Democrats have never been known for party unity. As the humorist Will Rogers famously remarked in the 1930s, “I am not a member of any organized political party — I am a Democrat.”
Things haven’t changed much since Rogers left the stage. During last month’s pair of unwieldy candidate debates, Democrats running for president aired numerous differences, including a few about tax. Almost all the candidates would repeal the Trump tax cuts, at least in part. But they disagree about which parts. And when it came to more creative tax proposals, they were all over the map.
Amid the conflict, however, it’s possible to discern the outlines of a consensus. As a party, Democrats have been steadily moving inequality to the center of most tax debates. And while some of the current candidates embrace the incrementalism common to the Clinton and Obama administrations, others have charted a bolder course. Indeed, if someone like Sen. Elizabeth Warren of Massachusetts or Sen. Bernie Sanders, I-Vt., ends up in the White House, tax policy might become an instrument of wide-ranging, structural economic reform.
New Economic Paradigm
Anyone seeking a roadmap to the new Democratic tax consensus might start with the “Beyond Neoliberalism” symposium, available in the current issue of Democracy: A Journal of Ideas. In her introductory essay, Heather Boushey, executive director and chief economist at the Washington Center for Equitable Growth, lays out the new economic paradigm animating progressives in the age of Trump. Central to that paradigm is a new focus on inequality — its growth, its pernicious effects, and its remedies.
“Putting inequality at the core of the analysis pushes forward questions about whether the market performs the same for everyone — rich and poor, with economic power or without — and what that means for how the economy functions,” Boushey writes. Taken together, those questions upend our most basic understanding of how the economy works. They also lead to the inescapable conclusion that “higher inequality increases the likelihood of instability in the financial system,” she contends.
To be fair, the focus on inequality isn’t new: It’s been percolating in academia for decades. Even in the prosaic world of policy experts, it’s been front and center since the early 2000s. (Prior analysis: Tax Notes, Sept. 4, 2006, p. 871.)
Recently, however, Democratic politicians have started to give inequality actual, real-world attention — or at least a place in their campaign platforms. To be fair, Barack Obama spoke frequently about the perils of inequality, sometimes with real eloquence. And some of his tax proposals were clearly designed to ameliorate the problem. But the current crop of presidential candidates have offered more ambitious tax remedies, including new wealth taxes and a range of estate tax changes.
Implications for Tax Policy
The most important outgrowth of the new economic paradigm, however, probably isn’t Warren-style tax innovation, but a generalized commitment to a much-expanded federal state. “The United States should be investing more, not less, in children, infrastructure, and public health,” Boushey writes in another article, “Taxing for Equitable Growth.”
“On top of these needs, we must maintain and improve the social insurance and safety net programs that help ensure a secure retirement and offer protection against ill health, employment disruptions, and poverty — including by insuring workers against the loss of earnings when they need to care for a loved one,” Boushey says.
Spending on all those needs would require a lot of revenue to balance the books. And when it comes to raising revenue, the paradigm-influenced Democrats are laser-focused on the rich. “Reform should also be progressive, raising these additional revenues from relatively more fortunate families, those whose incomes have grown more rapidly than the average in recent decades, and offering targeted benefits to low-income families, such as an expanded Earned Income Tax Credit and a fully refundable child credit,” Boushey writes.
Boushey endorses the elimination of preferential tax treatment for capital income relative to labor income. Under that rubric, she calls for the elimination of rate preferences for capital gains, coupled with one of three new approaches: mark-to-market taxation of investment income, deferral charges to offset the value of deferred taxes, or an annual wealth tax.
Boushey ends her specific suggestions with various reforms to business taxation, all designed to better equalize the treatment of different kinds of business entities. She calls for the elimination of the new section 199A business income passthrough deduction, insisting that “it simply lacks any compelling justification.” She would also eliminate the deductibility of business interest payments and replace it with a deduction for new investment. “This change would largely eliminate the tax preference for debt-financed over equity-financed investment at the business level and put an end to the negative tax rates that currently exist for certain types of debt-financed investment,” she contends.
Notably, Boushey calls for a carbon tax, framed as part of a broader emphasis on “corrective taxes.” The carbon tax also makes an appearance in “Raise My Taxes!”, an article by Facebook co-founder Chris Hughes that appears in the “Beyond Neoliberalism” symposium. Hughes, who now serves as a senior adviser at the Roosevelt Institute and a co-chair of the Economic Security Project, describes a carbon tax as one of several fiscal innovations with “merit.”
But neither Boushey nor Hughes explains how they might square their commitment to tax progressivity with their support for a carbon tax. The problem isn’t impossible to solve; as Eric Toder, co-director of the Urban-Brookings Tax Policy Center, has pointed out, the distributional impact of a carbon tax depends on how you spend the resulting revenue. Still, the question deserves attention from Boushey and Hughes, if only because a carbon tax regime would be regressive until it’s deliberately made progressive.
What’s Really Missing
Perhaps the most important aspect of the new tax program is something it lacks: a VAT. As noted above, the paradigm underscores the need for a much larger federal state. But when building that sort of state, other nations have relied heavily on VATs to make ends meet. America’s new progressives seem to think they can get by without one.
It’s possible that the progressives don’t believe new revenue is necessary for new spending, or at least not for all of it. Maybe the bills don’t really need to be paid. (To be fair, that seems to have been the principle guiding tax reduction in recent decades, so why not spending, too?)
I suspect that financial markets will someday put an end to that sort of wishful thinking, but it could be a while — maybe a long while. In the shorter term, however, public opinion may also prove to be a constraint.
There’s a lot of cheap commentary in the world about how “deficits don’t matter,” not only as a matter of economics, but also as a question of politics. A lot of that commentary is wrong, or at least oversimplified. (Prior analysis: Tax Notes, Feb. 19, 2018, p. 998.) In many surveys, deficits rank low on the list of voter priorities. But low doesn’t mean no interest, and in many surveys, roughly half of respondents say deficits are a big problem. In other words, deficits may rank low when compared with other voter concerns, but they rank higher when voters are asked what issues are important in absolute terms.
Indeed, the political importance of deficit spending is manifest in an earlier issue of Democracy. The editors report on a new poll commissioned by the journal in early 2019. The survey began with a crucial question: “We asked people what they thought the ‘biggest economic problem’ facing the country is and gave them four choices: the national debt and deficit, inequality, wage stagnation, and slow growth.”
The answers were revealing: Fifty-two percent named the debt and deficits as the country’s most pressing economic issue. The other three issues lagged significantly. Inequality came in second at 24.7 percent, wage stagnation third at 19.6 percent, and slow growth fourth at 3.7 percent.
Apparently, deficits matter.
Rise of Fiscal Hypocrisy
Progressives like Hughes tend to argue that deficit fearmongering, typically framed as “fiscal responsibility,” is a false narrative, concocted by Republicans in the 1980s to help stymie the growth of the welfare state. And such arguments aren’t entirely wrong. But fiscal responsibility isn’t an invention of the Reagan era as Hughes contends: It’s been a rallying cry for nearly the entire sweep of American history. Even the Keynesian revolution didn’t slay the budget-balancing beast; fiscal hawks remained a force in both parties throughout the post-World War II era.
That’s not to say that fiscal responsibility arguments haven’t been especially powerful in the decades since Ronald Reagan took office. But part of the reason they have proven so effective is that they weren’t a modern, hyperpartisan invention. They were rooted in much older, bipartisan concerns about deficit spending.
What changed after Reagan was a bifurcation in the fiscal responsibility argument. Budget hawks, especially in the Republican Party, continued to call for lower spending. But they were more than happy to cut taxes without offsetting spending reductions. Tax cuts have been given a special dispensation in calls for fiscal restraint.
Taking Taxes Seriously
Hughes argues passionately (and convincingly) that Democrats must rescue taxes from their political purgatory. He exaggerates, at least by implication, how much taxes were historically more popular than they are today. But as a matter of political strategy, he’s right to insist that progressives stop hiding from the issue. “We need to begin the work of championing government as a force for good, and there is no better issue to reset the paradigm than the role of tax policy,” he writes.
But Hughes doesn’t go far enough. The best way to rehabilitate the tax state is to make it an explicit element of the spending state. As much as possible, new programs should be designed with tax elements highlighted. This isn’t an argument for changing every tax into a user fee, but for making taxes a bedrock element of new spending programs. Taxes might be the price of civilization, but they are also the price of specific spending programs.
Linking taxes to spending can be dangerous; everyone likes new benefits, but few people like new taxes. Linking the two might reduce support for new programs.
But the linkage can be helpful to champions of a larger federal state. Consider the vital lesson embedded in the history of the Social Security program. Franklin D. Roosevelt understood that the key to making Social Security permanent was to link it to a particular tax. “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits,” he insisted. “With those taxes in there, no damn politician can ever scrap my social security program.” (Prior coverage: Tax Notes, Sept. 21, 2009, p. 1175.)
As a new generation of progressive political leaders tries to build on FDR’s legacy, they should take a lesson from their patron: Taxes might have the power to destroy, but when it comes to building a larger federal state, they also have the power to protect.