Millionaires Taxes and other levies on the wealthy are essential—not only for fostering an equitable recovery, but also for reining in the rampant inequality of the pre-pandemic economy.
Published in Boston Review.
Our elected officials should pass another stimulus to help those suffering amid the economic downturn caused by COVID-19. They should also tax the rich—but not simply in order to pay for a stimulus.
Often tax increases are defended only on the grounds that they generate the revenue needed to fund government programs. But the case for raising taxes on the wealthy need not be restricted to the desire to raise money for social spending. In the context of the pandemic, in particular, a powerful argument for increasing taxes on millionaires and billionaires rests on the idea that massive government interventions should not merely serve to prop up the pre-pandemic economic system. Instead, they should be oriented toward combating inequality, encouraging productive investment, and diminishing the insidious political power of concentrated wealth.
In the closing days of his race against Donald Trump, Joe Biden has held firm to his promises to raise corporate tax rates and repeal Trump’s cuts for those making more than $400,000 per year. And, already, conservative economists are trumpeting the charge that such moves will imperil the recovery and unduly punish “job creators.” On the campaign trail, President Trump has called Biden’s economic plan a “missile aimed at the heart of the middle class.” Meanwhile, the Wall Street Journal contends that “a corporate tax increase stemming from a Democratic victory in November could undermine one of the strongest drivers of this year’s market recovery.”
In fact, the pandemic has provided a compelling reason to look again at the inequalities in our economy and to rethink the goals of our tax system. As a response to the ongoing economic downturn created by the coronavirus, we need both federal stimulus and taxation aimed at reigning in the excesses of the most affluent. As Bryce Covert argued in these pages earlier this year, “taxes as important in their own right, rather than in relation to what particular programs they might finance.” For economic as well as moral reasons, the Democratic Party must not allow the momentum around wealth tax proposals on display earlier this year to dissipate. Because another round of government action that does not include mechanisms for directly confronting the still-growing concentration of wealth is not only bound to perpetuate trends toward inequality but also misses an opportunity to promote a more just and stable recovery.
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Democracy, Sacrifice, and Solidarity Taxes
The early months of 2020, before the pandemic hit, featured a robust discussion of new wealth and capital taxation, driven by the Democratic presidential primaries. Senators Elizabeth Warren and Bernie Sanders led the way with proposals for wealth taxes and steep income tax increases for top earners. Even candidates campaigning as centrists, including Biden, proposed to reverse Trump-era tax cuts and raise rates on capital gains.
A primary moral argument in favor of the wealth tax is the idea that, apart from any economic benefits that might result, the levy served as a means of breaking up the undue political influence of the rich. Advocates cited luminaries ranging from James Madison to Louis Brandeis, who counseled that stark inequality is incompatible with healthy democracy. “Wealth is power,” economists Emmanuel Saez and Gabriel Zucman wrote here in the spring. “An extreme concentration of wealth means an extreme concentration of power: the power to influence government policy, the power to stifle competition, the power to shape ideology.” Given that we just witnessed an election cycle in which a record $11 billion has been spent on federal races—with wealthy donors and self-financed candidates pouring in hefty donations—the urgency of such warnings has not diminished: it has only been deepened.
The pandemic has added an additional moral imperative to these calls to tax the rich. The economic pain of the current crisis has hardly been spread equally. Wall Street recovered rapidly from initial declines and investors have prospered—even as states continue to face a flood of new unemployment claims week after week, and more than ten million workers continue drawing benefit payments amounting to less than half of their former wages. According to a September CNN article, the 647 billionaires in the U.S. have seen their wealth rise by over $845 billion since the start of the pandemic. In May, a CNBC survey of 750 millionaires found that the majority believed their assets would increase or remain the same over the course of the year, while roughly 75 percent believed the same about their income.
In this context, the call for a fairer system of taxation to address widespread economic suffering has animated moves at the state level. This fall, for example, New Jersey passed a Millionaire’s Tax that lowered the threshold for the state’s top tax rate from $5 million per year in income to $1 million per year, with estimates that the measure will raise an additional $390 million to $450 annually. As Governor Phil Murphy explained in a September press briefing, “We do not hold any grudge at all against those who have been successful in life, but in this unprecedented time when so many middle class families and others have sacrificed so much, now is the time to ensure that the wealthiest among us are also called to sacrifice.”
Such sentiments have ample precedent in U.S. history, as national crises have been invoked alongside calls for more egalitarian taxation. A federal marginal income tax rate of more than 90 percent for those in the top tax bracket was achieved as a wartime exigency, first implemented during World War II. During both that war and the Korean War, Congress also passed “excess profits” taxes on large corporations, raising steep levies on all income above a certain rate of return. This had the radical effect of treating the entire corporate sector as a de facto public utility, with government tightly regulating its returns. During the Vietnam buildup of the 1960s, these “excess profits” taxes were once again debated seriously in Congress, though they were discarded by Lyndon Johnson, who was averse to challenging his allies in big business.
The popular association of sacrifice and public responsibility with times of crisis has been exploited to defend anti-tax ideology: businesses and the rich came to argue that in peacetime such demands should no longer apply. Under the Eisenhower and Kennedy administrations, for instance, opposition to high taxes focused on the fact that they were established in exceptional periods of national life. In spite of this potential pitfall, today, amid a pandemic that has resulted in an unprecedented economic downturn, the tradition of calling for shared sacrifice in exceptional times has opened space for considerations of greater equality.
Politically speaking, levies on the most fortunate—whether achieved through Millionaire’s Taxes, estate taxes, increases in corporate rates, or taxes on wealth like that proposed by Elizabeth Warren—have shown considerable viability. In September, Data for Progress released a poll of voters in 11 states that showed that 61 percent of respondents “said they’d be more likely to vote for a candidate who supports a wealth tax, while only 19 percent said they’d be less likely to.” These states included vital electoral prizes such as Iowa, Arizona, and North Carolina. This outcome matched with earlier polling results showing high support for a wealth tax nationally.
Noting the unique challenges of COVID-19, University of Wisconsin law professor Heinz Klug has called for a one-time tax on all forms of wealth, citing as precedent Iceland’s move to enact a temporary wealth tax to promote recovery from the Great Recession between 2008 and 2011. He calls this proposed levy a “Social Solidarity Tax.” In an April New York Times op-ed, Yale Law Professor Daniel Markovits likewise called for such a tax to assist the ailing pandemic economy. “A wealth tax would fund the relief effort in a way that gives meaning to shared sacrifice in the face of a universal threat,” He wrote. “It is fitting that an extraordinary—once in a century—catastrophe befalling the whole nation should be paid for not from the income-flows that fund routine policy in ordinary times but rather by a one-time charge against the nation’s accumulated stock of wealth.”
These proposals are not just being discussed in the press. In August, Sanders, along with Senators Ed Markey and Kirsten Gillibrand, introduced a legislative version of this idea, the Make Billionaires Pay Act, which would “establish a 60 percent tax on the gains in wealth billionaires made between March 18, 2020, and January 1, 2021,” while empowering Medicare to “pay for the out-of-pocket healthcare expenses of all Americans for one year.” While such a bill may sound outlandish to some, Markovitz points out that, in 1999, none other than Donald Trump proposed paying off the national debt “through a one-time wealth tax of 14.25 percent on fortunes over $10 million.”
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A Better Stimulus
On the economic front, there is further good reason that taxes on the rich should be implemented sooner rather than later—and not just as a means of generating revenue. Given the urgent need for federal stimulus, progressive legislators should not fall into the trap of defensively providing answers to the bad faith question, “How will you pay for that?” (As Covert pointed out, that query is rarely directed at Republicans who pass tax cuts alongside military budgets with huge price tags.) In spite of a federal budget deficit that reached $3.1 trillion in the 2020 fiscal year, the projected cost of paying for the national debt has actually gone down due to historically low interest rates created by demand for safe Treasury assets. Moreover, there are strong Keynesian grounds for the government to use counter-cyclical spending to shore up the economy and help those most in need: getting money into the hands of working people urgently trying to make ends meet during the pandemic’s period of mass unemployment serves as an important stimulus to consumer spending that will keep businesses afloat.
But if taxes on the wealthy do not need to be justified as necessary precursors to federal spending, they can nevertheless serve other useful economic functions, such as encouraging productive investment and reducing financial volatility. As Heather Boushey, president of the Washington Center for Equitable Growth and adviser to Joe Biden, told the Times this summer, “Countries that have this deep inequality like we do are much more prone to financial crises.” Rather than stimulating business spending on employment in the bricks-and-mortar economy, the excessive fortunes of the rich have led to rampant financial speculation, “hot money” flows, and asset bubbles, fueling episodes including the Asian financial crisis of the 90s, the demise of the dot-com bubble of 2001, and the crisis of mortgage-backed securities in 2008.
It is worth noting that postwar GDP growth in the United States peaked during the Korean War at 8.7 percent in 1950, a time when the top marginal tax rate on personal income was nearly 85 percent. During the decades of economic expansion that followed this rate never dropped below 70 percent. Today, by contrast, the top rate is 37 percent, a level set by the Trump administration’s 2017 tax law. This shift in income tax rates in the highest bracket—individuals making more than $518,400 in 2020—has dramatically increased savings, both in the form of corporate profits and holdings by those in the top 1 percent of income earnings. But these funds have not been invested in businesses at anywhere near the levels necessary to absorb workers into steady long-term employment.
Empirically, this can be seen in the number of years it has taken for the unemployment rate to recover after each of the past five recessions. In the period of high progressive taxes, between the 1940s and 1960s, unemployment fell sharply within the first year of recovery as corporations and banks used funds to expand hiring and make new business loans. Since the United States began cutting taxes on top earners, it has taken between four and ten years for unemployment to fall to pre-recession lows in the course of each expansion. During the 1990 recession, unemployment continued to rise for nearly two years after the recovery began, a remarkable shift. For the entirety of the recovery that followed the bursting of the dot-com stock bubble in 2001—which spanned the length of George W. Bush’s two presidential terms—the unemployment rate never again fell to the low levels of the 1990s. Then, after peaking at 10 percent during the global financial crisis in 2009, unemployment took 7 years—the whole of Obama’s two terms—to return to its Bush-era “lows.” As the historian Jonathan Levy points out, during the Reagan recovery of the 1983–1990, investment as a share of GDP in fixed assets such as equipment, plant, and building structures actually fell—a historic first.
Even the American Enterprise Institute acknowledges that the savings of high-income individuals do not contribute significantly to economic growth: it estimates that, precisely for this reason, Biden’s tax increases on the wealthy would create minimal drag on the economy. The New York Times further notes that Moody’s Analytics, which is far more bullish on taxing the wealthy, contends that “if Mr. Biden wins and Democrats control both the House and Senate, the nation’s real gross domestic product would be $960 billion larger at the end of his term than it would be at the end of a second Trump term with Republicans controlling both houses.”
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The Recovery Can’t Wait
While revenue generation need not be the driving motivation for higher taxes at the federal level, states do not have the same freedom to run annual deficits. Ideally, a new round of federal stimulus would be heavily directed to state and municipal budgets, but this may not be something that congressional Republicans will permit. Should that occur, the additional funds generated by state-level Millionaires’ Taxes can become quite important in sustaining vital government services and preventing cutbacks that would further exacerbate the unemployment crisis.
New Jersey is not alone in seeking to lessen the impact of the current pandemic on state budgets and the lives of its poorest residents. According to CNBC, California, New York, Illinois, Massachusetts, Maryland, Hawaii, Oklahoma, and Vermont are all considering new ways to tax affluent individuals or businesses. In June 2019 Illinois Governor J. B. Pritzker approved a graduated income tax proposal that is to appear as a ballot question in the general election, designed to bring in $2.8 billion from just the top 0.3 percent of all tax filers in the state. A somewhat similar debate is taxing place in California, although the proposal at hand, Proposition 15, would be aimed at taxing businesses instead of individual income. The measure would undo Proposition 13, a 1978 state amendment that severely restricted the government’s ability to raise funds through property taxes. According to the official ballot summary, the repeal would allow the state to raise between $6.5 billion and $11.5 billion annually in new funding for K–12 public schools, community colleges, and local government services such as public health, safety, and fire prevention.
While such measures are important, they are no substitute for federal action. In a February 2019 article entitled “Democrats Take Aim at the Reagan Tax Revolution,” the Wall Street Journal explained, “Bernie Sanders, Elizabeth Warren and Alexandria Ocasio-Cortez want big tax hikes on the rich to fight inequality, but such measures have usually succeeded only at moments of national crisis.” Less than two years later, the moment of national crisis has arrived.
It comes as no surprise that Republicans are warning that raising taxes on the rich would be a disaster in present circumstances. They insist that such taxes are disastrous no matter the economic conditions, and no matter what history tells us about the benefits of heading off runaway inequality. That Biden has not wavered in his pledges to raise taxes on the most well off shows an important shift in conventional wisdom within the Democratic Party and an overdue acknowledgement that measures to regulate excessive fortunes can be politically popular propositions. An expanded call for solidarity taxes on wealth to accompany a new round of stimulus from Washington would go far in realizing the promise of the moment. The pandemic should not be seen as a reason to postpone taxes on the wealthy, but as an opportunity to use government action to promote a more just economy.
Photo credit: MakeBillionairesPay.Info