that actually commands broad support among the public, if not among Republicans, centrist Democrats, and the wealthy donors who keep them in power. But first, we have to properly soak the rich.