The tax-cutting strategy endangers the prospect that the United States might ever build a social contract based on a promise of shared prosperity. Democrats are playing with fire in trying to reclaim tax cuts from Republicans, according to analysis by Eduardo Porter.
The Proposal and Its Appeal
Senator Chris Van Hollen and other Democratic lawmakers are embracing a policy that hardly benefits the middle class. The most prominent proposal comes in a bill from Van Hollen, a Maryland senator, which would cut taxes for Americans earning up to $80,500 ($161,000 for married couples) and fund the $1.6 trillion hole over a decade with a new surtax on Americans making more than $1 million. Middle-class Americans in the 40th to 80th percentile would save about $1,500 in taxes in 2026, paid for mainly by the top 0.1%, who would see taxes rise by an average of $1.2 million, according to the Penn-Wharton budget model. The proposal has support from Bernie Sanders, icon of the party's progressive left.
Risks of the Strategy
However, Van Hollen and his colleagues are playing with fire. The strategy endangers the prospect that the US might ever build a social contract based on shared prosperity. It furthers the case for depriving the state of resources needed to mitigate ballooning inequities. Among the 38 OECD nations, only six raise less in taxes than the US as a share of the economy. US tax revenues amount to roughly the same share of GDP as in the 1960s, but spending on social security and Medicare has grown by six points of GDP, and interest payments on federal debt by two points. Resources for everything else declined from 22% to 14.5% of GDP.
Inequality and Redistribution
Improving the progressivity of the tax schedule is not particularly effective at mitigating inequality. Mitigating inequality requires government resources to fund cash transfers or services. Economists from the World Bank and Paris School of Economics found that transfers account for 90% of the reduction in inequality, while taxes account for only 10%. The US's poor track record at mitigating inequality is largely a story of a state impoverished by half-a-century of tax cuts. Middle-class taxpayers would get an extra $1,500 a year from Van Hollen's proposal but would pay roughly that much out of pocket for health services, nearly the most in the OECD.
A Better Path Forward
This is no time for Democrats to throw in the towel. Van Hollen's tax proposal would not further defund the American state, but it would require a massive investment of political capital for not much gain. The political moment, with Trump's polling on the economy underwater by 31%, offers an opportunity for something more ambitious. American social democracy simply needs more money. Consider Sweden, where tax revenue amounts to 42% of GDP, 16 percentage points more than in the US. Sweden's poverty rate is only 8%, thanks to taxes and transfers that boost lower-income families' disposable income. Government redistribution reduces Sweden's Gini index by a third, to 0.289, while it trims inequality in the US by less than a quarter, to 0.394.
Tackling the Plutocracy
This is not a call to leave the rich alone. In the US, the very rich pay almost nothing in taxes, as they make most of their money through capital gains and rarely sell assets. They borrow against unrealized gains, rolling loans over tax-free. When they die, loopholes allow them to bequeath the pile untouched by the IRS. They must be taxed much more. Tackling that monster will require major surgery on a tax structure pared back over 50 years to let the plutocracy off the hook. For the sake of a more equitable US, Democrats should not just give the money back to everyday working families—they deserve more.
