My parents’ generation believed that “a rising tide lifts all boats,” a clever metaphor for the idea that everyone’s economic situation will improve when times are good. It’s the kind of statement baby boomers repeat, ad nauseam. And it’s the kind of quaint notion that provokes an eye roll from millennials.
Sorry, boomer, the young’uns simply aren’t buying it. People under the age of 30 equate trickle-down economics with membership in the Flat Earth Society. They eschew the feel-good slogans of yesteryear. They prefer objective data points — like the data provided by Thomas Piketty and Gabriel Zucman that suggest the rising tide has mostly lifted yachts.
The generational schism is evident in the emerging debate about taxing accrued wealth. Compared with income, wealth is even more highly concentrated among the top 1 percent of the population. The gaps between rich and poor have always existed, but they are growing larger. Apart from redistributive taxing and spending policies, there aren’t many tools available to address the problem. While our tax code is progressive when you focus on marginal rates on ordinary income, it’s regressive when you focus on wealth and the ability to convey it forward. For example, a large share of accrued family wealth escapes income taxation because of the stepped-up basis for capital assets at death. As a group, boomers tend to be fine with that outcome. They’re the generation that gutted the estate tax.
There’s a major challenge facing these trendy proposals for a federal wealth tax. The U.S. Constitution requires that direct taxes be apportioned among the states — language that is there because of the antebellum slave economy. The framers weren’t thinking about income taxation when they included the apportionment requirement; back then, the federal government was largely funded by tariffs and excise taxes. More than a century later, in the 1890s, the Supreme Court held that an embryonic version of the federal income tax was unconstitutional because it amounted to an unapportioned direct tax. It took the 16th Amendment, ratified in 1913, to overcome that hurdle.
The proposed wealth tax sure sounds like a direct tax, although opinions vary on the issue. Frankly, the whole exercise of distinguishing between direct and indirect taxes strikes me as wildly archaic in the 21st century. (It is worth noting here that the distinction in the Constitution is not unique; WTO trade rules on export incentives also distinguish between direct and indirect taxes.)
What can lawmakers do if they want to tax wealth, but they can’t enact a wealth tax? They find reasonable proxies for accrued wealth and target them via the federal income tax. Despite its progressive rate structure, the income tax doesn’t really do this. The tax code is littered with provisions that primarily benefit the superrich. If it truly wanted to, Congress could limit or repeal those provisions in lieu of adopting a wealth tax. That would be much easier than crafting an entirely new tax regime and tasking the underfunded IRS with enforcing it.
I half suspect this is what presidential candidates Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., truly have in mind when they repeatedly tout elaborate new methods for taxing wealth. Their proposals make efforts to snip away at tax breaks for the rich seem more palatable, like a compromise position. By veering sharply left, Warren and Sanders are redefining what counts as centrist thinking. It’s a familiar tactic — page 1 in the Roger Ailes playbook — that has worked brilliantly for conservatives for 25 years.
Turning to the generous itemized deductions that favor the rich, let’s consider the treatment of charitable donations. Should you ever wish to test how serious someone is about taxing the most affluent members of our society, ask them how they’d feel about a tax bill that sets a strict ceiling on deductions for charitable donations. Their will to target the rich may suddenly be lacking.
There’s an abundance of demographic data on charitable giving. When proportional giving is tracked against income levels, the result is an odd U-shaped curve. The very poor often donate a large share of their limited funds, usually to religious institutions. Giving rates decrease as people approach middle-income status, rise sharply for the wealthy, and skyrocket for the superrich.
But charitable giving doesn’t always translate into a tax write-off. Poorer households rarely itemize; they typically claim the standard deduction and miss out on the tax benefit for charitable giving. If you tracked only those donations that result in a tax deduction, the U-shaped curve would disappear and be replaced by a steep upward slope. While technically available to everyone, the tax benefits of the charitable deduction are highly concentrated among the superrich — the same group that feels threatened by a wealth tax.
If you’re a liberal progressive who favors taxing accrued wealth, but you are leery of the constitutional obstacles facing a wealth tax, you might regard a stingy cap on charitable deductions as the next best thing. There’s even a handy model for this approach in the limitation on the deduction for state and local taxes that came into effect with President Trump’s signature tax reform package in 2017.
Notably, the SALT cap is intensely unpopular among a large part of the country. I don’t like it much myself. A charitable cap would be similarly unpopular, but for different reasons. It isn’t the pool of potential donors who are likely to protest — rather, it’s the donees. Their charitable business model (if that’s not an oxymoron) depends on the deduction. Cultural institutions like opera companies and art museums depend on private donations to stay afloat. Where would PBS be without the charitable deduction as an inducement for donors? Tote bags only go so far.
Most of us agree that the charitable deduction accomplishes a significant social good. It promotes philanthropy and functions as an efficient substitute for direct public grants. Effectively, the charitable deduction is an indirect public grant. It’s a tax expenditure rather than a payment, but the results are economically equivalent subsidies for charitable institutions.
Occasionally, we hear about proposals to modify the charitable donation by imposing a floor, rather than a ceiling. The concept is that the deduction would go away for all but the largest donations. Indeed, this would raise revenue for the government, but it would also skew the benefits of the deduction even more toward the superrich than they already are. That would be good for large-scale philanthropy while worsening income inequality. Sorry, millennials, you can’t have it both ways. Go ahead and tax accrued wealth, but recognize that institutions like NPR will suffer as a result.
Tax policy is at its most compelling when it provokes intellectual squirming among our colleagues — the goal is never to offend, but to challenge premature conclusions. The next time you hear someone advocating using the tax code to attack income inequality, ask if they’d be willing to throw private philanthropy under bus in order to get there. Who knows, a wealth tax might be worth the collateral damage — but we shouldn’t pretend the two things aren’t intertwined.