Redistributive Tax Policy Is Not Actually “Radical”

Lately, I’ve consistently heard critics argue that Democratic presidential candidates are suggesting “radical” economic policies and redistributive schema. That isn’t really a fair take. The plans that several campaigns have floated (think Sens. Elizabeth Warren and Bernie Sanders’ respective wealth taxes) are instead efforts to undo the extreme wealth redistribution upward that has taken grip in the United States over the past 40 years. Defending the status quo — or making inequality worse, as the Trump administration’s policies have done — is actually the radical position.

According to the nonpartisan think tank the Institute on Taxation and Economic Policy, both income and wealth inequality are at apogee. The think tank cites estimates from Stanford University economists Emmanuel Saez and Gabriel Zucman, which report that the top 1% of Americans hold a fifth of total income in the United States and 42% of total wealth. Saez and Zucman also found that the share of wealth held by the very wealthiest 0.1% — a group of just 160,700 families who all had net worth exceeding $20 million in 2012 — tripled from 7% in 1978 to 22% in 2012. By 2012, the wealthiest 0.1% held nearly as much wealth as the bottom 90%, who owned 22.8% of the total.

Some of the causes of today’s inequality (globalization, skill-biased technological change) stem largely from market forces. Others (rent-seeking, asymmetric bargaining power between workers and firms) result from market distortions. However, just as markets began delivering more inequitable outcomes in before-tax incomes and transfers, policymakers simultaneously relaxed the federal tax code, propagating the Ronald Reagan-era myth that the benefits of lower taxes on the wealthy would “trickle down” to the middle and working classes. Indeed, in the past 40 or so years, the top marginal tax rate was lowered from 70% under Jimmy Carter to 28% under Reagan; it went up to 39.6% under Bill Clinton and down to 35% under George W. Bush and has essentially stagnated since.

More often than not, even in the face of market-driven increases in inequality, tax policy has helped the rich at the expense of everyone else. It’s worth keeping the numbers in mind when you hear commentators and critics call Democratic redistributive plans “radical.” They are really just the tip of the iceberg when it comes to measures we must enact if we are to resolve the ways in which elected officials have failed working people.

The coming Democratic primary will be a good time to figure out which specific ideas make sense and which don’t. So far, the agenda looks pretty reasonable. Warren has a plan to increase workers’ bargaining power within corporations by requiring at least 40% of corporate board members to be elected by employees. Sen. Cory Booker has floated a “baby bond” program to reduce the racial wealth gap. Sanders, together with Minority Leader Sen. Chuck Schumer, has called for a policy to limit corporate stock buybacks.

 Most importantly, perhaps, there is the wealth tax. Firstly, it is important to note the difference between income and wealth taxes. An income tax is defined as a tax levied on a person’s annual earnings; in contrast, a wealth tax is imposed on the market value of the assets owned by an individual. While income taxes can and should take a progressive structure, it is argued by many that a wealth tax would be a much more fined-tuned tool with which to combat economic inequality. (Recall that inequality of wealth is far greater in the United States than inequality of income). Warren has proposed to tax wealth above $50 million at a 2% rate and wealth above $1 billion at a 3% rate; the plan from Sanders would impose somewhat higher rates on the super-rich, reaching a rate of 8% for wealth over $10 billion.

The wealth tax is a prime example of a policy that is far less radical than their opponents claim. You know who already pays a wealth tax? Middle-class Americans, who every year pay a percentage of the value of their home (the biggest asset most families own) in property taxes. If middle-income Americans can pay a yearly tax on their main source of wealth, then the top 1% obviously can too. It’s not radical. It’s called fairness.

Critics have argued that a wealth tax would raise much less revenue than expected due to tax evasion, loopholes or international tax competition. But as Saez and Zucman point out in a New York Times editorial entitled “How to Tax Our Way Back to Justice,” the fault is not in our stars, but in ourselves, and that if the right policy choices are made, the taxation of capital and globalization are perfectly compatible. 

“The good news is that we can fix tax injustice, right now,” they wrote. “There is nothing inherent in modern technology or globalization that destroys our ability to institute a highly progressive tax system. We can countenance a sprawling industry that helps the affluent dodge taxation, or we can choose to regulate it. We can let multinationals pick the country where they declare their profits, or we can pick for them. We can tolerate financial opacity and the countless possibilities for tax evasion that come with it, or we can choose to measure, record and tax wealth.”

Are these ideas for greater economic justice feasible politically? It is easy to be discouraged — money in politics and self-serving ideologies are a hell of a drug. But the good news is that some political leaders have recognized that the current level of economic inequity is, in part, due to policy choices their predecessors have made, and also that they have the power to make different ones. The United States as we would like to know it — optimistic, future-oriented, progressive, a leader in global affairs — cannot survive the stagnation of collective economic security. over many decades.