If you follow the contest between Hillary Clinton and Bernie Sanders, most of the tax discussion is about who has the best plan to squeeze the rich with ever-higher tax rates.
For those motivated by spite and envy, Bernie Sanders “wins” that debate since he wants bigger increases in the tax rates on investors, entrepreneurs, business owners, and other upper-income taxpayers.
For those of us who don’t earn enough to be affected by changes in the top tax rates, this may not seem to be a relevant discussion. Some of us like the idea of higher tax rates on our well-to-do neighbors because we expect to get a slice of the loot and we think it’s morally okay to use government to take other people’s money. Others of us don’t like those higher rates because we don’t resent success and we also worry about the likely impact on incentives to create jobs and wealth.
But all of us are making a mistake if we think that the policy proposals from Bernie and Hillary won’t mean higher taxes on ordinary Americans.
Here are three basic proposition to help explain why lower-income and middle-income taxpayers are the ones who face the biggest threat.
- Hillary and Bernie want government to be much bigger, because of both built-in expansions of entitlements and a plethora of new handouts and subsidies.
- There’s not much ability to squeeze more money from the “rich” and America already has the developed world’s most “progressive” tax system.
- The only practical way to finance bigger government is with big tax hikes on the middle class, both with higher income taxes and a value-added tax.
There’s not really any controversy about the first proposition. We know the two Democratic candidates are opposed to genuine entitlement reform, so that means the burden of government spending automatically will climb in coming decades. And we also know that Hillary and Bernie also want to create new programs and additional spending commitments, with the only real difference being that Bernie wants government to expand at a faster rate.
So let’s look at my second proposition, which may strike some people as implausible, particularly the assertion that America has the most “progressive” tax system. After all, don’t European nations impose higher tax rates on the “rich” than the United States?
Yes and no, but first let’s deal with the issue of whether the rich are a never-ending spigot of tax revenue. The most important thing to understand is that there’s a huge difference between tax rates and tax revenue. If you don’t believe me, simply look at the IRS data from the 1980s, which shows that upper-income taxpayers paid far more to Uncle Sam at a 28 percent tax rate in 1988 than they paid at a 70 percent tax rate in 1980.
And keep in mind that there are incredibly simple – and totally legal – steps that well-to-do taxpayers can take to dramatically lower their tax exposure.
The bottom line is that high tax rates penalize productive behavior and encourage inefficient tax planning, the net effect being that higher tax rates won’t translate into higher revenue.
Moreover, as shown by a different set of IRS data, the American tax system already is heavily biased against the so-called rich. Even when compared with other countries. There are some nations that impose higher top tax rates than America, to be sure, but that’s only part of the story. The “progressivity” of a tax system is based on what share of the burden is paid by the rich.
And if you look at this data from the Tax Foundation, particularly the two measures of progressivity in columns 1 and 3, you can see that the United States gets a greater share of taxes from the rich than any other developed nation.
By the way, the data is from the middle of last decade, so the numbers are probably different today. But since we’ve taken more people off the tax rolls in the past 10 years in America while also increasing tax rates on upper-income households, I would be shocked if the United States didn’t still have the most “progressive” tax code.
In any event, the most important takeaway from the Tax Foundation data is that America has the most “progressive” tax system not because we impose the highest tax rates on the rich, but rather for the simple reason that the tax burden on lower-income and middle-income taxpayers is comparatively mild.
In other words, the tax burden on the rich in America is not particularly unusual. Some nations impose higher tax rates and some countries impose lower tax rates. But because other taxpayers in the U.S. pay very low effective tax rates, that’s why the overall tax code in the United States is so tilted against the rich.
Which brings us to the third proposition about the middle class being the main target of Hillary and Bernie.
Simply stated, the only practical way of financing bigger government is by raising the tax burden on lower-income and middle-income Americans. As already explained, there’s not much leeway to generate more tax revenue from the “rich.”
In other words, the rest of us have a bulls-eye painted on our backs. Our tax burden is relatively low by world standards and there are simple and effective ways that politicians could grab more of our income.
Let’s look at some of the details. The folks at the Pew Research Group crunched the data for 39 developed nations to compare tax burdens for various types of middle-income households. As you can see, taxpayers in the United States are relatively fortunate, particularly if they have kids.
Here are some excerpts from the article.
…most research has concluded that, at least among developed nations, the U.S. is on the low end of the range. We looked at 2014 data from the Organization for Economic Cooperation and Development’s database of benefits, taxes and wages, which has standardized data from 39 countries going back to 2001 and allows comparisons across different family types. …We calculated this for four different family types: a single employed person with no children; two married couples with two children, one with both parents working and the other with one worker; and a single working parent. In all cases, the U.S. was below the 39-nation average – in some cases, well below. …Much of the difference in relative tax burdens among different countries is due to the taxes that fund social-insurance programs, such as Social Security and Medicare in the U.S. These taxes tend to be higher in other developed nations than they are in the U.S.
And here’s the most shocking part of the article. The aforementioned data only considers income taxes and payroll taxes.
…the OECD data don’t include…other national taxes, such as…value-added taxes.
This is a huge omission. The average VAT in Europe is now 21 percent, so the actual tax burden on taxpayers in other nations is actually much higher than shown in the chart prepared by Pew.
Let’s look at the scorecard.
- Non-rich Europeans pay higher income tax rates.
- Non-rich Europeans pay higher payroll taxes.
- Non-rich Europeans pay the value-added tax.
And because all these taxes on lower-income and middle-income people are the only effective and realistic way to finance European-sized government, this is the future Hillary and Bernie want for America. Even though they won’t admit it.
P.S. I can’t resist pointing out that the countries most admired by Bernie Sanders, Denmark and Sweden, both have tax systems that are far less “progressive” than the United States according to the Tax Foundation data. And the reason for that relative lack of progressivity is because of a giant fiscal burden on lower-income and middle-income taxpayers. And that’s what will happen in the United States if entitlements aren’t reformed.
P.P.S. Since I’m a fan of the flat tax, does that mean I like the countries with lower scores in column 3 of the Tax Foundation table? Yes and no. A lower score obviously means that a nation’s tax code isn’t biased against successful taxpayers, but it’s also important to look at the overall size of the public sector. Sweden’s tax system isn’t very progressive, for instance, but everyone pays a lot because of a bloated government. It’s far better to be in Switzerland, which has the right combination of a modest-sized government and a non-discriminatory tax regime.
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Dan Mitchell, middle class is a term laced with class envy leftist language.
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Demonrats, the party of the little guy, the middle class–right! We are Demonratic carron. Munch on, that is if Barry leaves you any scraps.
Hillary an Bernie don’t want to destroy America. But they will have to in order to give voter-lemmings what they promised in exchange for being elected into high office.
Politicians, in order to keep their futile and suicidal policies alive — yet one more day — in a declining economy (an economy that is structurally growing at rates below the world average) will have to tax the middle class. This scenario has played in most other countries and it just seems naive Americans are now finally stepping on the same banana peel.
There just isn’t enough money in the pool of few rich people to distribute more than a few extra thousand dollars per person. Especially since, at the margin, many of the most productive people will withdraw from extreme “greed” and let their companies be overtaken by international competition. Have you seen the French Steve Jobs? He surely is somewhere there amongst the sixty million French but has not enough enthusiasm to outcompete Apple. Even if he personally did have enough enthusiasm his overtaxed employees do not. Many French Steve Jobses have even tried, only to see their companies never flourish or fold in mediocrity. The rest quickly got the lesson: “It just ain’t worth it to waste your youth that way — mediocrity ain’t worth it”. Just go to France and advertise to your French friends that you will start a company to compete with Apple. Let’s see what reaction you get.
In an economy that is growing slower than the world average nothing is sustainable. You relentlessly compound down towards the world average.
PS. Greece is about to up its VAT tax to 24% (on top of a 56% income tax over $70k) to align itself with its French economic teachers.
PPS. Top tax rates in Europe kick in at a mere 2-3X average income — and, on top, the middle class pays a hefty 22-24% VAT on everything they buy. That is the world of Bernie and Hillary. The world of structural 1% growth to decline. The trajectory of becoming a middle income country by the latter half of the century — a fate that our European brethren are on trajectory to reach even sooner.
PPPS European nations tried to tax the rich even more. But they hit upon the Laffer curve — and worse the resultant low growth rates — so they had to resort to taxing the very middle class whose collectivist aspirations they were pandering to.
While the income tax data is interesting, that is not how the middle class gets soaked.
In an economy where the primary tax collections come from consumption taxes (and yes that does include salary income, payroll, excise, corporate income taxes) the middle class is soaked through the prices they pay for products and services.
It does not matter how high any individual tax is, the consumer pays. The primary reason VAT and FairTax plans are bad is that high levels of tax can be hidden in prices. The consumer does not know that businesses are trying to keep prices down for competitive reasons, they only see a high price and think that greedy capitalists are at fault.