Editor’s Note: In the wake of the Republicans’ passage of their tax plan in both houses of Congress, we decided to ask a number of progressive policy experts and thinkers a simple question: When the day comes that the Democrats have control of the White House and Congress, what kind of major tax reform should they pass and why?
Click here to read the rest of the essays from our series on “The Tax Reform of Our Dreams.” The first entry is from Steven Teles, a political scientist at Johns Hopkins University and co-author with Brink Lindsey of The Captured Economy, just out from Oxford University Press.
The Republicans’ repeated attacks on the Affordable Care Act have moved a single-payer health care system from the outer edge of left-wingery toward something like the consensus of the Democratic Party. Likewise, it may be that the Republicans’ irresponsible, sado-partisan tax bill will have a similar effect, convincing the Democrats to move from the path of incrementalism in the direction of radical reform in the way government pays for itself. If so, it would be about time.
Even before the Republicans began mangling the tax code, our current system was not up to the job funding our current level of government. If Democrats want to invest in the preconditions of economic growth like research and infrastructure, move in the direction of single-payer healthcare, and fund a decent scheme of long-term care for the elderly, we need a tax system capable of raising far more money than our Rube Goldberg tax code can.
Our current system is not up to that job because it relies far more than it should on the income tax. The original purpose of income and estate taxation, which began in the 1910s, was to compensate for the regressive nature of the tariff, which was basically a form of sales tax, but just applied to imports (tariffs were the government’s chief source of income by far until the income tax was imposed). It is high time to go back to that kind of vision. We should make taxes on consumption and socially undesirable behavior the workhorses of the tax code, and use income and estate taxation primarily as a way to correct their distributive consequences.
A good example of such a reform is the one designed by Columbia Law School’s Michael Graetz, which he calls the “competitive tax.” In brief, the Graetz plan would impose a value-added tax (VAT) of just under 13 percent, cut the corporate tax to 15 percent, and eliminate the income tax entirely for families under $100,000, with rebates for the lowest earners (in part to replace the earned income tax credit and child tax credit, and to compensate for the fact that a VAT would disproportionately hit lower earners).
While it has many economic advantages, from my point of view its greatest attraction is political. By pulling the great bulk of taxpayers out of the income tax entirely, it will create a much sturdier political foundation for even higher income taxes in the future, and eliminate the appeal to most citizens of the politics of income tax backlash. Republican attacks on the income tax would be entirely without attraction for most citizens—including most Republican voters.
Graetz’s plan is designed to be revenue neutral and to not shift the distribution of taxes up or down the income scale. But it need not be. Graetz’s plan imposes a 14 percent marginal tax rate on income from $100,000 to $200,000, 27 percent on $200,000 to $600,000, and 31percent on all dollars earned above $600,000. Graetz’s plan does not broaden the base of the income tax as substantially as most reform plans, but there is plenty of room to do so (especially since Republicans are already mowing down the mortgage and state and local tax deductions), which would increase the progressivity of his plan significantly. It would make sense to add to Graetz’s plan a financial transaction tax, which would also have the benefit of counteracting excessive financialization of the economy. This would also hit the highest earners, while barely touching ordinary citizens. Finally, Democrats should bring back a robust estate tax, combined with substantially upgraded tax enforcement, especially on the offshore tax havens that have been exposed by the Panama Papers.
The combination of stiffened income, financial transaction, and estate taxation could be used to fund even larger rebates to low income taxpayers, which could compensate for a somewhat larger VAT, higher alcohol taxes, and a substantial carbon tax. The latter would create a considerable incentive for the de-carbonization of the economy, while raising significant revenues for at least a decade or two (after which, hopefully, they would shrink into insignificance).
A super-charged version of the Graetz plan would raise more revenue, in a more politically sustainable way, than the current tax code (not to mention the monstrosity the Republicans are about to pass). By bringing in more revenue, this new system would reduce the incentive that Democrats have had to pursue social ends through complicated, kludgey end-arounds like the Affordable Care Act. And it would do so in a manner that is the least distortive of economic efficiency.
Democrats need to move from just playing defense on taxes. Out of the ashes of the current tax bonfire being built by the Republicans, Democrats can build a tax code that is simpler, more economically sensible, and less politically vulnerable to Republican attack. Where taxes are concerned, now is the time to start thinking big.