It is hard to think of any facet of American life that Democrats don’t want to spend more money on: child care, health care, housing, higher education … I won’t belabor it; you’ve listened to the speeches, too.
So, in recent years, the conversation has focused on more exotic plans to tax rich people’s total wealth, or their unrealized capital gains (accumulated gains in assets that haven’t been sold yet). The United States has historically taxed most of those gains only upon the assets’ sale. President Joe Biden’s administration has put forth a plan to institute a 25 percent minimum tax on people who have $100 million in assets, including their unrealized capital gains, and last week, Vice President Kamala Harris’s campaign said she is adopting that plan.
The good news is that Harris understands she needs to raise more revenue. Our national debt now stands at 99 percent of gross domestic product, and this year’s budget deficit is projected to be 7 percent of GDP, almost $2 trillion. Those numbers are of course projected to rise as more baby boomers retire and start tapping Social Security and Medicare. So unless politicians find some spending they’re willing to cut (other than the 0.3 percent of GDP we spent on foreign aid last year), we’re going to need to hike taxes on the rich significantly to put our national books in some sort of order. And the rich can spare the money more easily than the middle class.
The bad news is that Harris, like Biden, has pledged not to raise taxes on people making less than $400,000 a year. That is simply not enough to fund our existing commitments and an expansive Democratic agenda.
Though this limitation probably seems quite reasonable to six-figure couples in expensive metropolitan areas, earning $400,000 puts you in the top 3 percent of all households. Yes, that group earns a disproportionate share of national income: the top 5 percent of taxpayers take home 42 percent of total adjusted gross income. (Sorry, I was unable to find data that broke out the top 3 percent.) But they also pay two-thirds of all income taxes, with almost half coming from the top 1 percent.
With an average effective tax rate of 25.9 percent, the 1 percent still have money to spare to help balance our books. But the pledge not to raise taxes on anyone making below $400,000 makes it harder to get at that money, because you can’t close tax loopholes that hit anyone below that cutoff, and you can’t raise marginal rates on their first $400,000 of earnings — which is a significant chunk of the income of many people in the 1 percent.
The cascading strictures introduced by the pledge are perhaps why Democrats are being forced into desperation moves such as taxing unrealized capital gains. These taxes have a lot of problems: They distort investment decisions, as wealth shifts toward hard-to-value assets such as art and privately held companies; they could impede capital formation; and they are an administrative nightmare for an IRS that doesn’t currently have the expertise to figure out exactly how much your mansion appreciated last year. Worst of all, these taxes don’t even raise that much money: $500 billion over 10 years, according to the Peter G. Peterson Foundation. Moreover, some of that simply reflects tax payments shifted forward, rather than a long-term revenue increase, since taxing gains now lessens the taxes paid when the assets are sold.
There is a reason Europe’s more generous welfare states don’t try to fund their spending by taxing a tiny handful of extremely rich people. According to the Progressive Policy Institute, “the United States actually imposes slightly higher taxes on the incomes of households in the top 1% of the income distribution than most European countries do.” The Europeans would also love to shift more of that burden to the wealthy, but experiments with things such as wealth taxes have largely failed, and their governments have clearly concluded that big welfare states can be funded only with a big, broad tax base that includes the middle class.
I’m not terminally naive, and I don’t expect a politician in a tight campaign to announce middle-class tax hikes on the stump. But Democratic voters should understand that they can’t have the social spending they want without steep tax increases on the middle class. And Democratic politicians should understand that with the government’s borrowing costs rising, they can’t simply keep ignoring our deficits, and promising lavish new spending programs, while also promising that all of it will be paid for by someone else. Or rather, they can keep making those promises — but they can’t keep them.
