In what could become the most crowded Democratic presidential field in history, candidates are trying to outbid each other on plans to tax the wealthy, a growing effort to win the support of the party’s most progressive voters who will dominate the early caucus and primary states next year.
Sen. Elizabeth Warren of Massachusetts wants to impose a 2 percent tax on the total wealth of many wealthy Americans.
Sen. Kamala Harris of California said people “making $10 million” annually need to “pay more taxes.”
Former Housing and Urban Development Secretary Julian Castro said he wants “folks at the top paying their fair share.” And Sen. Bernie Sanders of Vermont wants to levy a 77 percent tax on estates larger than $1 billion.
They are following the lead of newly elected Democratic congresswoman Alexandria Ocasio-Cortez of New York who has floated a plan to raise the top marginal income tax rate from 37 percent to 70 percent for people earning more than $10 million a year.
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The renewed call for more money from the wealthy is part of a Democratic quest to reduce income inequality in the United States and finance the costs of many of their programs, such as Medicare for all Americans, free college education, and a guaranteed annual income.
“It’s time to fundamentally transform our tax code so that we tax the wealth of the ultra-rich, not just their income,” Warren said last month. “By asking our top 75,000 households to pay their fair share, my proposal will help address runaway wealth concentration and at the same time accelerate badly needed investments in rebuilding our middle class.”
A call for higher taxes is a guaranteed crowd pleaser simply because there are more middle-class voters than rich voters. New York Mayor Bill De Blasio, who has not ruled out running for president, said last month on CNN “there’s plenty of money in this country” for health coverage for everyone, but the money is “just in the wrong hands.”
To critics, Democrats are engaged in a game of optical illusion.
They argue the U.S. income tax code – even after the 2017 tax reductions — is already progressive with families earning more than $200,000 annually in 2015 paying nearly 60 percent of federal income taxes while 66 million low-income Americans that year did not pay any federal income tax.
They say that Warren’s plan to raise $2.75 trillion during the next decade through her wealth tax does not come anywhere near the trillions of dollars needed to finance a government health insurance system and free college education.
“We don’t have enough rich people to do these things,” said Holtz-Eakin, who was a senior economic adviser to the 2008 presidential campaign of Republican John McCain. “The most generous interpretation is they can’t do math.”
“If we’re going to have a guaranteed job, free college, Medicare for all, you are going to have to — broadly speaking — tax the middle class much more,” said Holtz-Eakin, former director of the Congressional Budget Office.
And while today’s Republicans have eschewed their long-standing fears of adding to the swollen federal debt, economics analysts say the Democratic plans for new spending will push federal debt to far more than 100 percent of the gross domestic product in just a few years.
“Everybody wants to be Santa Claus,” said Howard Gleckman, an analyst at the Tax Policy Center in Washington. “Democrats want to spend the money and Republicans want to give it away through tax cuts.”
Rather than raising taxes on capital gains – which is the profit from the sale of stock and real estate – Warren wants to impose a 2 percent tax on all assets held by Americans with a net worth of more than $50 million and 3 percent tax for those whose assets exceed $1 billion.
Known as a wealth tax, Warren’s plan has been tried abroad with mixed results. Twelve members of the Organization for Economic Co-Operation and Development adopted a similar tax, but eight abandoned it because it was too difficult to determine how much wealth a person actually has.
“What happens with a wealth tax is somebody has to evaluate how much that business is worth,” Gleckman said. “That is very subjective.”
Harris has not yet outlined a specific plan to raise taxes, but in addition to extending Medicare to all Americans, she has proposed a $6,000 annual tax credit for families earning less than $100,000 a year.
Those who support higher marginal rates – which is what people pay on their annual income above the highest tax rate — point to the 1950s and 1960s. Despite a marginal rate of 91 percent, the nation’s gross domestic product expanded rapidly throughout those decades as millions of middle-class Americans bought homes, and everyday people had access to television sets, telephones, and electric appliances.
“Our strongest period of economic growth – when the economy grew rapidly in real terms but also was broadly shared – was from the World War II era until the 1970s,” said Seth Hanlon, an economist at the Center for American Progress, a progressive non-profit in Washington.
“I don’t think there is any evidence that marginal tax rates at the very top hurt growth,” Hanlon said.
He also said simply measuring the percentage of how much income tax is paid by the wealthy ignores the that middle-income Americans are burdened with state and local sales taxes, which Hanlon described as “regressive,” as well as federal Social Security and Medicare payroll taxes.
But a number of economists say there is simply no way to compare today’s economy to the thriving 1950s and 1960s.
Gleckman said the United States prospered in the 1950s because “the economies of the rest of the world were destroyed,” while Cox said the economy was boosted in the 1960s because of “baby boomers coming out of school and women coming out of the home into the labor force.”
“So the labor force grew and the economy grew,” Cox said. “Most of these workers coming into the labor force weren’t taxed at 91 percent.”