By James Kwak
Tyler Cowen thinks that we are entering an age of debates over wealth taxes. If only.
It’s true, as Cowen notes, that national debt everywhere is a relatively small fraction of national wealth and that, therefore, “fiscal problems are best regarded as problems of dysfunctional governance.” One of our central arguments in White House Burning was that the United States obviously, easily has the ability to pay down the national debt, and how it will do so is basically a distributional issue.
Even if wealth taxes make sense, that doesn’t mean they will happen. Cowen claims that “Like the bank robber Willie Sutton, revenue-hungry governments go ‘where the money is.’” But all that is cleverly phrased is not true. Consider this chart from White House Burning:
Since the beginning of the current round of perceived deficit problems in the late 1970s, tax revenues have shifted away from income taxes (especially the corporate income tax) and toward payroll taxes—at a time when real wages have been falling. This trend was accentuated by the 1997 (Clinton-Gingrich) and 2003 (Bush) tax cuts, which reduced capital gains taxes first to 20 percent and then to 15 percent. As capital gains have made up a larger and larger share of income, we have been taxing them less and less, with only a partial correction this year. Our one significant wealth tax—the estate tax—was slashed by Bush; even after the latest tax compromise, the exemption is set at $5 million and indexed for inflation, as compared to $1 million (unindexed) only twelve years ago.
The reasons are obvious. As much as conservatives like to portray the federal government as some kind of Leviathan out to maximize its own size at the expense of the people, the reality is that for decades people who want to cut taxes have either held the reins of power or been able to veto policies they oppose. Since they are backed by the wealthy, of course they have set about reducing taxes on wealth at every opportunity. How is that going to change—when conservatives have more than a 2-to-1 advantage in outside spending (7-to-1 for groups that don’t disclose their donors)?