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The Democrats Are Losing Their Nerve on Taxes

Not that they had much to begin with. But it’s getting worse.

Rod Lamkey/Getty Images

I pride myself on being a pragmatist. When Democrats splintered on how to write the reconciliation bill, I advised readers to stop fretting; this will get done. I even showed how to get the bill’s cost down from $3.5 trillion to $2.5 trillion. Then somehow the price tag dropped to $2 trillion. Okay, whatever. Surely there’s $500 million more to cut.

But now the negotiators are hitting bone. Farewell, two years’ free tuition at community college. The Wall Street Journal says four-year colleges are lobbying against it because they don’t want to have to compete for students by dishing out more financial aid. Shame on them. The New Republic’s Grace Segers reports that the expanded Child Care Tax Credit is up for grabs, even though it’s Biden’s signature domestic program.

But that isn’t the worst of it. The worst is that Senator Kyrsten Sinema, author of a 2009 book extolling the virtues of political compromise (“letting go of the bear and picking up the Buddha”), has firmed up her previous opposition to raising tax rates on businesses, individuals, or capital gains, and now, reports The New York Times, the Biden administration and congressional Democrats are “moving toward dropping” such plans.

Last month I speculated that Sinema’s opposition might provide an opportunity to pass a carbon tax, given Sinema’s stated enthusiasm for measures to halt climate change. That would have been lovely. But now Manchin and Senator Jon Tester of Montana say it isn’t on the table, and we still don’t know whether even Sinema would support it. So I’m not holding my breath.

What, Sinema, is so godawful about raising top marginal tax rates? In your lefty days you probably noticed that the United States government let its once-great progressive income tax go to seed. This is perhaps the single biggest domestic-policy failure of the past half-century. The American bargain had always been to eschew the de facto income redistribution that Europeans achieve through universal government programs and instead deliver it in hard cash through a more progressive income-tax system than the Europeans would tolerate. That’s still America’s basic approach, but it’s eroded badly over my lifetime.

Until my sixth birthday the top marginal tax rate on personal income was 91 percent. When I was 24, President Ronald Reagan dropped it from 70 percent to 50 percent, then later to 38.5 percent, then still later to 28 percent. These changes left his successor, President George H.W. Bush, with a budget deficit of $221 billion, prompting Poppy to increase the top rate to a still-shockingly-low 31 percent. For this, many believe, he was voted out of office. That isn’t really true, but you’d be hard-pressed to find any political professionals who believe otherwise.

Clinton lifted the top marginal tax rate further, to 39.6 percent. That’s as high as anyone who succeeded him could manage, so he probably deserves more credit for the achievement than he gets. Clinton even managed, for a brief turn-of-the-century moment, to balance the budget. But 39.6 percent still wasn’t nearly high enough either to halt growing income inequality or to sustain domestic policies that, even by diminished American standards relative to Europe, would meet the country’s needs.

Since 1993, politicians have played pathetically small ball on personal income tax rates. President George W. Bush was a hero to conservatives for dropping the top rate to 35 percent. President Barack Obama was a hero to liberals for raising it back up to 39.6 percent. President Donald Trump dropped it back down to 37 percent.

Now all President Joe Biden wants to do, the poor bastard, is raise the top marginal rate back to Clinton’s 39.6 percent. You won’t feel it if you’re among the 98 percent of Americans whose income is less than $400,000. (Marginal tax rates affect only that portion of your income above a certain threshold; in this instance, on every dollar you earn above $400,000.) But Kyrsten Sinema won’t let him. She won’t even let the Democrats raise the top marginal corporate income-tax rate to 26.5 percent, which is less than Biden’s proposed 28 percent, which is much less than the 35 percent it was before Trump dropped it to 21 percent, and that was less than four years ago. For most of Reagan’s presidency, the top marginal corporate rate never fell below 40 percent.

Even if you think the spending level in the reconciliation bill should be zero, you can’t logically call yourself a fiscal conservative and oppose higher marginal tax rates for both individuals and corporations. You just can’t. In 1990 a budget deficit of $221 billion (about $476 billion in current dollars) was enough to scare the bejeezus out of George H.W. Bush. That was about 4 percent of Gross Domestic Product. Today the budget deficit is $3 trillion, or about 13 percent of GDP—a larger share, except for last year, than any year since 1945, when we were deficit-financing a world war. If we add $2 trillion to that, we’ll need to hike marginal rates on individuals and corporations. If we don’t add $2 trillion to that … we’ll still need to hike marginal rates. I know Modern Monetary Theory says we won’t, but we will. It may perhaps be a poor strategy to point out that we have a really big deficit when you favor, as I do, the once-in-a-generation expansion of social welfare programs that Democrats are trying to achieve. But we do.

Even before you consider the cost of this expansion, Americans are seriously undertaxed. Rich people and corporations are undertaxed the worst, and yes, we need to raise taxes on them the most. But we need to tax the merely affluent more, too. By historic standards, the average effective federal tax for everyone fell from 22.4 percent in 1979 to 19.3 percent in 2018, the last year for which data are available. The decrease was more glaring for the top 1 percent in income distribution, who saw their average effective federal tax fall from 35.1 percent to 30.2 percent (assuming they paid taxes at all; the reconciliation bill would expand IRS funding to bust rich tax cheats). But it fell in every income category. And though we can cheer that the bottom quintile saw its effective tax rate fall during this period from 9.3 percent to zero—the one truly progressive change to our tax code since 1979—it doesn’t make much sense that people earning well above the median should pay less, too. Next time you complain about lousy government services, consider how little you pay for them.

Capital, of course, is undertaxed even worse than personal income. It’s gotten to be a bad joke. The maximum capital gains rate was about 40 percent in 1979. Today it’s about half that. The top corporate rate is less than half what it was in 1979. These changes, even more than changes in the personal income tax, have helped drive the historic growth in income inequality that began around 1979, especially at the high end.

We have two political parties in the United States. One has been systematically cutting taxes for four decades. That’s the Republicans. The other has mostly been too terrified to increase them. That’s the Democrats. If this second group lets Kyrsten Sinema win on taxes, it will be hard to see much practical difference between them, and that will hurt Democrats in the midterms.