To their credit, many congressional Democrats, both the new class and the veterans, recognize the need for more tax revenue. Though they almost surely won’t be able to legislate revenue-raising measures amid a divided (and partially shut) government, now is an excellent time to start thinking through the best ways to raise revenue most fairly and efficiently.
The motivation is clear. First, thanks to the Trump tax cuts, the U.S. Treasury pulled in 16.4 percent of GDP in revenue in fiscal year 2018, a percentage point below the long-term average. More relevant, that’s two points below the average at times like these, when we’re closing in on full employment, or over $400 billion in missing revenue. Simply put, the Trump tax cut broke the link between strong economies and revenue flows such that we’re now collecting recessionary-level revenue near full employment (it also worsened inequality). Repairing this damage will have to be step one.
We clearly need the money. Based on our aging population and the pressures that puts on our retiree health and income security programs, the state of much of our infrastructure, geopolitical threats, climate change, inequality, and the fact that the next recession is out there somewhere, we need more, not less revenue.
Second, while the new Democrats are appropriately not obsessed with deficits, they do recognize that they should try to progressively pay for their ideas. That’s one reason Rep. Alexandria Ocasio-Cortez (D-N.Y.), for example, floated a much higher top tax rate of 70 percent for the tiny slice of households with incomes above $10 million to fund her climate initiative.
If such efforts are thwarted by those who view tax policy as a one-way ratchet (rates can only go down, never up), then deficit-financing should definitely be considered. But I’ve talked to many members of Congress, new and old, and there’s growing agreement on the need for an amply funded, and far more functional, federal government. So, here are some ideas to begin working on.
Raise the top rate: As many economists have emphasized, Ocasio-Cortez’s idea to raise the top tax rate is sound, though it could be strengthened by grouping it with other policies. Research shows that a much higher rate on personal income has the potential to raise a lot more revenue without distortions, especially when partnered with measures to close escape-hatch loopholes.
An important rule of tax policy is that when one type of income is favored over another, every rich person with a tax lawyer suddenly discovers that the favored income is the very type they have piles of. A good place to start here is to close the pass-through loophole opened by President Trump’s tax cuts, where high-end filers can get a fat deduction by classifying their earnings as pass-through income.
Tax wealth: One way in which our tax code lacks basic fairness is the extent to which it fails to adequately tax wealth (and wealth-generated income). The Trump cuts exacerbated the problem by slashing taxes on estates passed from one generation to the next. According to the Center on Budget and Policy Priorities, those “few estates large enough to remain taxable — those worth more than $22 million per couple — will receive a tax cut of $4.4 million apiece.”
But resetting the estate tax parameters and closing loopholes in the estate tax to capture far more untaxed wealth is only the first step. We also must end “step-up basis,” a practice that allows heirs to avoid taxes on the appreciation of assets they inherit. In the spirit of the rule noted above against favoring certain types of income, raising the rate on realized capital gains and closing the carried interest loophole also fit in this category.
Lower the rate at which the wealthy can claim deductions: This idea dates back to old Obama administration budgets, but I’ve always thought it smart for the following reason: The tax code is littered with wasteful deductions that subsidize spending that would have occurred even without the tax break, but picking them off one by one invokes endless battles with powerful industry lobbies. Instead, if we impose a rule that says households above an income threshold can still take their same deductions, but at a lower rate, we avoid picking winners and losers. Obviously, favored industries won’t say “thanks!” But no group can say they’re being singled out. Because it significantly reduced the incentive to take itemized deductions, the 2017 tax cut trims the revenue flow from this option, at least through 2025. But it’s still worth looking into.
A financial transactions tax (FTT): An FTT is a small — just a few hundredths of a percent — tax on securities trades. I particularly like this idea because it both raises serious revenue and dampens noise/high-frequency trading that has very little to do with productive capital allocation. Recent Congressional Budget Office analysis finds that a 0.1 percent FTT could raise over $700 billion in revenue over a decade. Opponents make the point that the tax will dampen the velocity of trades. But given the tiny magnitude of the tax, the large decline in transaction costs over recent decades and the outsize role that speculative finance has played in recent economic bubbles and busts, perhaps a little dampening is warranted.
Raise the gas tax: Much of the above, excepting the FTT, involves tweaks to the existing system. But some new members, appropriately alarmed by the extent to which climate policy is going backward, want to add a new carbon tax into the mix. Given the gap between the actual and social cost of fossil fuels, this makes a gigaton of sense. But it is an especially heavy lift in an agenda comprised of nothing but heavy lifts (ballot initiatives to tax carbon have failed twice in Washington state).
However, there’s a possible tweak here, too: an increase in the federal gas tax, which has been stuck at 18.3 cents per gallon since 1993. This tax, which feeds directly into highway and urban mass transit infrastructure funds, has not been raised in 26 years. Especially given the improved mileage of vehicles since the early 1990s, this freeze is indefensible. Granted, unlike the other ideas, this one hits all income classes. And it is not incidental that French populists recently rioted over an increase in their fuel tax, though they were motivated by the fact that the gas tax hike coincided with cuts in wealth taxes. Perhaps amid these other progressive ideas, a gas tax hike would go down a bit easier.
But such pragmatic concerns get ahead of my case, which is simply this: We need more revenue. And while we’re not going to get them anytime soon, the time is ripe for the new, progressive majority to start thinking about and debating the best ideas to implement if and when the political space to do so opens up.