Democrats have frequently called for the rich to pay more in taxes, but some in the party are becoming dissatisfied with the solutions Democrats have put forward so far, which mainly involve untangling kinks and loopholes in the existing system and general, jack-of-all-trades hikes and surcharges.
To lessen inequality and to raise new revenue to fund broad, progressive new programs, senior Democratic policymakers have been talking about novel ideas for taxing the wealth of the richest Americans. Those plans could include a comprehensive tax on capital, a broad category of wealth that includes stocks, bonds, businesses, property and other assets.
“Progressives should be focused on how to fundamentally reform how we tax capital income in this country,” said David Kamin, who served as a special assistant to President Barack Obama on economic issues.
“You really have to be looking at new and creative ways to address capital taxation, or the taxation of wealth,” said Michael Shapiro, a former economic adviser to Democratic presidential nominee Hillary Clinton. “Aggressive, bold proposals should absolutely be on the table.”
How to tax capital is one of the most important unresolved issues for the Democratic Party after its bruising defeat in November's election. Not only are there important practical and technical challenges to try to solve, there is also the broader question of whether Democrats are prepared to take a populist, antagonistic stance in an effort to answer voters' frustration with the economic elite. Some partisans have favored a more cautious and conciliatory approach to winning over those who supported Trump or stayed at home in the last election.
Taxing capital is important because while the economy has become more unequal in general, inequality of wealth is the most severe, Shapiro said.
Consider the richest American household in every 1,000, ranked simply according to how much it makes each year — the uppermost 0.1 percent of the distribution. This group now claims about 11 percent of national income, up from 3 percent of the national income a half-century ago, according to economist Thomas Piketty and his colleague Emmanuel Saez.
In other words, take all the earthly possessions of the upper middle class, the middle class, the working class, the poor and the destitute in the country and add them up. That is about how much the richest one in 1,000 households own — an extraordinary fact that former Democratic presidential candidate Sen. Bernie Sanders (Vt.) cited on the campaign trail.
These figures suggest compelling practical reasons for Democrats to talk about taxing wealth. For many on the left, inequality is a serious problem in itself, and conventional taxes on income can only go so far toward a more egalitarian economy.
Meanwhile, more centrist Democrats have proposed ambitious new social programs and public benefits, such as paid parental and family leave, assistance with tuition at public colleges and help covering the cost of child care. These programs will cost money, but moderate Democrats have shied away from proposing new taxes on the middle class or increasing federal borrowing.
The only remaining option is to increase taxes on the rich, but without innovative capital taxes, their proposals will not really get at that money, Kamin argued. While candidates such as Sanders and Clinton said they want the rich to pay more, they have not put forward a holistic plan for taxing wealth.
The current system is a hodgepodge of rules that imposes a heavier burden on some forms of capital and nothing at all on others. Different rules apply to dividends, sales of property, interest on bonds, corporate profits and gifts and bequests, and rich taxpayers have a variety of strategies for bringing down their tax bill or avoiding taxes on their wealth altogether.
The Obama administration called for closing one major loophole, which allows investors to avoid taxes on gains from their investments entirely if they hold off on selling their assets for their whole lives and pass them onto their heirs when they die. Beyond that proposal, however, other ideas Democrats have put forward would be less consequential.
During the presidential campaign, Clinton proposed a couple of broad new taxes on the rich, in part in response to concerns that those taxpayers were shirking their responsibilities. For instance, she endorsed the “Buffett rule,” named for billionaire Warren Buffett, which would require taxpayers with more than $2 million in income to pay at least 30 percent of their income in taxes, ignoring many deductions, credits, loopholes and other goodies. Clinton also would have imposed an additional 4 percent surcharge on annual incomes above $5 million.
These taxes would not have applied at all to the income from vast sums of wealth if taxpayers avoided declaring that income on their federal tax returns. The Buffett rule “may have been effective rhetorically, but it didn’t raise very much money,” Kamin said. “We need other tools.”
For instance, Kamin endorses a basic shift in the way capital gains are taxed. Currently, investors pay taxes on their gains only when they sell their assets.
As a result, investors can put off paying that tax by holding onto their assets for decades or even generations. Instead, Kamin argues, investors should pay taxes every year based on the change in the price of the securities they own.
While intuitive, a system like this one could be hard to enforce, since many securities are not publicly traded and are difficult to value as a result. Ed Kleinbard, a legal scholar at the University of Southern California, suggests instead requiring households to pay a flat fee every year in the form of a percentage of their initial investments.
Kleinbard's plan would be economically similar to the kind of tax on wealth that Piketty has famously advocated. Kleinbard also compares his proposal to those that have been adopted successfully in Nordic countries, which have often served as models for U.S. policymakers on the left.
There are differences, though. Most legal scholars agree an explicit tax on wealth — like those in Europe — would be unconstitutional in the United States. That is because of an obscure clause some argue was intended to prevent the federal government from taxing slaves in the South. The 16th Amendment, ratified in 1913, gave the government the authority to tax wealth indirectly by taxing the income from capital.
Beyond the legal issues, a more serious objection to taxes on capital is that they slow down the economy by discouraging saving and investment. Overcoming that common point of view could be a challenge for left-leaning thinkers who want a change in the way Democrats talk about the issue.
“It’s actually always been a real source of contention in the party,” said Jared Bernstein, who served as chief economist to Vice President Joe Biden.
For instance, President Bill Clinton compromised with GOP lawmakers in 1997 to bring down the maximum rate on capital gains from 28 percent to 20 percent. Bernstein dismissed that decision as “a real sop to the investor wing of the party.”
The economic argument against taxing capital is less and less persuasive, Kleinbard said, as the economy becomes more unequal and more rich Americans drawn on inherited wealth rather than the fruits of their own thrift and labor.
As of 2010, about 60 percent of all U.S. household wealth had been inherited, according to Piketty and his colleagues' rough estimate. That figure has increased from about 50 percent between from 1960 through 1990, the economists found.
“Half of all the capital invested by Americans today comes not from my labor but from my having chosen my parents wisely,” Kleinbard said. “That’s just serendipity.”
Another counterargument in favor of taxing capital is that increasingly, businesses and corporations are recording enormous profits, researchers have found. To be exact, margins beyond the cost of labor, production and financing are unusually wide.
Economists debate the reasons for this shift, but one thing is clear: Entrepreneurs with such lucrative opportunities will not pass them up just because taxes on capital are higher. They stand to come out ahead either way.
Data on how the economy is changing has encouraged Democrats to take another look at the tax system, said Shapiro, Hillary Clinton's former adviser. “We are talking about historic levels of income inequality going back to the Gilded Age,” he said. “It undermines confidence in the economic system.”
Correction: An earlier version of this item incorrectly implied that Democrats' "Better Deal" agenda did not mention taxes. The document did include references to taxes, and this version has been corrected.