Brian Riedl
The Democratic party has been tearing itself to pieces debating whether its latest reconciliation bill should spend $3.5 trillion or $2 trillion or even $1.5 trillion. Less noticed, but perhaps more important, has been the quiet death of the progressives’ bold “tax the rich” utopia.
For years, socialists and progressives such as Bernie Sanders and Elizabeth Warren have enticed voters with free-lunch promises of a European social democracy financed mostly by new taxes on millionaires and large corporations. Now that Democrats have full control of the White House, House, and Senate, they can no longer blame Republicans for blocking these taxes. Instead, basic politics and simple arithmetic won out.Don’t Buy Rustic Furniture before Peeking Inside.AdLiving Spaces
Joe Biden was elected president while promising to add $11 trillion in new spending and $4 trillion in corporate and upper-income taxes over the decade. Now it appears Democrats will be fortunate to squeeze out more than $1 trillion in new taxes.
Despite Biden’s complaint about how his agenda has been held up by “two members of the Senate who vote more with my Republican friends,” the Democratic opposition doesn’t end with Joe Manchin and Kyrsten Sinema. Numerous other powerful Democratic lawmakers have quietly whittled down the tax package while letting those other two take the heat. Nor can this opposition be dismissed as purchased with corporate campaign donations. Bernie Sanders and Alexandria Ocasio-Cortez have shown that left-wing, anti-corporate views can also raise enormous sums of money, and besides, unpopular “pro-corporate” policy views require extra fundraising for ads to repair the reputations of lawmakers who play ball.
Instead, these tax-the-rich proposals collapsed because many of them proved to be unworkable, unwise, or (in certain states and Congressional districts) unpopular. It is economic malpractice to propose a new global tax system that applies a 15 percent minimum tax rate for multinational companies across the OECD—and a 21 percent minimum tax rate for American multinationals. Many Democrats also balked at restoring the highest corporate tax rate in the developed world. Farm-state Democrats were never going to support pairing the existing estate tax with a new capital gains tax on assets passed down at death. And without that policy, President Biden’s proposed steep capital gains tax rate increases become easier to evade and thus will raise little revenue. Finally, giving the IRS additional information on Americans’ bank accounts was never going to fly in swing districts.
Much like many bold conservative spending cut proposals, many of the progressive tax proposals excite their supporters on social media, and at think tanks and conferences, but ultimately were not ready for primetime when exposed to real national scrutiny. Rather than create new progressive tax structures from scratch, Democrats may end up merely turning a few tax rate dials—raising the corporate, capital gains, and top-income tax rates upwards a few percentage points. Adding in some modest IRS tax enforcement funding, pass-through business tax increases, and smaller tax proposals will bring the total to between $1 and $1.5 trillion. And much of that revenue could be canceled out by giving a $600 billion tax cut to upper-income families via a repeal of the $10,000 cap on state and local tax (SALT) deductions.
This presents a math problem for progressives. The Congressional Budget Office (CBO) baseline shows deficits of $12 trillion over the decade (and a staggering $112 trillion over three decades). On top of that, Democrats are proposing roughly $6 trillion in new spending across various bills. Overall, Biden has proposed $11 trillion in new spending over the next decade, while Elizabeth Warren proposed $40 trillion, and Bernie Sanders proposed $97 trillion. None of this is remotely plausible if a full Democratic government cannot enact even $2 trillion in tax-the-rich policies.
The progressive math problem would still apply in a government filled with Bernie Sanders’ acolytes. The numbers simply do not add up. Even seizing all $4 trillion owned by American billionaires would fund the federal government one-time for just eight months while slamming every 401(k), as most of this wealth is stored in the stock market. Annually seizing 100 percent of all household income earned over $1 million would not even balance the budget, and Alexandria Ocasio-Cortez’ proposed 70 percent income tax bracket would finance 1.2 days of federal spending.
In fact, let’s add up all the common progressive tax proposals. Repeal the 2017 tax cuts, create 70 and 50 percent income-tax brackets, and cap the value of tax deductions. Raise capital-gains tax rates, apply them annually on paper gains and also at death. Apply Social Security taxes on all wages. Impose President Biden’s corporate tax increases, as well as Elizabeth Warren’s “real corporate profits” tax, and tax financial transactions (such as stock trades) and financial institutions. Finally, impose a carbon tax, Bernie Sanders’ 8 percent wealth tax, and his 77 percent estate tax. Layer all of these taxes on top of each other without regard to policy interactions, economic effects, or combined tax rates exceeding 100 percent. All of these taxes would raise approximately $13 trillion over the decade (or 4.5 percent of GDP), according to CBO and other mainstream public tax scores. Barely enough to balance the budget for the next decade, and then fall back into deficit thereafter. Certainly not enough to bring European social democracy over here. If America wants to copy European spending, it must also copy European taxes, and that means slamming the middle class with value-added taxes of around 20 percent, and drastically higher income and payroll taxes.
This math problem begets a political problem: Americans support progressive policies only if the new taxes to pay for them are limited to the wealthy. A 2019 Harris poll revealed that half of Democrats would oppose steep taxes on multi-millionaires if they were among the wealthy themselves. More broadly, polls have long shown that less than half (and sometimes far less) of Americans are willing to pay much higher taxes, even for more government services.
On climate, just 30 percent of Americans support spending trillions on the Green New Deal, surely due to the fear of new taxes. Multiple surveys show that most Americans are unwilling to pay even $2 per month in new taxes or utility costs as part of a climate agenda (and only a quarter of Americans would pay $10 per month). Support for Medicare-For-All falls when respondents are reminded that it would require new taxes (and no, there is no tax mechanism that would guarantee that families’ new taxes do not exceed what they had been paying in health premiums).
This tax resistance spans the political spectrum. A poll conducted by Vox and Morning Consult revealed that two-thirds of Bernie Sanders supporters would not be willing to accept more than $1,000 in new taxes to ensure universal health coverage or free public-college tuition. Even the progressive coalition of upper-income coastal professionals (buried in mortgage, property-tax, and child-care costs) and young urban hipsters (buried in student loans and high rent) would struggle with the new taxes necessary to finance the revolution.
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In other words, it’s all a bluff. Democrats will surely be able to dial upward a few upper-income tax rates. Yet even a government controlled by Democrats cannot pass most of the half-baked progressive tax proposals. And passing them all would still leave revenues far short of progressive spending promises, not to mention the escalating baseline deficits. That leaves European-style middle-class taxes, which even progressives won’t accept.
Progressives may find it easy to scapegoat Republicans, weak-kneed Democrats, and corporate campaign contributions. But ultimately, their dreams were defeated by the laws of math.