Fiscal Policy

Democratic Taxers Will Need Middle-Class Taxes to Fund Their Agenda

President Joe Biden delivers remarks on the June jobs report at the White House in Washington, D.C., July 2, 2021. (Kevin Lamarque/Reuters)
If Biden wants to fund his spending proposals, he can't just tax the rich.

The progressive goal of moving toward a European-style social democracy is colliding with America’s anti-tax reality.

President Biden’s American Jobs Plan and American Families Plan proposed a total of $3.3 trillion in new taxes over the next decade to partially finance $4.5 trillion in new benefits. In response, the Senate has passed a $550 billion infrastructure bill with few legitimate pay-fors, and Congress has pledged a $3.5 trillion reconciliation bill that would add up to $1.75 trillion in new deficits.

Yet the president and Congress are hitting the mathematical, economic, and political limits of the progressives’ long-standing promise to finance European spending levels on the backs of the very rich.

Biden was elected on the most aggressive tax-the-rich platform of any president since Franklin Roosevelt. His proposed $1.8 trillion in new corporate taxes (five times as large as the tax cuts they received in 2017) includes returning the U.S. corporate-tax rate to the highest in the OECD. His campaign and current proposals include $1.5 trillion in tax increases for families earning over $400,000 annually — a combination of income and payroll taxes that would bring marginal tax rates (including federal, state, and payroll taxes) above 62 percent in some states.

Most of these new upper-income and corporate-tax proposals are already facing increasing resistance from congressional Democrats. They note that the huge tax hike on corporations’ overseas earnings would place American multinational companies at a severe competitive disadvantage, and large new taxes on investors would be largely punitive and unworkable. The promised $780 billion in tax-enforcement savings far exceeds what the Congressional Budget Office deems plausible.

Still, let’s pretend for the sake of argument that the president achieved full progressive “tax the rich” nirvana. In addition to his $3.3 trillion in proposed taxes on corporations, investors, and upper-income families, let’s add the Biden campaign proposals to cap the value of tax deductions at 28 percent and reimpose the full Social Security tax on wages over $400,000. For good measure, let’s also hit the wealthy with Senator Sanders’s 8 percent wealth tax and 77 percent estate-tax rate, Representative Ocasio-Cortez’s 70 percent income-tax rate, and progressive Wall Street financial and bank-tax proposals. Altogether, that combined $7.9 trillion tax increase — generously assuming the economy continues humming along despite combined marginal tax rates approaching 100 percent for some families — would barely cover the sum of the President’s $4.5 trillion in current proposals plus his $3 trillion in leftover campaign pledges across health care, Social Security, education, and elsewhere.

Most important, using up all the “tax the rich” options for the president’s new proposals would leave the wealthy unable to close the underlying — and unsustainable — $112 trillion in baseline deficits over the next 30 years, or finance progressive fantasies such as Medicare for All and the Green New Deal.  Which means — just as Presidents Clinton and Obama discovered — promises of no new middle-class taxes will likely be revisited sooner rather than later.

Progressives are already lining up the arguments. They tell us that the middle class wants aggressive new spending on health care, education, infrastructure, family leave, child tax credits, and Social Security. The $11,400 in total pandemic relief checks for the typical family of four means they won’t even notice a middle-class tax increase. Two decades of middle-class tax relief has reduced the middle-earning quintile family’s average federal income tax rate to 0.5 percent (10 percent including payroll and other taxes). A value-added tax (essentially a complicated form of a national sales tax) will be hidden in higher prices.

Polling, legislative history, and electoral history all converge on the reality that Americans support raising taxes only for those wealthier than themselves (in part because they underestimate the current tax rates paid by the wealthy).

In fact, a 2019 Harris poll revealed that, while 59 percent of registered voters support imposing a 70 percent tax rate on annual incomes above $10 million, that figure drops to 40 percent when respondents are told to assume they had won a $30 million lottery jackpot and would therefore be subject to the higher tax rates. Even Democratic voters split to roughly 50-50 on this policy if it includes their own mega-millions wealth.

More broadly, polls have long shown less than half (and sometimes far less) of Americans are willing to pay much higher taxes, even for more government services. And when the new taxes are specified, support often drops further. For example, despite the general popularity of fighting climate change, a 2019 survey showed that less than half of Americans are willing to pay even $2 per month in new taxes or utility costs as part of a climate agenda (and only a quarter of Americans would pay $10 per month). Polls by the Associated Press and Reuters produced nearly identical results. In fact, the mere possibility of new taxes has reduced support for spending trillions on the Green New Deal to 30 percent. Virtue signaling is cheap; taxes are not.

Similarly, support for Medicare for All falls when respondents are reminded that it would require new taxes. Just wait until they discover that fully financing the proposal would require trading their premiums and deductibles for a 25 percentage-point increase in the payroll tax.

This tax resistance is not limited to conservatives and moderates. Even two-thirds of Bernie Sanders supporters would not be willing to accept more than $1,000 in new taxes to ensure universal health coverage or free public-college tuition. The revolution is acceptable only if funded by “the billionayas,” not “the people.”

Democratic Congressional leaders recognize that their coalition of upper-income coastal professionals (buried in mortgage, property-tax, and child-care costs) and young urban hipsters (buried in student loans and high rent) are not eager to surrender more money to historic tax increases. That is why the Democrats’ most aggressive repeal votes on the 2017 tax cuts have been to restore the full State and Local Tax (SALT) deduction. The last Democratic Congress showed little interest in reversing the law’s tax cuts for estates or corporations. But they scheduled House and Senate votes to undo the one part of the law that raised taxes on their upper-income, coastal voter base.

Republicans would love nothing more than for Democrats to break their promise on middle-class taxes. The conservative movement may seem dispirited, disorganized, and distracted by symbolic issues. But nothing unifies the Right like going to war against Democratic middle-class tax increases. Conservative think tanks, grassroots organizations, and lobbyists are designed specifically to eviscerate middle-class tax-increase proposals with the same precision and ruthlessness that the progressive political infrastructure employs against threats to Social Security and Medicare. There will be TV blitzes, interactive tax calculators, and warnings that a proposed 2 percent value-added tax (costing perhaps $700 for the typical family) would be merely a down payment on the 15 to 25 percent VAT rates that prevail in Europe. Vulnerable Democratic House members from swing districts — whose support would be required given their party’s razor-thin majority — would be committing political suicide by voting yes.

These outcomes may sound hyperbolic only because many of today’s tax advocates are too young to remember why Democrats long ago stopped embracing middle-class tax hikes. In 1993, the last time Democrats proposed broad-based middle-class taxes (breaking President Clinton’s familiar promise of taxing only the rich), they lost 54 House seats and eight Senate seats the following year. All it took was some gas taxes, as well as income and payroll tax increases for upper-middle class families and seniors. President Clinton also proposed a modest BTU energy tax that would be passed on to consumers, and when Democratic representative Marjorie Margolies Mezvinsky cast the deciding House vote in favor, House Republicans chanted “’Bye Marjorie!” (she indeed lost reelection the following year). Senate Democrats then noted the political headwinds and dropped the BTU tax proposal without a vote. Lawmakers still refer to the pointless sacrifice of taking a career-ending vote for an unpopular proposal that ultimately does not even get enacted as “getting BTU’d.”

Temporarily learning the lesson, President Obama was elected promising no new taxes for families earning under $250,000. He immediately broke the pledge by more than doubling tobacco taxes, and then imposed several indirect taxes on the middle class to finance Obamacare. The most controversial tax — a 40 percent excise tax on high-cost health plans known as the “Cadillac” tax — received such an immediate public backlash that Congress never allowed it to be implemented, voting to repeatedly delay it before killing it altogether in 2019. Several other Obamacare taxes were also occasionally delayed and then ultimately repealed. Democrats lost the House in 2010 and the Senate in 2014.

For the most part, Democratic politicians have rebuilt their brand by promising to tax only “the rich.” Perhaps each generation of Democrats has to propose middle-class tax increases once (and then lose their congressional majority) to learn for themselves why previous generations rarely tried it a second time.

For better or worse, pandering to the middle class is the only route to electoral success. Republicans cut their taxes, and Democrats hand them spending. Raising middle-class taxes is as politically perilous as cutting their spending. Which means Democrats face a severe budget-math problem that can otherwise be addressed by either scaling back their voracious spending appetite or engaging in a reckless and unprecedented peacetime borrowing spree. In the meantime, dispirited Republicans are begging for another middle-class tax increase battle to unite around.

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