The ghost of Ronald Reagan is having a good laugh.
As recently as this past spring, President Joe Biden and Democrats were planning the first major tax increase since 1993, including raising rates for the rich and corporations, to fund his ambitious infrastructure, climate and social agenda.
Some Democrats in the 2020 presidential primaries wanted to raise taxes even more. The year before, Rep. Alexandria Ocasio-Cortez of New York proposed to raise the top marginal tax rate to 70% to help finance a “green New Deal.”
Biden also wanted to raise the top marginal tax rate to 39.6% or higher, up from the current 37%. (It’s called marginal because it applies to each additional dollar earned above a certain threshold.)
But apparently most of that tax increase is not to be.
Among the casualties: Rolling back the Trump tax cuts for the rich and eliminating the “carried interest” loophole that benefits private equity and hedge-fund managers.
Also taxing capital gains of more than $1 million upon a person’s death; increasing the capital-gains tax rate for those making more than $1 million in gains; and significant corporate tax hikes.
Instead, Biden and the Democrats are close to agreeing on a surtax that would affect the top 0.02% of taxpayers; cut a loophole by which those making more than $400,000 can avoid a Medicare tax; some modest corporate tax increases; and better IRS enforcement.
The important goal of taxing investment income at a rate close to labor income was abandoned. Billionaires — who became fabulously wealthy by creating companies — beat the millionaires, many of whom manage those enterprises.
As Neil Irwin wrote in The New York Times: “Jeff Bezos, the Amazon founder who is worth nearly $200 billion, would see little change in his highly favorable tax situation. Andrew Jassy, who succeeded Mr. Bezos as chief executive and received about $36 million in compensation in 2020, is likely to owe more in taxes if the Democrats’ framework becomes law.”
Without the intransigence of Democratic Sens. Joe Manchin and Kyrsten Sinema, Biden did better overseas. The Group of 20 nations reached a minimum tax agreement applying to all its members. The 15% minimum tax is intended to keep big companies from moving profits across borders to avoid taxes.
I mention Reagan because he pushed through a massive tax cut in 1981, lowering the top marginal rate from 70% to 50%, then down to 38.5% in 1987.
Reagan convinced Americans of two things that weren’t true.
First, that they were taxed more heavily than other countries. In fact, Americans face among the lowest tax burdens among advanced nations.
Second, that the lower rates would bring in more income. In the 1980 primary, George H.W. Bush derided this as “voodoo economics.” And he was right. The Reagan cuts reduced federal tax receipts and helped balloon the deficit. They also began the large gap in equality, with the earnings of the top 1% running away from the rest like a scalded dog.
David Wessel at the Brookings Institution explained:
“As projections for the deficit worsened, it became clear that the 1981 tax cut was too big. So with Reagan’s signature, Congress undid a good chunk of the 1981 tax cut by raising taxes a lot in 1982, 1983, 1984 and 1987. George H.W. Bush signed another tax increase in 1990 and Bill Clinton did the same in 1993. One lesson from that history: When tax cuts are really too big to be sustainable, they’re often followed by tax increases.”
Still, tax rates are historically low.
Under Republican President Dwight Eisenhower in the 1950s, the top tax rate was 91%. This was partly to pay for the costs of the Korean War.
From 1964 and all through the 1970s, the top rate was in the 70% range. Not coincidentally, this coincided with the zenith of the middle class and historic economic growth (the latter derailed by inflation in the later ‘70s). The United States also had more tax brackets, with the very rich being taxed higher than the merely rich.
So Ocasio-Cortez was onto something with her 70% proposal.
In 2013, economists Emmanuel Saez of the University of California Berkeley and Peter Diamond of MIT released a paper that argued the optimal top rate would be 73%.
They offered three recommendations: “First, very high earners should be subject to high and rising marginal tax rates on earnings. Second, low income families should be encouraged to work with earnings subsidies, which should then be phased-out with high implicit marginal tax rates. Third, capital income should be taxed.”
It’s a convincing argument, especially based on history.
However, Reaganomics still has its hold. Republicans say “tax cuts” with the repetitiveness of the Aflac duck. They are the simple answer to every situation: recession, expansion, even seemingly the $14 trillion flushed away on post 9/11 wars. Overall current taxes are less progressive, with lower-income people paying more proportionately than the wealthy.
That this thinking is wrong doesn’t move the needle on our closely divided country. Explaining the need for tax increases to invest in infrastructure, the social safety net and combating climate change is complicated. Democrats who do so risk being tarred with the S-word (socialist).
The tax-cut ethos spread into the red states that happily defunded education, for example, to make it work.
But blue Washington is little better, with no income tax and repeated failures to enact one.
I’ve argued against Seattle’s jobs tax because it makes the city less competitive in the region, not because the state shouldn’t do better.
If Virginia’s gubernatorial election is a bellwether, Republicans will retake the Congress in 2022 and be in good shape to return Donald Trump to the Oval Office two years later.
No matter the state of the nation, the answer will be … tax cuts.