Why We Shouldn't "Tax the Rich"
Not actually; we should definitely tax the the rich, I just don't like the phrase and this post talks about why.
Ignoring my January 2020 op-ed (or perhaps specifically because of it), Democrats have adopted “tax the rich” as their new favorite catch-phrase. AOC wore it on a dress, Joe Biden based his budget around it, and anyone who wants to fund anything thinks that Jeff Bezos should personally foot the bill.
And why not? Anyone financing their own space voyage is obviously begging to be taxed. My problem isn’t with taxing rich people but with the commonly-held understanding that “tax the rich” (TTR) actually means “tax only the rich”. I believe that is both bad policy and bad politics and I’ll explain why here. [Note: When I refer to tax the rich/TTR I don’t just mean this phrase but the larger body of “those-rich a-holes-and-corporations-are-the-problem” type messaging and the sort of policy ideas that tend to accompany it.)
Why is “tax (only) the rich” bad policy?
Taxing only the rich will not raise enough money. America needs to raise a lot of revenue to fund all of the common sense things that most wealthy countries are already doing—universal childcare, healthcare, and housing; actually affordable college, green infrastructure, etc—and it cannot all come from billionaires. (It’s also not all going to come from debt but I’ll deal with you MMTers in a future post). For a rough comparison, the average OECD nation spends about 50% more on public goods than we do. In America, that would amount to about an extra $1.5 trillion per year. Can the rich pay that? Well, right now tax-the-rich-only Democrats are trying to figure out how to raise that much over 10 years and are struggling even at that. Ultimately, we’ll need a mix of broad and progressive taxes coupled with increased borrowing.
“Tax the rich” enthusiasts (TTRers) tend to focus on overly-specific loopholes that don’t amount to that much money and never actually get solved. When policymakers and advocates say tax the rich, they rarely mean “raise top income tax rates by 15 percentage points” or “equalize income and capital gains rates.” Instead, they tend to focus on solving highly specific problems like skyrocketing CEO pay or runaway profits for investment managers. Those are frustrating problems, but they are hard to target and our attempts often get flouted. Tax experts even have a name for this—“the loophole cycle” is when policymakers identify a loophole, design a policy to fix it, and then tax accountants find a new loophole to avoid the fix. And in the meantime we lose sight of the big picture, which are the public services Americans need and are not getting. Broader reforms like increasing capital gains rates would have similar distributionary effects on these irksome CEOs and investment managers, and would raise more revenue. Of course, I would support deeper reforms aimed at really closing loopholes, but that’s a massive political lift.
Bad, small-bore policy is not just incidental to the “tax the rich” messaging, it is the defining feature. TTRers say “tax the rich” but what they really seem to mean is “tax the guilty.” TTR seeks to recruit popular support for taxation by promising to shift the burden onto those who “deserve it.” For this reason, TTRers must seek out the most compelling villains for punishment and avoid any collateral damage to keep the righteous message pure (yes, this is a horrible paradigm through which to view taxation but that’s coming in a minute). Investment managers paying only paltry capital gains taxes? Get ‘em! Millionaires writing off interest on their yachts? Yar! We must tax them. The list of offenders is long, but their crimes never add up to as much revenue as promised and…oh, wait, what’s that? This beloved local business might be affected by our inheritance tax? Well we can’t have that. How about an exemption for small business? …and a new loophole is born, and on we go. Ugh.
One positive policy note on Biden’s “tax the rich” agenda: The White House deserves enormous credit for proposing a substantial increase in funding for the IRS, which has suffered from decades of horrendous cutbacks that rendered them run sufficient audit rates on wealthy individuals, or enforce tax law on sophisticated tax avoiders and large corporations. This will be a game-changer that will end substantial avoidance and boost collections. It is the exact kind of smart, simple thinking on taxes that I wish Democrats would do more often.
Having said all that, the most common and compelling response to my gripes about “tax the rich” is that my focus on the policy dimensions is wrong to begin with. After all, “tax the rich” is a messaging line. If it gets people thinking in the right direction, what’s the harm? Well, the harm in my opinion is that it gets people thinking in precisely the wrong direction.
Why is “tax (only) the rich” bad politics/messaging?
“Tax the rich” focuses on taxes instead of the things they buy. If you follow me on twitter, you know that my catchphrase is, “what matters about taxes is the things they buy.” That’s because Republicans have dominated tax the debate for decades by separating taxes from public benefits. There was once a time when Americans understood their schools and roads needed public funding. These days, I think we are suffering from a slight amnesia about why we keep running over potholes on the way to our dilapidated elementary schools. The antidote for this amnesia is a combination of desire for more/better public goods and the knowledge that taxes = better public goods. TTR gives us neither; rather, it reinforces the discussion of taxes as isolated from what they provide. Ack!
“Tax the rich” accepts the conservative premise that taxes are bad. Another part of the Republican coup on taxes was convincing us that they are economically destructive and unpopular. The notion that “everyone hates paying taxes” is not borne out by social science research (for more on this check out Vanessa Williamson’s great book Read My Lips) and of course they are not destructive but in fact essential to the foundation of modern society. By refusing to defend taxes and instead trying to reassure certain groups they won’t have to pay taxes, Democrats are adopting the conservative framing that taxes are odious and painful, and then meekly promising “but these ones won’t hurt you, personally.” This is a losing strategy. Democrats should be beating the drum about the need to support the public goods that Americans want and the ones they already have, love, and rely on.
“Tax the rich” will always look like a lie. This one’s simple: Unless you are strictly raising marginal income tax rates, it is very hard to craft tax policy that will affect only the rich. Conservatives get a hold of a few retirees worried about capital gains rates or a study showing corporate taxes trickle down into higher prices and—poof!—we’re no longer just taxing the rich. Absent that, they can just lie, and now we’ve done this whole TTR song and dance to end up in a spitting match with Republicans about who’s telling the truth. It’s the worst argument for our side and then it’s the only one we end up having. Barf.
“Tax the rich” does not identify the core problem of underfunding/austerity. The core problem we are facing is an underfunding of public goods, not an imbalanced tax code. If the problem were an imbalanced tax code then we could solve it either by raising taxes on the rich or cutting taxes for low- and middle-income people. If we did that, those folks would get back a few bucks a week and we would be even further from affordable childcare, college, good transit, and one million other things that everyone desperately needs and no one can access or afford. Of course it would be nice if people had some more money, and I am all for cash support, but in truth there is no amount of cash redistribution that could make up for the things we lose when we underfund our basic collective needs like good schools and health care. Stating this outright is essential to establishing a followable narrative on what’s gone wrong (underfunding) and what could fix it (adequate funding).
“Tax the Rich” is divisive instead of inclusive. Although some people believe the class warfare angle is essential for getting folks riled up, I don’t believe that TTR’s “us v. them” attitude is productive. In truth, public programs are good because they benefit everyone, and that’s something Americans are amply capable of understanding and appreciating. Medicare and Social Security are some of our most popular and successful programs; they benefit rich and poor alike and they are also some of the most broadly funded programs we have. Likewise, there are things like safe streets and clean air that are literally impossible to enjoy without an asserted collective effort. Personally, I think the path to more and better public goods is a greater consensus on their universal benefits and virtues, not a sharper distinction between the haves and have-nots. TTR implies “we need their money for our stuff” but in truth we all need to pitch in to accomplish things we cannot do alone.
None of this is to say I oppose populist messaging on taxes; I think a general awareness of corporate avoidance, low effective rates on wealthy people, and other signs of under-taxation of the rich would be useful components in any revenue campaign or related discussion. But I am describing a particular sort of strategy or attitude that I have observed often in my years in the policy world, premised on the belief that ensuring people that they won’t be taxed is a way to pass tax increases. It’s the kind of thing that makes Joe Biden come out and promise not to tax anyone making under $400,000 per year (which is the top 1.8 percent and makes you rich in any place in the country). And if you think this is specific, then I refer you to a great article by Joshua Mound on how populist fervor over tax avoidance resurfaces regularly but has never resulted in meaningful reform.
I’ll close by saying I don’t know exactly why we do this. Why TTR and not a more positive, compelling vision? I’ll explore in future posts I’m sure, but for now I’ll say this: My fear is that it is the result of lingering aversion to taxes and genuine public goods messaging. My hope is that it’s well-intentioned fear of doing harm to lower-income people who need every penny they can get. I think folks on the left don’t want to presume to raise taxes on lower-income folks, even if they know that small/broad tax increases could fund programs that would actually save families money and vastly improve their quality of life. If that’s the case then I get it, but I think that’s something we should get over because no one is served by paying $100 less in taxes and receiving $10,000 less in essential irreplaceable public benefits.
Ok, hope you enjoyed my first real post!
Talk soon,
Eric