Opinion | Why It’s So Hard To Tax the Rich
In the last few weeks, the Democrats have veered from one tax-the-rich plan to another. First there was President Joe Biden’s suggestion to increase capital gains taxes for heirs, which disappeared over the summer. Sen. Ron Wyden’s (D-Ore.) Billionaires Income Tax made it as far as a plan, but seems to have died the day it was born. The latest version is a surtax on millionaires, but it could easily meet the same fate as its predecessors by the time the deal is done.
Why is it so hard to tax the rich? After all, the idea behind progressive taxation is simple, even beautiful: Let the engine of capitalism roar and then have the winners compensate the losers. By taking care of those who lose out in the free-market melee, the winners ensure the losers won’t want to destroy the system. What’s more, taxing the wealthy is popular, with a majority of Americans telling pollsters that they think the wealthy don’t pay their fair share. And economists have endorsed it, pointing out that the wealthy have benefited disproportionately from the economic growth of the last several decades, that taxes on the wealthy prevent unproductive dynasties from forming, and that the things those tax revenues are spent on, from child care to clean energy, can benefit the economy.
And yet Democrats can’t find a way. They’re not alone — in fact no country has yet managed to get enough money out of progressive taxation to fund a comprehensive system of social programs. European countries with generous social programs fund them by making everyone pay, not just the rich. As a result, in those countries social programs don’t feel like charity or redistribution, but rather like insurance — something everyone pays for, and which everyone can access in times of need as a matter of right.
The United States has always rejected this broad-based approach to taxation, insisting on progressive taxation instead. On multiple occasions it has even been the American left, which in theory supports a more robust social system, that has undermined creating the European-style tax base needed to fund it. We do have a few programs that work on the insurance principle, like Social Security and Medicare, and it’s not a coincidence that those are our most resilient programs. But the talk lately has been of redistribution rather than insurance because it’s hard not to think that the wealthy, who have benefited so spectacularly over the last several decades, ought to shoulder more of the tax burden (and indeed, the European wealthy should too).
Examining the history of taxing the rich shows why it’s hard, even when there is a compelling economic and moral argument for doing so.
Taxes on the rich increased dramatically during the First and Second World Wars, but other than global catastrophes with mass casualties, nothing seems to produce the desperation that leads to broad, bipartisan consensus on raising taxes on the rich. Indeed, even a global catastrophe with mass casualties can’t always do it, as the pandemic has shown, because low interest rates have made it easier for the government to borrow instead.
Thus, since the Second World War, the top marginal income tax rate for individuals has declined steeply, as Democrats came around to the position that cutting taxes for the wealthy stimulates the economy (under John F. Kennedy) and then Republicans came around to the position that deficits are not a big problem (under George. W. Bush, and because of Ronald Reagan). Even if you account for all of the loopholes in the 1950s tax code, the effective tax rate for the top 1 percent — that is, the taxes they actually pay — is considerably lower now than it was at mid-century. In fact, in 2018, one study found that the top 400 billionaires were, for the first time in history, actually paying a lower tax rate than the bottom 50 percent of families.
A few recent U.S. presidents have successfully raised taxes on the rich, but those efforts didn’t pay off politically. Under Bill Clinton’s administration the top marginal tax rate rose very slightly in 1993, but it did not help Clinton in the 1994 midterms. Under Barack Obama tax rates for the wealthy went up in 2013 — and then the 2014 midterm elections produced the largest gains for Republicans in the Senate since the 1980s, and in the House since the 1930s. The midterm defeats were not caused by the tax increases, but increasing taxes on the rich didn’t help either Clinton or Obama. Although polls always show majorities favorable to taxing the rich, people don’t seem to vote based on that issue.
The awareness that taxing the rich doesn’t gain votes must be part of what makes moderate Democrats cautious. And because the rich can pay people to figure out how to legally violate the spirit of the law — an old standby is to find ways to turn income into things that don’t get taxed as highly, like capital gains, and a newer trick is to borrow against your assets so you don’t have to sell them and incur taxes at all — it takes a complex administrative machinery to stay ahead of them. Wyden’s wealth tax plan, which received support from over a hundred organizations, would have run into questions about whether it violated the constitutional requirement that direct taxes be proportional to a state's population. It would also have required new procedures for valuing people’s wealth. It’s difficult to value assets as it is; you can guess how much a painting is worth but how do you really know until you try to sell it? And valuing those assets in the middle of an adversarial exchange between government and taxpayer is even harder, which may be why most of the countries that have attempted wealth taxation have ended it. It’s not impossible, and nothing says we have to restrict ourselves to what has happened in the past. But it is a big push on an issue on which notional support in polls does not translate into electoral support.
In the absence of desperate need or strong political support, is there any way to tax the rich? Raising capital gains taxes remains an appealing option. Getting rid of the home mortgage interest deduction is another.
And as it happens, there is one option that would not require any complex new administrative procedures, and that has actually been tried recently, and has been shown to work — but it’s Democrats who are standing in the way.
Other than Clinton and Obama, the other president who successfully raised taxes on the rich was Donald Trump. His tax cut of 2017, which was mostly a giveaway to the wealthy, included one provision that actually raised their taxes instead — the cap on deductions for state and local taxes, or SALT. This is a deduction that, all analysts agree, is shockingly regressive. It benefits only 9 percent of taxpayers, and most of the benefits go to the wealthy. As scholars have argued, it underpins systemic racism. It essentially forces the less wealthy to subsidize the local public services the rich purchase through higher state and local taxes. By putting a cap on it, Trump and the Republican Congress actually raised taxes for the wealthy. (They also put a limit on the home mortgage interest deduction, which also amounts to raising taxes on the wealthy, but because they raised the standard deduction the end result was to make the mortgage deduction even more regressive.)
Republicans have wanted to get rid of SALT for a long time, as it benefits the wealthy in blue states the most. These are the states where state and local taxes are the highest. As political maneuvering it’s brilliant, because it forces Democrats into a position of deciding between their principles of taxing the rich and their political wishes to protect their constituents.
In that battle, principles aren’t standing much of a chance. Senate Majority Leader Chuck Schumer and a coalition of Democrats from blue states have even argued for repealing Trump’s cap, even though the benefits of that repeal would go almost entirely to the richest quintile, and even though that would be an even bigger giveaway to the wealthy than Trump’s entire tax cut.
It’s Joe Manchin and Krysten Sinema who have drawn the ire of progressives. But Schumer and allies have been so devastatingly and quietly effective that somehow there is not much complaint that they have been lobbying for what amounts to a tax cut for rich Democrats. Indeed, they have been so invisibly effective that completely getting rid of the deduction is not on the table, despite the fact that even with the cap the deduction benefits the wealthy the most. Perhaps the easiest and simplest way of raising taxes on the rich — by getting rid of this deduction — is not even being proposed.
Why has it been so hard for Democrats to find a way to tax the rich? Because those rich people live in the blue states.
