The progressive Economic Policy Institute is out with a menu of tax hike options it hopes policymakers will consider. The paper and the related Politico interview are worthy of a response.
“A lot of people assume the public is anti-tax. But they might just be very annoyed because they think the wealthy are avoiding their obligations,” said Josh Bivens of EPI, the author of the report…
“Might” taxpayers be “annoyed” because they “think” the wealthy are avoiding their obligations? A lot of fudge factors in that sentence. Certainly the latter point rings true — polling consistently shows that Americans believe corporations and wealthy individuals don’t pay enough.
But how much should the wealthy pay? And how much is fair? EPI doesn’t answer those questions, but S-Corp does.
Our friends at the Winston Group asked registered voters what tax rate they thought the wealthy currently pay. The average response was just 20 percent. When asked what’s the most the wealthy should pay, they responded with an average 31 percent rate. So the average voter thinks the wealthy are paying just two-thirds of what they think is fair.
Two problems for EPI. First, the average voter supports top rates well below what EPI is recommending. Second, high-income earners already pay more than what’s considered fair. On a marginal basis, they pay federal rates above 40 percent. On an average (effective tax rate) basis, top earners pay 32 or 33 percent of their income in taxes. Again, that’s above what the average voter thinks is fair, but well below what EPI recommends.
So where does that leave us? The typical voter believes the wealthy don’t pay enough taxes, but that’s because they vastly underestimate how much the wealthy pay, not because they support excessively high tax rates. The EPI is simply wrong in its assumption of where the voters are.
The group is prodding policymakers to raise taxes on the rich simply on the merits, in no small part so that regular taxpayers can have more trust in the system.…[Bivens added] that standalone tax increases “just improve the faith in the political process.”
If we raise taxes on the rich, the average voter would be willing to pay more themselves? Apparently, that’s the plan:
This is the preferred path, according to Bivens: The public sees the rich paying more and then becomes more open to increased tax obligations on themselves to pay for more social spending.
So the goal isn’t to fix the tax code, it’s to soften up the electorate for future, broad-based tax increases. EPI is saying the quiet part out loud: raise taxes on job creators now so voters will be more willing to stomach their own tax hikes later. Good luck with that.
The report itself is a regurgitation of the usual bad tax policy ideas – raising the top individual rate back to 39.6 percent and hiking the corporate rate from 21 percent perhaps all the way back to 35 percent. They also float a wealth tax alongside proposals to end the so-called “buy, borrow, die” strategy and convert the estate tax into a progressive inheritance tax. What these policies all have in common is not just the inevitable constitutional challenges, but that they’ve been tried and abandoned across the developed world.
The proposed wealth tax is a perfect example. When Norway enacted its latest wealth tax, it was sold as a way to make the rich “pay their fair share.” Instead, it made them pack their bags.
Within a year, hundreds of high-net-worth Norwegians fled the country, taking with them billions in capital, thousands of jobs, and a portion of the tax base the policy was designed to expand.
Now California is flirting with a proposed “billionaire tax,” backed by the regional SEIU union, that would impose a five percent levy on individuals and trusts with a net worth over $1 billion. While it’s billed as a one-time stopgap to bolster safety net services, the proposal is raising concerns among investors and entrepreneurs about the future of the state’s tax base.
The allure of easy revenue is not confined to the Golden State. Two years ago, we saw coordinated campaigns in multiple states (Washington, New York, and others) where legislators introduced copycat wealth tax proposals aimed squarely at family businesses. As we warned at the time, those proposals targeted those whose wealth was tied up in their companies, not bank accounts.
Illinois recently considered going down the same road, floating a “tax on unrealized gains” that would have hit businesses and investors alike. The idea was ultimately shelved, but only after opponents pointed out that taxing paper wealth would destroy liquidity, discourage investment, and punish firms for owning appreciating assets rather than selling them.
Wealth taxes and taxing unrealized gains are administratively unworkable, constitutionally dubious, and economically destructive. They punish ownership and reinvestment, the very traits that drive innovation, create jobs, and sustain communities. As we wrote a few years back, taxing unrealized wealth isn’t just bad economics – it’s an invitation to double taxation, valuation disputes, and endless compliance nightmares.
Policymakers shouldn’t be fooled. The American voter is very reasonable in what they expect public corporations and wealthy taxpayers to pay, and there’s no evidence whatsoever that “bait-and-switch” plans to tax the rich now and the middle-class later would ever have their support. Voters want a system that is simple and transparent, not one that drives investment offshore or treats family-owned businesses as the piggy bank for new spending ambitions.