Update 328 — Bicoastal Bids in Big Battle
As 2020 Contest of the Tax Proposals Unfolds
It’s a classic match-up — East Coast vs. West Coast, familiar champion vs. lesser-known challenger, with the biggest stakes on the line. Talking New England Patriots, the L.A. Rams, and Sunday’s Super Bowl? Yes, but also the first big-ticket economic policy debate of the 2020 cycle, between the tax proposals of expected and announced Democratic presidential candidates Sens. Elizabeth Warren of Massachusetts and Kamala Harris of California, respectively.
Credit to the candidates for leading with large-scale tax reform plans. The proposals couldn’t be more different and the contrast sets up a broad national debate on taxation, the deficit and debt, inequality, and growth as the new political cycle begins to take shape. More below.
Good weekends all. And beat LA.
Sen. Harris: Expansion of EITC
Sen. Kamala Harris has come out with a tax plan that is now part of her recently-announced presidential campaign platform. The LIFT the Middle Class Act (LIFT, for Livable Incomes for Families Today) is essentially a large expansion of the Earned Income Tax Credit (EITC). Singles without children who earn $50,000 or less and singles with children who earn $80,000 or less would receive tax credits up to $3,000. Joint filers earning $100,000 or less would receive tax credits up to $6,000. The Harris tax credit bill will end up costing $2.8 trillion over a decade.
Source: Tax Policy Center
The tax credit is meant to compensate working and middle class income-earners to help cope with rising costs of living, such as healthcare, rent, and childcare. It also fills a hole left by the Trump tax cuts (TCJA), which were made permanent for corporations but not for people. Individual tax cuts will expire in 2025. The tax credit would phase out for higher earners but clearly does not directly benefit Americans with no earnings.
Sen. Harris’ proposal has been lauded by many, but not all progressives.
- Progressivity: Expansion of the EITC is not generally seen as the centerpiece for progressive tax policy, but just a part of it. The EITC does not create revenue for social programs and only benefits tax-paying Americans, leaving out large parts of the population. Although expanding tax credits can be effective, progressive fiscal policy traditionally entails raising tax revenue to expand social programs. Prominent Republicans, including former Speaker Paul Ryan, have supported EITC expansion as an incentive to work, but the class of beneficiaries — and, so, the policy as a bulwark against inequality — is limited, writ large.
- Beneficiaries: Harris’ plan raises the after-tax incomes of the bottom 20 percent of taxpayers by 20.5 percent on average, but the tax credit does not apply to those who do not earn income. This population makes up about half the country and includes children, the elderly, the disabled, caregivers, and the unemployed, who also disproportionately make up the percentage of U.S. population living below the poverty line.
- Cost: Sen. Harris has indicated that she would fund the bill by eliminating aspects of the TCJA that give tax windfalls to the rich, as well as by imposing a new tax on large financial institutions. Doubts have been raised, though, about whether these levies would be enough to pay for her proposal.
Sen. Warren’s “Ultra Millionaire” Tax
While Sen. Harris’ plan focuses on providing tax credits to lower-income Americans, Sen. Warren’s plan aims to alleviate wealth inequality in the United States by targeting households with over $50 million in assets. Under the proposal, households over the $50 million threshold would be subject to a two percent tax on their net worth every year. This tax would rise to three percent for households with over $1 billion in assets. Sen. Warren’s plan would affect around 75,000 households out of the 110 million tax filers. It is estimated to raise $2.75 trillion in federal revenue over the next ten years.
Warren’s tax plan is a clear attempt to redistribute wealth in America, but the proposal also raises some important policy questions.
- Double taxation: Sen. Warren’s levy would be assessed annually, creating a situation where the same assets would be subject to the same tax annually, in perpetuity. Is this a case of double taxation? There is a similar ongoing furore over the fairness of estate taxes by some on the right, but with common property taxes in place for ages in thousands of mostly state and local jurisdictions essentially doing the same thing, there is plenty of precedent for Sen. Warren’s proposal.
- Enforceability: Full details of her plan have not yet been released, so it unclear how this tax would be assessed on “net assets.” The value of many assets are difficult to assess — a recurring issue in the calculation of estate taxes. Sen. Warren’s plan would also be an annual tax, making this challenge even more difficult. Additionally, those that are land-rich but cash-poor may be forced to liquidate assets as a result of her proposal.
- Effectiveness: Critics point to a 2016 study of Switzerland’s wealth tax which shows that for every 0.1 percent increase in their wealth tax, wealth reported to the government fell by 3.5 percent. Increasing wealth taxes could lead the ultra-wealthy to find more ways to evade taxation, potentially reducing tax receipts.
Roads to Redistribution
Although vastly different, both plans attempt to address rampant income and wealth inequality in America — Sen. Harris through tax credits for the working and middle class; Sen. Warren through a tax levy on the richest Americans. Current tax policy does and has done little to redistribute income and wealth. The wealthiest one percent of Americans own more wealth than the bottom 90 percent, and they earned, on average, 26.3 times as much income as the bottom 99 percent.
A Tale of Two Tax Plans
Not only are these two plans outside of what is considered traditional Democratic tax policy, they starkly differ. The key differences are in approach and message.
- Sen. Warren’s plan: directly affects the ultra wealthy by imposing a progressive tax starting at households with assets of $50 million, creating extra tax revenue. Assumedly, Warren intends to use the extra tax revenue to invest in social programs that help a wide-range of Americans, including non-earners, but she has not yet detailed how.
- Sen. Harris’ plan: prioritizes direct relief to the working and middle class rather than raising taxes on the wealthy. Although the way Harris intends to pay for the credits involves possible tax increases for the wealthy and financial institutions, that idea is not at the core of her proposal. At the very best, the plan is revenue neutral.
- Sen. Warren’s plan: emphasizes the degree of wealth inequality in America and addresses the injustice of the ultra wealthy who don’t pay their fair share.
- Sen. Harris’ plan: rewards those who work by providing relief to income-earning individuals and families that file taxes.
Sen. Harris’ and Sen. Warren’s tax plans reflect different priorities and different means to get there — the Democratic party at a crossroads. Both plans are well-intentioned attempts at redistributing wealth in an economy that is increasingly producing inequitable wealth and income distributions.
Will tax policy be the healthcare of the Democratic primary? In the 2018 midterm cycle, progressives ran on a Medicare-for-All platform, where establishment Democrats and red-staters alike stuck to campaigning on a single-payer model. While some progressive policies, like Medicare-for-all, seem to creep into the mainstream, others, like rejecting corporate and PAC contributions, explode into it. With these Warren and Harris plans already fiercely debated and more proposals to follow, the tax space has rarely been a more popular and engaged place to discuss Democratic ideology.