Taxing just the super-rich won’t fund America’s future
President Biden has proposed to finance his $4 trillion American Jobs and Families Plans by raising taxes exclusively on corporations and households that earn above $400,000 — the top 1.5 percent of taxpayers. Biden is right that the rich should pay more than they currently do given the staggering income inequality in America that’s been made worse by the COVID pandemic.
Almost 60 percent of Americans support funding Biden’s spending plans with his proposed tax increases — seven times the share that supports debt-financing them. But while taxing the rich is smart policy and politics, funding America’s future and realizing Biden’s policy vision will also require asking more taxpayers to contribute to the public good.
Even if lawmakers fund Biden’s plans through higher taxes on corporations and the wealthy, they would need to raise taxes even further to fund the government we already have. Social Security, for example, is projected to raise only 83 cents in tax revenues for every dollar of benefits it pays out over the next 25 years. Covering these existing shortfalls is a tall order: The Congressional Budget Office (CBO) found in September that stabilizing the national debt at 100 percent of gross domestic product by 2050 – an ambitious goal, yet well above the historical average – would require reducing annual deficits by $730 billion relative to current law starting in 2025. The top 1 percent of households would need to pay at least 70 percent more in total federal taxes to cover that amount, which doesn’t include the costs of Biden’s proposals or $2.8 trillion in additional COVID aid subsequently passed by Congress.
Such high tax rates would likely spark a fierce political backlash, given the daunting challenges Biden’s existing plans already face. Republicans refuse to consider changes to their 2017 tax bill, and some Democratic senators want smaller corporate tax increases than the president does.
The Biden administration itself has lowered its proposed global minimum tax from 21 percent to 15 percent to win international support. And House Ways and Means Chairman Richard Neal (D-Mass.) has floated delaying Biden’s proposed tax on unrealized capital gains at death until heirs sell their inherited assets, giving capital owners far less incentive to sell (and pay Biden’s higher capital gains tax rate) before they die.
As lawmakers change Biden’s plans, they will needlessly limit their ability to raise the revenue necessary to fund new public investment if they automatically reject every tax proposal that affects anyone outside the top 1 percent.
The simplest option to raise additional revenue would be to expand the tax increases on income and capital gains that Biden has already proposed. Though the president has pledged not to raise taxes on households earning below $400,000, his recent proposals are even narrower. Biden would increase capital gains taxes only on households earning over $1 million, and income taxes only on individuals earning above $523,600 and couples earning above $628,300. Lowering these thresholds to $400,000 would bring in more revenue without violating the president’s pledge — and lowering them further could generate even more without raising taxes on lower- and middle-income Americans.
Congress could also tax the use of public resources, which would both raise revenue and encourage people to use those shared goods efficiently. For example, taxing each driver’s vehicle-miles traveled could finance road maintenance while also preventing unnecessary wear-and-tear by incentivizing people to drive less. Similarly, taxing carbon emissions could pay for environmental investments while also giving clean energy a boon. Taxing the super-rich alone would not generate these collateral public benefits.
A bolder alternative would be to adopt a national value-added tax (VAT), as every other developed nation has done. VATs are like sales taxes but applied at each step in the production process. Because VATs are so broad, a rate as low as 5 percent could raise as much as $3.4 trillion over 10 years once fully phased in. Sen. Joe Manchin (D-W.Va.) has pointed out that this breadth would also make a VAT a particularly fair way to pay for infrastructure “because there’s not a person living in America that doesn’t use infrastructure.” And while a VAT would affect everyone, wealthy people who consume lavishly would pay the most.
Carbon taxes paid by polluters, mileage taxes paid by commercial vehicles and VATs paid by producers could conceivably comply with Biden’s campaign pledge because they are not paid directly by households making under $400,000. Although some costs of these taxes would be passed on to such households, the same is true of Biden’s proposed corporate tax increase, which he has deemed consistent with his pledge. To offset these costs for low-income people, Congress could lower regressive payroll taxes and/or expand programs that benefit the poor. For example, PPI has proposed pairing broad-based taxes with a new Living Wage Tax Credit, which would essentially expand the Earned Income Tax Credit up the income scale and allow people with no income to benefit from it.
Biden is right: After decades of widening income and wealth disparities, it is time to increase public investment and ask the wealthiest to contribute more to the common good. But all Americans have a stake in the success of “building back better,” and a grand national project of this scope will succeed in the long run only if all Americans contribute.
Brendan McDermott is a fiscal policy analyst at the Progressive Policy Institute’s Center for Funding America’s Future.