Republicans promised to pass tax reform but instead delivered tax cuts heavily tilted to the rich and to corporations. Far from simplifying the code, this added complications, including the 20 percent rate for pass-through income. The result has been massive deficits, no sign of the economic boom President Trump promised and increased income inequality.
In response, some Democrats are proposing a wealth tax, which is politically attractive but would raise less revenue than other proposals. Natasha Sarin and Lawrence H. Summers argue that “base-broadening reforms — rolling back President Trump’s tax plan, increasing tax compliance by the rich, closing shelters, eliminating stepped-up basis and deductions for the wealthy, and broadening the estate tax base — together raise more revenue than the wealth tax [from Rep. Alexandria Ocasio-Cortez] is estimated to.” They argue, as Republicans did once upon a time, that “these measures would be desirable even if they did not raise revenue, because they would improve investment efficiency and correspond to the basic notion of fairness: If two people are similarly situated economically, one of them should not be able to pay substantially less tax because of cheating or taking advantage of quirks in the law.” The biggest argument against wealth taxes is that they don’t work all that well:
The Organization for Economic Cooperation and Development recently assessed wealth taxation and concluded that “from both an efficiency and equity perspective, there are limited arguments for having a net wealth tax.” Of the three countries with a wealth tax, two — Norway and Spain — raise an average of 0.305 percent of GDP. These taxes generate less than one-third of what the wealth tax estimates despite having a much broader base: While precise data are hard to come by, we suspect that less than 10 percent of this revenue — or 0.03 percent of GDP — comes from those in the top 0.1 percent of the wealth distribution.
If we want to raise more revenue and reduce income inequality, there is a much better approach. Former car czar Steven Rattner (as well as members of both parties over a decade or so) recommends narrowing the gap in rates between investment income (capital gains) and regular income (salaries):
At present, a beneficiary of long-term capital gains or dividends pays 23.8 percent of the profit to Washington. That’s already a good bit less than the 37 percent top rate on so-called ordinary income.
Among the justifications for taxing profits on capital at a lower rate than income from work has historically been that companies pay taxes on their profits, so taxing shareholders on their gains represents a form of double taxation.
But the 2017 tax cut legislation reduced the tax rate on corporate profits to 21 percent, from 35 percent. So if taxes on capital gains and dividends were raised by those 14 percentage points, we capitalists would be no worse off — and American companies would still be more competitive globally, the theory behind reducing the corporate tax rate.
Even Republicans used to understand the benefits of leveling the rates between capital gains and ordinary income: It was a central feature of the 1986 tax reform bill, which best embodied the idea of lowering rates and broadening the base.
Getting back to the wealth tax, Summers and Sarin argue that, if the problem is that wealthy people have too much political power, there are better ways to address the issue. (“Consideration should be given to limiting the deductibility of lobbying expenditures; restricting the ability of political organizations to have allied 50(c)(3) organizations that can receive tax-deductible contributions; and tightening the rules on donor-advised funds that enable the wealthy to get essentially all the benefits of foundations without any of the requirements to pay out resources or provide any public transparency.”)
More important, I would argue, is passing sweeping ethics reform, including some of the measures Sen. Elizabeth Warren (D-Mass.) has recommended. She has proposed redoing rules for lobbyists, one way in which the rich accumulate excessive power:
Start by fixing the Swiss cheese definition of a “lobbyist.” Require everyone who gets paid to influence government to register.
And bring lobbying out into the sunlight. Make every single meeting between a lobbyist and a public official a matter of public record. Require public disclosure of any documents that lobbyists provide to government officials. Put it all online. And if that seems overwhelming - too many meetings, too many company-drafted bills, too many love notes - think about what that means is going on in the dark recesses of our government right now.
Put a windfall tax on excessive lobbying, to ensure that when companies spend millions trying to stop the government from protecting the public, the cops on the beat get more resources to fight back. . . . We should ban Americans from getting paid to lobby for foreign governments - period. If foreign governments want to express their views, they can use their diplomats.
One more piece: End legalized lobbyist bribery by prohibiting lobbyists from writing campaign checks or giving personal gifts to anyone running for or holding federal office. Reining in corporate lobbyists will make a big difference. But there’s more.
Warren also has intriguing ideas for eliminating “corporate capture” in the regulatory process. “Enough of this garbage. Prosecute companies that knowingly mislead government agencies,” she proposes. "And stop the practice of companies paying for sham ‘studies’ designed to derail the rulemaking process. Instead, let’s force anyone who submits a study to a regulatory agency to disclose who’s paying for it and who’s editing it. If studies with financial and editorial conflicts don’t meet minimal methodological standards, throw them out before they disrupt the process."
In short, don’t use the tax code to address corruption, for which there are a raft of effective remedies.
Democrats have the chance to advance economic fairness, pursue the worthy goal of tax reform and increase revenue for worthy spending programs. They don’t have to sound like AOC to do it. They can take inspiration from the 1986 Reagan tax bill.