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The Democrats' latest idea on taxes will only help Trump
[WASHINGTON] One of my strongest political memories is of Democrats lamenting their loss to Donald Trump. How could this have happened, they asked. We won't ignore the Midwest again! We'll pay closer attention to the working middle class! Yet I now see Democrats making a similar mistake: They are talking about a 70 per cent marginal tax rate in a manner that could not be better designed to split their coalition.
Rep Alexandria Ocasio-Cortez has been promoting the idea of a 70 per cent top marginal tax rate, and Paul Krugman has been defending it. Matthew Yglesias of Vox has written that 70 per cent might be too low.
Call it the Trump re-election campaign.
Let's consider the economics of such a tax reform. Most of the income of America's super-wealthy comes not from labour but from capital. It can be earned through capital gains, exercising stock options, and from corporations with possible foreign domiciles. Raising the marginal income tax rate to 70 per cent will not, for better or worse, squeeze them very much.
Who then is most likely to pay more? Well, it depends on exactly which income level the higher rate would set in. But say you had a 70 per cent rate at US$500,000 and above. The biggest losers would be high-earning professionals in major cities and suburbs. Think doctors, lawyers, business consultants and the like, mostly on the coasts. A lot of those people live in blue states and are highly educated. More and more of them are educated women. All of these groups tend to be strongly anti-Trump, often passionately so.
And they are not just voters, they are donors, fundraisers, organisers and prominent voices in their communities. Some of them are even columnists for newspapers and web sites, or TV pundits. In essence, the Democrats would be giving some of their most influential supporters a huge pay cut. The party also would be telling them they can't ever hope to build up much of a financial cushion for the future.
You might think this is all fair compared to what the government does to address the travails of a single mother trying to get by on US$27,000 a year. But I don't think that message will be especially well-received.
Keep in mind the 70 per cent marginal tax rate is on the federal level. If you live in, say, California, the maximum state income tax rate is over 12 per cent, which could increase your total marginal rate to more than 82 per cent. (Just imagine if the 12 per cent were added to an 80 per cent marginal income tax rate.) If you then consider that some cities have income taxes, and the effect of sales taxes, then the true marginal rates go higher yet.
You don't have to be an Arthur Laffer supply-sider to suspect that is bad economics. Nor do you have to be an especially close follower of the news to realize that it is also disastrous politics.
The responsible fiscal view is this: Right now the US has a large and growing fiscal gap. And no one knows just how strong an appetite the rest of the world will have for US Treasury securities as the federal government's debts and deficits grow. Eventually, the solution to this problem will require adjustments of unknown size on a number of magnitudes, including both spending trajectories and taxes. It is very likely that the solution will involve some higher tax rates on higher earners.
I know that doesn't sound as progressive or as dramatic as a 70 per cent marginal tax rate right now. But it is closer to what a consensus of economists might agree with.
By the way, you might be tempted to boost taxes on capital income too, or maybe instead of hitting the high-income professionals. But keep in mind that a lot of capital is internationally mobile, and the social democracies of Western Europe typically have low tax rates on capital income. (They tend to fund their additional expenditures through value-added taxes.) "Soak the rich," however easy it may sound, doesn't automatically make the government more just or responsible. Finally, Democrats should remember this: Their last president proposed cutting the corporate tax rate to 28 per cent.
I am not a Democrat (or a Republican), but I have some simple advice for members of the party: If you wish to defeat President Trump, talk about health care, wages, good jobs and the economy. As a secondary issue, get some generals to repeat endlessly on TV that US foreign policy could be far more reliable and stable. You should also run on competence, and on the value of respect for all the American people. Be a little boring, because Trump himself will motivate your base to turn out. Recognize that you'll never be that popular on the tax issue.
Most of all, don't get so many of your biggest and most influential supporters wondering why you want to punish them so much.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "The Complacent Class: The Self-Defeating Quest for the American Dream."