Magazine | February 15, 2016, Issue

The Bernie Tax

Senator Bernie Sanders (Jim Watson/AFP/Getty Images)
Sanders’s socialism is very different from the Danish model he admires

In late January, during a town-hall forum at Drake University in Des Moines, Iowa, Bernie Sanders, a senator from Vermont and Hillary Clinton’s chief rival for the Democratic presidential nomination, said something legitimately ground-breaking. When Chris Cuomo of CNN asked Sanders whether he was willing to raise taxes to finance his proposed “Medicare for all” single-payer health-care system, the self-described socialist was admirably frank: “We will raise taxes. Yes, we will.” And he’s not kidding. Sanders is proposing over $1 trillion in tax increases, according to the Tax Policy Center.

You might be wondering why Sanders’s tax pledge is so remarkable. After all, it is a commonplace that Democrats want to raise taxes on high-earning households, and Sanders is certainly eager to do so. He goes much further than most mainstream Democrats on that front, as you’d expect from a man who is very self-consciously working to push the American mainstream leftward. Among other things, Sanders has called for drastic increases in capital-gains taxes, in top income-tax rates, and in taxes on corporate profits. He has also come out in favor of a new financial-transactions tax. All of these measures are designed to soak the rich, even though all of them will likely cause collateral damage for working Americans who benefit from capital investment and economic growth.

What’s really interesting about Sanders’s tax pledge is that he is making a bold break with Clintonism. Back in the 1990s, Bill Clinton and his disciples swore off tax hikes on U.S. households earning $250,000 or less a year (roughly $414,000 in today’s dollars), and in doing so they helped neutralize what had been a Reagan-era GOP advantage on taxes. It turns out that as long as middle-income voters are convinced that their own taxes aren’t going up, they are quite happy to support candidates who pledge to raise taxes on the rich. Shrewd Democrats such as Senator Chuck Schumer and House minority leader Nancy Pelosi, of Brooklyn and San Francisco, respectively, have clung tightly to this Clintonite strategy. Though fewer than 5 percent of U.S. households earn over $200,000 a year, many of those who fall in this slice of the upper middle class are loyal Democrats who resent being lumped in with those wealthier than they.

Sanders is taking an entirely different tack. He is explicitly in favor of substantial increases in payroll taxes, which would impact all working households. To help finance Medicare-for-all, Sanders is proposing a 6.2 percent employer tax (in Sanders’s words, an “income-based health premium”), which will be paid by workers in the form of reduced wages, and a 2.2 percent income tax (also an “income-based premium”). He is quick to point out that these tax increases will substitute for the health-care premiums that Americans with private coverage now pay directly or through their employers, a subject to which we’ll return.

Sanders’s stance in favor of middle-class tax increases doesn’t just represent a fitting rejection of Clintonism. He is violating a taboo that has kept Democrats in check since 1984, when Walter Mondale, the Democratic presidential nominee, told the delegates assembled at the Democratic National Convention that “Mr. Reagan will raise your taxes, and so will I.” According to Mondale, Reagan’s tax-cut promises were a deception. The former vice president claimed that Reagan had a secret tax plan that would “sock it to average-income families” while leaving the rich untouched, a claim that is roughly the opposite of what in fact happened under the 1986 tax-reform legislation Reagan championed in his second term.

Yet Mondale did have the germ of a point: If the U.S. was going to dramatically increase public spending, which was very much his goal, the money would have to come from somewhere, and it couldn’t all come from the rich. By calling for higher payroll taxes, Sanders is trying to refashion the American social contract in a larger, more ambitious way. In keeping with his admiration for Europe’s social democracies, and in particular his love of Denmark, a country he ritualistically invokes as his model of a good society, Sanders wants to nudge us towards a model in which much higher government-spending levels are balanced by much higher taxes.

So what could possibly go wrong? By and large, Europe’s social democracies finance their high spending levels with high consumption taxes, which are embedded in the cost of virtually all goods and services. There is much to be said for relying on consumption taxes over income taxes. For one thing, there is some evidence to suggest that relying more heavily on consumption taxes is more conducive to economic growth than relying more heavily on income taxes, as consumption taxes encourage savings and investment. The downside of high consumption taxes is that they are regressive: Low-income households consume a higher share of their total income than high-income households, so consumption taxes will tend to hit low-income households harder.

There are ways around this dilemma. The most obvious is to ensure that, while the tax burden might be somewhat regressive, government spending flows to low-income households more than high-income households, thus ensuring that the overall tax-and-transfer system is progressive. This is roughly the tack taken by Europe’s successful social democracies.

The trouble is that this Danish path that Sanders would like the U.S. to follow is rooted in an entirely different historical experience. Let’s leave aside the fact that Danes are Danes and Americans are Americans; we don’t even need an elaborate story about deep-rooted cultural differences to explain how our experiences have diverged. As the Northwestern University sociologist Monica Prasad argues in The Land of Too Much, Europe’s social democracies were the product of a bargain between elites and the working class. To raise economic-growth rates in the wake of devastating wars and the economic challenge posed by the hyper-productive United States, workers would accept relatively low wages and high consumption taxes. In exchange, they’d get generous cradle-to-grave welfare states.

Organized labor was strong in much of Western Europe. But as the legal scholar Matthew Dimick has observed, unions in countries such as Denmark and Sweden operate under what we call “right-to-work” rules. People join labor unions not because of closed-shop rules, but because they find it advantageous to do so. For much of the post-war era, tax systems were more regressive in Western Europe than in the United States, and labor–management relations were far less adversarial over there than over here.

The U.S. settled on a very different model. While European social democrats accepted that the working class would pay for the welfare state through high consumption taxes — an arrangement that European elites were happy to accept — the American Left fought for steeply progressive income taxes, which turned more-affluent voters against big expansions of government social programs. U.S. unions, meanwhile, fought to extract as much as they could in employer-provided benefits, which led them to favor policies such as the tax break for employer-sponsored insurance coverage. And as long as job-based coverage was the norm, working- and middle-class voters never really clamored for a government takeover of medical care of the kind Bernie Sanders is now proposing.

Love them or hate them, the genius of Europe’s socialists is that they found a way to make peace with capitalism. They found a way to finance expansive welfare states while still allowing the rich to get richer. America’s socialists, from Bernie Sanders on down, have never quite figured this out. And so our dyed-in-the-wool socialists keep losing to liberal hucksters such as Bill and Hillary Clinton, who keep pretending that higher taxes on the rich will pay for middle-class entitlements as far as the eye can see despite knowing full well that the math will never add up.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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