A group of Americans are standing around, waiting for a business deal to take place. As they wait, they begin to grumble about the state of the economy, including their taxes. One of them asks an elderly man whether he thinks the taxes are too high. He replies that yes, they are high, but the burden of paying them is hardly the most onerous burden in their lives. More onerous, says the old man, are people’s own “idleness,” “pride,” and “folly.”
It would be remarkable for a scene like this to play out anywhere in America, at any time in the nation’s history. So deep-seated is the American revulsion at paying taxes that it is a rare American indeed who will tell their fellow countrymen — ordinary people, not especially rich ones — to stop complaining about their taxes. But Benjamin Franklin wrote this scene in 1758, in The Way to Wealth. His famous creation, Poor Richard, observes the old man, Father Abraham, quoting Richard’s own maxims about thrift, saying of the vices of idleness and pride and folly, “from these taxes the commissioners cannot ease or deliver us.” Years before joining a rebellion kicked off by taxes levied by a government in which Americans had no say, Franklin saw clearly that taxes could be a fairly minor burden on a free people.
Since today would normally be the deadline for Americans to file their income tax returns, it’s a good day to ponder whether all of us, not just the wealthy, need to be willing to pay higher taxes.
Many commentators make good fiscal and moral arguments for raising taxes on the wealthy. And it is absolutely true that, as the people who have accrued the bulk of the income and wealth gains of the past several decades, the richest Americans are the first who ought to be taxed to pay the cost of government. But soaking the rich is not enough. If we are going to pay for all the public investments we need — infrastructure, clean energy, affordable health care and housing, medical and scientific research, the common defense — sooner or later all of us must be ready to pony up.
Furthermore, when COVID-19 has passed, and the U.S. economy is safely growing again, we will have to rediscover the importance of fiscal discipline. The money for public priorities cannot keep coming from borrowing. Interest on the national debt is already one of the federal government’s largest expenditures. It’s often pointed out that the debt, as a percentage of gross domestic product, is the largest it’s been since World War II. To win that war, the government insisted that Americans sacrifice many of their material comforts — rationing food, driving slowly to save fuel and rubber, handing over scrap metal to be turned into tanks and ships and planes — as well as compelling millions to put on uniforms and risk their lives. Also, Congress turned the federal income tax into something most Americans had to pay, rather than a levy that mainly applied to high earners. While COVID has certainly put a burden on Americans’ lives (especially those who were already economically vulnerable), a call for ordinary Americans to sacrifice more financially (while making clear that the greatest increases in taxes should be on the rich) would not go amiss.
In recent weeks, it’s been encouraging to see two ideologically different Washington Post columnists — the left-leaning Catherine Rampell and the right-leaning Henry Olsen — critique President Biden and his fellow Democrats for their reluctance to raise taxes on anyone except rich people and big business. It’s conventional wisdom that a politician who asks voters to raise their own taxes harms themselves in the polls and at the ballot box. But if the President and his party don’t want any nasty shocks to befall them, or the American public, when interest rates go up (as they eventually will) and it gets much harder to borrow and spend, they will have to find ways to convince ordinary Americans to contribute at least a little more to the common good.
If we’re going to get serious, as we should, about making sure we can afford what we expect and deserve from our government, we need many options for raising revenue. What follows is my own list of preferences.
For the rich and big business:
Raise the top income tax rate.
The top rate is currently 37%. At a bare minimum, it should be raised to 39.6%, as Biden has proposed and where it was under Bill Clinton. (See here for the top marginal rate by year.) It could easily go higher, perhaps the 50% it was for much of Ronald Reagan’s presidency. It doesn’t have to go as high as the 91% it was under Dwight Eisenhower or the 70% it was under Lyndon Johnson. But the people at the top can easily afford to pay more.
Tax wealth amassed at the top more heavily.
There are several ways to do this. We could undo all the cuts to the estate tax of the past two decades. During the 1990s boom, the top estate tax rate was 55%, and estates worth less than $675,000 (twice that amount for couples) were exempt. Today, the top rate is only 40%, and the exemption is more than $11 million. This makes no sense at all. Rolling back all these cuts (including lowering the exemption to where it was under the Clinton-era boom) is eminently sensible.
Alternatively, we could replace the estate tax with an inheritance tax. The case for this has been excellently made by Lily Batchelder of NYU Law School and Ben Ritz of the Progressive Policy Institute. Instead of taxing wealth that’s accumulated over a recently deceased person’s lifetime, we could tax the person’s heirs when they receive the money. Exempt a certain amount, then tax the rest at the same rates as wages, with a surtax on top of that. Either this or a beefed up estate tax would make the tax code far more progressive while bringing in much-needed money.
Tax corporations and capital gains more heavily.
It’s great that Biden wants to raise the corporate tax rate from 21% to 28%, and that during his campaign he called for raising the top rate on long-term capital gains from 20% to 40%. He also wants corporations to pay a minimum 21% on their overseas income. Let’s go even further. Let’s seriously consider taxing all income earned by U.S. corporations anywhere in the world at 28%. And let’s consider taxing all capital gains at the same rates as wages. Yes, there are economic drawbacks to both of these. Let’s weigh them against the need for more federal revenue.
Tax big banks.
In 2015, President Obama proposed a tiny tax of 0.07% on financial institutions with liabilities over $50 billion. In 2018, the Congressional Budget Office estimated that at a rate of 0.15%, such a tax would raise about $10 billion per year. Go higher. Much higher. Instead of trying to break up the big banks, let our deal with them be: you can grow into big fat cows, but we’re going to take a lot of your milk.
For the upper-middle class:
Eliminate the mortgage interest deduction.
There is no reason to keep this tax break around. It mostly benefits high-income households, and it encourages people to build bigger homes than they need, raising energy costs and increasing suburban sprawl. While the maximum interest homeowners can deduct was lowered in 2017, it still costs the government about $30 billion a year. Get rid of it.
Eliminate the state and local tax deduction.
This, too, is a tax break for people who don’t need tax breaks, upper-middle class as well as rich. About three-quarters of it goes to the top 20% of the income distribution. Defenders of it argue that it makes it easier for affluent people to support social spending at the state and local level, and that to get rid of it would make them more reluctant to pay for public services. Alternatively, they can suck it up, take their lumps, and insist that the increased revenue Washington gains by closing this loophole be directed toward federal programs for the less fortunate: child care, housing, the earned income tax credit, etc.
Eliminate the cap on the Social Security payroll tax.
The tax of 6.2% of a wage earner’s income, matched by their employer (or paid in full by the self-employed) only applies to earnings below a certain amount (rising every year). When Democrats talk about adding new revenue to Social Security, they often propose limiting the tax increase to incomes far above the current cap (currently $142,800) and leaving a gap. Biden says $400,000. During the 2020 Democratic primaries, Pete Buttigieg, Bernie Sanders, and Elizabeth Warren all said $250,000.
Why should someone making $200,000, or even $150,000, be exempt from a tax increase, especially one to preserve a program as vital as Social Security? They shouldn’t. Even in this difficult economy, someone bringing home a paycheck that size is doing just fine, and can easily afford to give up more for the common good. Eliminating the cap would be an excellent policy to pair with other changes to ensure Social Security remains solvent; see these suggestions by the Committee for a Responsible Federal Budget, of which ending the cap is one.
For all of us:
Raise the Medicare payroll tax.
Along similar lines, if there is enough popular support for paying a higher tax to keep Medicare solvent, politicians should consider it. Medicare Part A (hospital insurance) is funded by a 1.45% payroll tax. As with Social Security, the tax is matched by the employer, but unlike the Social Security tax, there is no cap. Medicare is set to be insolvent a mere three years from now. While politicians should factor any plausible economic downsides into their calculus, if it turns out most citizens of a famously tax-averse country are willing to pay higher taxes for a specific purpose (and Medicare has historically been very popular), they should take advantage of that rare opportunity.
Raise tobacco taxes.
Smoking kills an average of more than 480,000 Americans per year. The health, social, and economic costs are massive. Tobacco taxes can do a lot more to help reduce that number. A 10% increase in the price of a pack of cigarettes would reduce demand for cigarettes among adults by 4%. The federal cigarette tax is $1.01 per pack, with other rates for other tobacco products. Raise them sky-high.
Raise firearm and ammunition taxes.
While attempts to ban particular types of firearms face a major uphill political battle (one so difficult it may be worth dropping them to enable other gun control laws to pass), taxing guns and bullets is a worthwhile alternative. There are already federal taxes on them, which fund conservation projects. Not only could increasing them raise revenue to fund any number of programs to reduce gun violence, but the taxes could be modified to encourage safe gun ownership. It’s worth a try.
Raise taxes on gasoline and other petroleum products.
Congress’ refusal to raise the federal gas tax is a recurring problem in debates about infrastructure. It’s only $0.184 per gallon, and it’s been stuck there since 1993, with inflation eroding its impact. Meanwhile, America’s highways deteriorate further and further. But a change to the nature of the tax could make an increase more palatable. Instead of the feds collecting the money and then returning it to the states with very precise rules about how they can spend it, Congress could devolve the tax to the states, letting each one choose its own transportation priorities. Since there’s so little public trust in the federal government (not without reason), let’s give the states a chance to do better.
Tax carbon emissions.
Biden’s desire to invest much more in alternatives to fossil fuels is very welcome. This is big step toward making the United States the world leader in tackling climate change. It would be even better if that were paired with a carbon tax. There are many benefits to it, economic and environmental. If the money raised went into public works — upgrading the country’s roads, bridges, airports, harbors, water systems, energy grid, and more — the benefits of the tax would be clear in people’s everyday lives.
More than 10% of Americans have diabetes, while about one in three American adults has prediabetes. The rise in obesity rates in the United States has been common knowledge for a long time. In 2016, South Africa passed a 10% tax on sugary beverages, to combat the highest rate of obesity in sub-Saharan Africa. Since then, purchases of the beverages taxed have fallen 16%. It’s worth trying here.
Legalize and tax marijuana.
This is a no-brainer.
Advertising is a form of pollution. In the American Interest in 2019, Adam Garfinkle suggested taxing it; indeed, he expressed surprise that no major figure on the left had put forward such a proposal already. Another interesting note is that, while “neoliberalism” is often used as a slur for people happy to let the free market run wild, the sociologist-economist who coined the term in the 1930s, Alexander Rustow, wanted to ban advertising. He thought that, in addition to being a vulgar practice of playing to the lowest common denominator, it gave big businesses an unfair advantage over small ones. Anyone who’s sick of rampant online advertising, not to mention billboards and other in-person ads, should consider supporting a tax on them.
There are other taxes to consider, and it’s also worth discussing cuts to different areas of federal spending. But we’d better not wait too long to seriously debate them. When World War II ended, the United States dominated the world economy. That wasn’t the case when COVID began, and unless some sudden and catastrophic shock hits China’s economy, it won’t be the case when COVID ends. There is a long list of challenges for the United States, and the longer Americans wait to pay to overcome them, the greater the chance we will fail.