Wealth and income inequality have become a much-discussed issue in American politics. Democrats emphasize the injustice and aesthetics of recent income and wealth inequality. Narrowing that gap has become a primary concern for many Democrats. One way to achieve this is to increase what Europeans call “social provision” of services and money to lower income groups. The “human infrastructure” component of their plans call for government spending on child-care, universal pre-K, free community college, and expanded spending on health-care. Once created, such entitlements do not go away. They only expand.
A second way is to substantially raise taxes on both the income and the underlying assets of the wealthy. The maximalist version of the current infrastructure bill nicely illustrates this double policy. As one New York Times reporter puts it: they “see a rare opportunity to harness the political popularity of infrastructure spending to achieve their long held policy of raising taxes on the rich.” Senator Ron Wyden (D-Oregon), chairman of the Finance Committee, puts it succinctly: “What we’re doing is generating revenue, but we are also making a major area of American government more fair, so people don’t feel they’ve been played while the rich person gets off scot-free.”[1] In sum, the Democrats have long desired to tax the rich and they think that they have finally found a winning justification.
The tax proposals chiefly target corporations, the fossil fuels industry, and wealthy individuals. First, the tax on corporations would rise from the current 21 percent, the “small business” tax break for certain partnerships and limited liability companies (LLCs) would end, and so would a provision that taxes the fees of private equity firms as capital gain rather than as income. The tax breaks currently allowed to fossil fuel companies would be redirected to benefit “clean energy” companies. The top tax rate on individuals would rise from 37 percent to 39.6 percent, and the tax on capital gains for those earning more than $1 million a year would rise from 20 percent to 39.6 percent. It is hoped that such measures would generate $2.5 trillion in revenue over ten years.
One thing that is not discussed is alternative uses for the increased tax revenue. Over the last 20 years, the real Gross Domestic Product (GDP) of the United States has slightly more than doubled.[2] Over the same period, the national debt has risen from about $6 trillion to about $27 trillion.[3] That is, it has more than quadrupled. From 2016 to 2020, the national debt increased from 106.6 percent of GDP to 127 percent of GDP. This has taken place in an environment of near-zero interest rates. If interest rates had to rise to counter either a serious inflationary surge or speculative bubbles, then the cost of that debt would rise as a share of the budget.
Suggesting that the increased revenue go to reducing the debt to a more manageable size would be met with hoots of derision. No one is going to want to pay for benefits that their predecessors received, but for which they refused to pay. Herein lies the lesson.
[1] Both quotes are from Jonathan Weisman, “Bipartisan Infrastructure Talks Collide With Democrats’ Goal to Tax Rich,” NYT, 21 June 2021. Conservatives would contest the “scot-free” designation. In their view, the top 10 percent of income earners paid 71,7 percent of federal income tax on adjusted gross income, while the bottom 50 percent of income earners paid 2.94 percent of the federal income tax on adjusted gross income. See “Letters to the Editor,” WSJ, 26-27 June 2021. As my beloved sister-in-law said when asked to define “fair”: “more, a lot more.”
[2] See: https://www.statista.com/statistics/188105/annual-gdp-of-the-united-states-since-1990/
[3] See: https://fiscaldata.treasury.gov/datasets/historical-debt-outstanding/historical-debt-outstanding
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