04 02 2019

Two Paths on Taxes

While Elizabeth Warren is proposing a tax hike for the wealthiest Americans, Kamala Harris wants a tax cut for some of the poorest.

TWO OF THE LEADING Democratic presidential candidates are taking diverging paths on how to retool the nation's tax system, setting up an early contrast that could force a substantial political and economic debate within the party.

Sen. Elizabeth Warren of Massachusetts is putting forth a novel approach in proposing taxing the wealth of "ultra millionaires," defined as the approximately 75,000 Americans with more than $50 million in assets.

She'd stick a 2 percent annual tax on those with a net worth between $50 million and $1 billion and a 3 percent tax on billionaires – plucking new revenue streams from those at the very "tippy top" of the economic ladder.

Conversely, Sen. Kamala Harris of California is pitching a lower-middle-class tax cut for households earning under $100,000 annually and single people making under $50,000 a year. Families would pocket $6,000 annually and individuals would receive $3,000 through Harris' refundable tax credit plan, which she's promised would be "the largest working- and middle-class tax cut in a generation."

Eat the rich or boost the poor? The two top-tier contenders are attempting to address the country's yawning economic disparities from different ends of the spectrum: Warren with a tax hike at the top and Harris with a tax cut at the bottom.

Warren's audacious plan has earned considerably more public blowback than Harris' more conventional approach. Former Starbucks CEO Howard Schultz, who is considering an independent run for president in 2020, demeaned it as "ridiculous" and "not something that's ever going to be passed." Former New York City Mayor Michael Bloomberg, who is contemplating a campaign as a Democrat, opined that it's probably unconstitutional. Conservatives piled on to say it would kill jobs, discourage investment and stifle growth.

But Howard Gleckman, a senior fellow at the nonpartisan Tax Policy Center, thinks that Warren's path may actually be more politically powerful than Harris'.

"As a political matter, Warren is on to something that Harris isn't," Gleckman says. "Warren is playing on this feeling among voters that rich people and corporations are not paying enough tax and she's going to make them pay more tax. Harris, on the other hand, is saying 'I'm going to cut your taxes.' And people basically say, 'Eh, I think I'm kinda paying OK.'"

Gleckman's assessment is based on his belief that while middle-income people will always take a tax cut, they aren't necessarily clamoring for one. On the other hand, the idea that the rich aren't paying enough is not only enormously popular, it's galvanizing, especially among Democrats.

"This will have broad appeal ... A small tax on tens of thousands could bring economic prosperity to tens of millions."

A Fox News survey this month found 70 percent of voters support hiking tax rates on those making more than $10 million annually, and 65 percent support higher rates for those earning more than a million. But Warren isn't even attempting to touch income. She's trying to pry open the concentration of accumulated wealth – which can be defined broadly from real estate holdings to yachts to art collections. It's projected to raise $2.75 trillion over a decade, which Warren has said she'd apply to implementing universal childcare, student loan relief or a treasure trove of other programs at the top of liberals' wish list.

"This will have broad appeal," says Gene Sperling, the director of the National Economic Council for Presidents Barack Obama and Bill Clinton, who consulted with both Warren and Harris on their plans. "We already have a wealth tax in this country in the form of a property tax that just hits the middle class. People are screaming now when suddenly it's going to hit a wider array of assets that are held by the very, very, very most fortunate people in our country. This will leave a lot of room for 99.9 percent of Americans to surpass their wildest dreams and not be burdened by the tax or any complexity. A small tax on tens of thousands could bring economic prosperity to tens of millions."

A YouGov poll funded by the liberal Data For Progress firm, found 61 percent overall support for Warren's wealth tax, including 76 percent support among Democrats and even a plurality of support among Republicans, 44 percent to 37 percent.

Still, while Warren's plan looks politically popular, that doesn't make it legislatively probable. The world is moving away from wealth taxes. In 1990, a dozen of the nations that make up the Organization for Economic Cooperation and Development used them; now just four of the 36 countries continue to.

Despite her pledge of greater enforcement to nail down the valuation of assets, economists say the nation's wealthiest will always find ways to game the system, through tax shelters or even citizenship changes.

"If it's 2 percent tax, is it worth it for Jeff Bezos to pay $2 billion a year to stay a U.S. citizen?" asks Dean Baker, the co-founder of the Center for Economic and Policy Research. "It may well not be."

Gleckman believes that an army of crafty attorneys will find ways to reduce valuations to get their clients under Warren's $50 million threshold, "so she's going to generate a lot less revenue from this tax than she thinks she is."

He adds, "You've almost got to laugh at the idea of funding the IRS. Nobody wants to fund the IRS. .. [It] would not be easy to get passed."

Harris' tax cut plan, which she introduced in Congress earlier this month as the "Lift the Middle Class Act," is a more conventional approach and is praised by Democratic economists for its effort to continue the expansion of the earned income tax credit at a cost of around $200 billion a year.

One estimate pegs Harris' proposal as about the same size as President Donald Trump's tax cuts, except that it targets the lower end of the spectrum. But given her endorsement of a "Medicare for all" system that discards private insurance, she's bound to hear repeated questions about how she'll pay for all of the towering costs without blasting an even bigger hole in the deficit.

Asked what she thinks of Warren's wealth tax, a Harris spokesman replied, "She has her own tax plan." But Harris has signaled that those earning at least $10 million annually should have to contribute more taxes, too.

A former top Obama administration economic official who requested anonymity because he considers Harris a friend says, "When I see Kamala's thing, I say, really? Six thousand dollars for everybody? I've done too many tax proposals. Once you get into the broad middle class, the price of the proposal goes through the roof."

"I don't think it's impossible, but can you really do that and 'Medicare for all' and free college?" he asks skeptically.

But as any casual observer knows, campaigns are run in lofty poetry and administrations are guided by sober prose. Right now, in the first inning of the Democratic primary campaign, all of the progressive energy is demanding big, bold ideas, without caveats or restraint. That means there's little risk to overpromising, even if it means having to scale back expectations later on.

On Thursday, Sen. Bernie Sanders of Vermont became the latest to put forward a specific tax hike, advocating for a 77 percent tax rate on the estates of billionaires and a 55 percent rate on those with more than $50 million in holdings.

In the tax debate, the threshold on the left is clear: Taxing the rich is popular and mainstream, perhaps more so than ever – and on this important litmus test, Warren has gotten the early jump, leading the pack to where most Democratic candidates will likely end up.

"The degree to which Trump at many points, and Republicans, have tried to deny the degree to which they're cutting taxes on the wealthy is indicative to where they see this conversation going," says Jacob Leibenluft, an economist with the liberal Center for American Progress who advised policy for Hillary Clinton's 2016 campaign. "I think there's considerable room for a more full-throated defense of taxing the wealthy. A component of any viable Democratic or progressive economic platform is going to be higher taxes on the wealthy."