- Broad tax increases would hit top earners hardest, report says
- Proposals could reduce incentives to invest, study finds
Senator Bernie Sanders’s proposals for sweeping tax hikes on businesses and individuals to bankroll universal health care, infrastructure and free college tuition would raise $15.3 trillion over the next decade but “substantially reduce incentives to save and invest in the United States,” according to a new policy study.
Sanders’s plan would “modestly raise” tax rates for average taxpayers and “raise them significantly for high-income taxpayers,” according to the report by the Tax Policy Center, a research group in Washington, D.C. that’s a joint venture of the Urban Institute and the Brookings Institution. The report is the last of the center’s analyses of leading presidential candidates’ tax plans.
While the plan -- which would be sure to face opposition in a Republican-controlled Congress -- could generate benefits by increasing “the nation’s investment in productive physical and human capital,” economists are unsettled on the question of just how much increases in tax rates spur or stymie economic growth. Sanders’s proposals “would be a great experiment,” said Len Burman, director of the Tax Policy Center.
Warren Gunnels, Sanders’s policy director, criticized the tax center’s findings. The analysis was conducted “in a vacuum without taking into account the savings the American people would gain” under the candidate’s proposal to replace private health-insurance with a publicly funded “Medicare-for-all” plan, he said. Gunnels cited an earlier study by Citizens for Tax Justice, which found that 95 percent of U.S. households would see their take-home pay increase under Sanders’s health plan.
Sanders would tax capital gains as ordinary income and eliminate opportunities under current law for avoiding the tax through gifts and bequests of appreciated property. Under Sanders, the top marginal tax rate on long-term gains and dividends would more than double to 64.2 percent from 23.8 percent, the report said.
Still Sanders, who describes himself as a Democratic socialist and is seeking the Democratic presidential nomination, would generate about 40 percent of his trillions in new revenue from broad-based plans that include levying an additional 2.2 percent income tax on all taxpayers; implementing a 6.2 percent payroll tax that would be paid by employers on all earnings; expanding the Social Security payroll tax to earnings over $250,000; and imposing higher rates on the highest incomes, the report said. Those taxes would pay for Sanders’s health-care program, which he says will cost $1.38 trillion a year.
“This is a very ambitious proposal,” Burman said. “Changes of this magnitude are going into uncharted territory.”
Tax increases on Americans with the highest incomes would generate about 25 percent of the new revenue. Sanders would create a new top marginal rate of 52 percent for people who make more than $10 million a year. (The current top rate is 39.6 percent.)
The remaining 35 percent of the new revenue Sanders envisions would come from higher taxes paid by businesses, a new tax on financial transactions and a new tax on carbon emissions.
If not spent on new programs, the revenues would be enough to reduce the national debt by $18 trillion through 2026 and, by 2036, eliminate the $56 trillion debt, the report said. Instead, he proposes an array of new spending initiatives -- which like his tax measures, would face political opposition in a Republican-controlled Congress.
“Sanders is clearly betting that people are willing to pay for his expansive welfare state” and “is very clear about how he’d pay for it,” Burman said. In fact, he said, Sanders’s plans are more detailed than any other presidential candidate’s in laying out how he would raise revenue.
While Sanders’ proposals share some elements with those of Hillary Clinton, the Democratic presidential front-runner, the two are “radically different” in general, Burman said. Clinton’s plans “are more incremental,” he said. “Bernie Sanders clearly wants to change things radically. There’s a very, very clear choice.”
Sanders wants to reduce student debt and bankroll free tuition at public colleges and universities, at a cost of $75 billion a year, through a financial transactions tax of 0.5 percent on stock sales and 0.1 percent on bond sales and 0.005 percent on derivatives. Tax-exempt municipal bonds and short-term debt would be exempt.
The tax “appears as likely to increase market volatility as to curb it,” the center wrote, adding that taxes at the rates Sanders proposes “would discourage all trading, not just speculation and rent seeking.” The center said the stock sales tax was “likely to be inefficiently high.”
In contrast, the center said, Sanders’s proposed carbon tax “would make markets work better by putting a price on carbon emissions, thereby forcing households and businesses to take account of the environmental costs of their activities.” The tax would start at $15 per ton of carbon dioxide and rise to $73 per ton in 2035, rising 5 percent more plus the inflation rate in subsequent years. The tax, paid by businesses, would be rebated to those reporting less than $100,000 a year in adjusted gross income. While it would reduce revenues from some other federal taxes, the carbon tax would raise net federal revenues by approximately $900 billion over 10 years, according to the center’s report.
Under Sanders’s plan, corporations would see their average U.S. tax rates rise to 37 percent, from the current 35 percent, while new equity-financed investment would see tax rates rise to 44 percent, Burman said. “This could have a significant effect on the economy,” he said.
Sanders proposes to end deferral of overseas earnings, a provision that allows companies to keep profits of foreign subsidiaries overseas to avoid paying U.S. income taxes on them indefinitely. Ending deferral “could put U.S.-based multinationals at a competitive disadvantage by raising the tax rate they pay on income earned in low-tax countries compared with taxes paid by foreign-based multinationals,” the center’s report said. The change “would create greater incentives for U.S. firms to change their tax residence through mergers with foreign-based firms,” it said.
Sanders’s plan for curbing inversions, in which U.S. companies merge with offshore companies to move their tax addresses abroad to lower-tax countries like Ireland, would require companies’ senior managers to also move overseas. That “could raise the economic costs of inversion” to the U.S., if companies also move their research and development staffers to foreign countries, the center said.
Sanders also wants to limit corporate use of foreign tax credits and prevent earnings stripping, in which multinational companies reduce taxes by loading up their U.S. subsidiaries with deductions while transferring income to affiliates in low-tax countries. He would also eliminate certain tax breaks for oil, gas and coal companies.
Sanders proposes a two-tiered system with a base income tax rate of 28 percent, with graduated taxes on the wealthy on top of that. The wealthiest would pay a top rate of 52 percent. His plans would raise the average taxpayer’s annual taxes next year by almost $9,000, lowering average after-tax income by 12.4 percent.
Those whose incomes place them in the top 0.1 percent of taxpayers would be hit the hardest. They’d see an average tax increase of $3 million in 2017, or nearly 45 percent of their $6.9 million average after-tax income, according to the report. By contrast, the average tax increase for the lowest-income households would be $165, a reduction of 1.3 percent of after-tax income. Middle-income households would have an average tax increase of about $4,700, or 8.5 percent of after-tax income.
“The increases in marginal tax rates under the plan would reduce incentives to work, save, and invest,” the report said. They would also “increase the disincentive for potential second earners to enter the workforce.”
Sanders would also expand the estate tax to cover individual estates worth more than $3.5 million, down from $5.45 million today. And he’d impose higher graduated rates on the largest estates, up to 65 percent for individuals with estates of at least $500 million, or at least $1 billion for married couples. A 10 percent surtax would apply to those estates.