National Review -To finance a vast expansion of the federal government, including a new single-payer health system, Bernie Sanders, the winner of the New Hampshire Democratic primary, is promising a massive increase in taxes, and not just on the rich. But as Josh Barro of the New York Times explains, Sanders is probably understating the extent to which his ambitious domestic policy agenda will necessitate large tax increases on middle-income households.
The Sanders campaign is calling for federal top tax rates that would push the average combined top tax rate (factoring in state and local taxes, among other levies) to 73 percent on income over $10 million and just over 65 percent on income from $500,000 to $2 million. The number of households earning such high incomes is very small in any given year. In 2014, the threshold for membership in the top 1 percent was over $615,000. It’s also true, however, that high-income households account for a large share of total federal income tax revenue: that same year, the top 1 percent paid 45.7 percent of all federal income taxes while the top fifth of households as a whole paid 83.9 percent. The more progressive the federal income tax system gets, the more sensitive federal income tax revenues are to the behavior of high-earning households. And though we can’t say for sure how high-earners will react to dramatic increases in their income taxes, it’s a safe bet that they might start reducing their pretax incomes, whether by working fewer hours, being less aggressive in negotiating for higher cash compensation, or finding more creative ways to dodge the IRS. Indeed, to some policy thinkers on the left, the fact that high marginal tax rates will reduce pre-tax income is a feature rather than a bug. Barro interviews Thomas Piketty, a French economist and one of the leading intellectual proponents of increasing taxes on income and wealth to combat the concentration of wealth, who tells him that if Sanders’s tax hikes were to somehow come to pass, “I think pretax top incomes would finally start to decline.”
It turns out, however, that the Sanders campaign assumes that drastic increases will have absolutely no effect on the behavior of high earners, as Barro reports:
“We do not assume taxpayers change their behavior,” said Warren Gunnels, the policy director for the senator’s campaign. He said the tax rates under the plan were not chosen with an eye toward the Diamond-Saez hypothesis, but rather to generate sufficient revenue to pay for the senator’s policy proposals. He said the plan assumes that new, higher rates would be applied to the existing income base, without taxpayers reporting lower incomes.
How about that?
It must be stressed that federal income taxes are only part of the larger federal revenue picture. Only 46 percent of all federal revenues come from federal income taxes while another 34 percent comes from payroll taxes, which by design are borne more heavily by low- and middle-income households. To his credit, Sanders acknowledges that his plans for growing government will require tax increases on middle-income households, which is why he’s calling for the creation of entirely new payroll taxes. But if he’s counting on a surge of income tax receipts from high earners, and if high earners respond by earning lower incomes, well, he’ll simply have to raise taxes on middle-income households by quite a bit more than he’s promised so far. Taxes on middle-income households are relatively low in the U.S. when compared to other countries, perhaps Democratic voters welcome the prospect of trading some amount of their hard-earned disposable income for guaranteed access to a government-run health system. I’m skeptical. And if Sanders nevertheless emerges as the Democratic nominee, I suspect his Republican opponent will be quick to remind voters of what exactly is at stake.
by Reihan Salam -