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 second entry is from Henry Aaron, the Bruce and Virginia MacLaury Senior Fellow at the Brookings Institution.
The recently passed tax bill is a depressing reminder that a party with a sufficient majority, acting unilaterally on behalf of the wealthy, can pass legislation devoid of principle or justification. But the law does not extinguish the possibility that a future Congress and President, acting on reason and compassion, can pass sensible tax reform. Especially now, it helps to set a goal by defining what such legislation should look like.
Before all that, however, let’s remember the basic laws of arithmetic. Unless taxes are increased, a progressive legislative agenda is just idle blather. Population aging requires an increase in taxes of about 3 percentage points of GDP simply to sustain current commitments under Social Security, Medicare, and other age-related programs. Even now, these programs are not particularly generous and are inadequately funded for the long run. Without added revenues, benefit cuts are inescapable. If Democrats don’t have the guts to make the case for higher taxes and the brains and skill to persuade voters to support them, anything else in their program that costs money is window dressing.
So, where does one get additional revenue? First, a sizeable tax on greenhouse gas emissions can not only help stop global warming, it can also raise a pile of revenue—$1 trillion over ten years for a $25 per metric ton tax on greenhouse gas emissions according to the Joint Committee on Taxation, and even more from a somewhat higher rate, which can be justified on environmental grounds. Leading economists from the political left and right alike have endorsed such a tax. In fact, I do not know of any reputable economist from either party who opposes it.
Where the parties differ is on how to spend the revenue. Progressives want to use some of it to beef up the earned-income tax credit (EITC) or other benefits focused on those with low or moderate incomes, who would bear much of the burden of a tax on greenhouse gasses. But a group of highly regarded conservatives, not currently in elective office and hence not in thrall to campaign contributors, has proposed an equal per capita grant, independent of income. The targeted approach is superior, if it is well crafted.
The second element of a progressive tax agenda is a value-added tax (VAT). The Congressional Budget Office estimates that a broad-based VAT would generate $2.7 trillion over a decade. The VAT is politically suspect on the left because of regressivity. The suspicions are well founded but misplaced. They are well founded because a VAT, taken alone, is regressive. But, as with a tax on greenhouse gasses, a VAT can and should be linked to measures that are highly progressive. These measures include increases in the EITC, larger subsidies under the Affordable Care Act to bring universal coverage within reach, and introduction of a refundable income-tax credit against payroll taxes. The revenue from a VAT can also be used to excuse millions of low- and moderate-income Americans from owing any income tax at all and even having to file a return.
But progressive concerns are misplaced for this reason. The objective of Democrats should be a system of taxes, transfers, and other public services that is progressive. Consider the public finance systems of other wealthy democracies. They collect a larger share of GDP in taxes than we do, in no small part because all have sizeable VATs. Their tax systems are not more progressive than our own. Yet their system of taxes and transfers is more progressive than ours, because revenues are sufficient to pay for a broad range of public services, most of which serve people of modest means, that are superior to our own.
Next, sensible tax policy cannot ignore the two large trust-funded programs, Social Security and Medicare Hospital Insurance. Both run largely on revenue from earmarked payroll taxes. Both face long-term funding gaps. Taken in isolation, payroll taxes are not progressive. But they pay for benefits that are progressive and fundamental to the well-being of low- and moderate-income families and individuals. As soon as progressives have regained sufficient political leverage to strike a good deal, they should initiate a campaign to restore Social Security and Medicare to sustained, long-term balance from added revenues to the maximum feasible extent.
Finally, the progressive agenda should address genuine income tax reform. That program must include undoing much of the damage from the recently enacted tax bill. The expansion of ways the well-lawyered can avoid or evade taxes, for example through so-called “pass-through” entities, such as partnerships and S-corporations must be undone. The provisions that will allow the well-compensated to convert labor income that would otherwise be subject to tax rates of 35 percent or more into corporate income that will be taxed at 20 percent or less must be undone. The estate tax repeal must be undone. In addition, capital gains on assets that heirs receive should not wholly escape tax, as current law allows.
But I want to end by returning to basics. Progressives’ goals are served primarily and overwhelmingly by what happens on the expenditure side of the budget. How revenue is raised matters. But that revenue is raised is essential. Republicans have learned that lesson. That is a primary reason why they try so hard to cut taxes. Democrats need to have the toughness to tell Americans that the era of tax cuts is over. They need to tell voters that if they want a society that is even moderately compassionate, they have to pay for it. If they can’t do that, then the Trump/Ryan/McConnell team wins, whatever happens in the next elections.