A central theme among the candidates vying for the Democratic presidential nomination has been increasing the tax burden on the wealthy. This trend is expected to continue as more candidates unveil their tax proposals. For instance, Sen. Elizabeth Warren (D-MA) recently unveiled a plan for a new 7% tax on corporate profits in excess of $100 million.
While the first two articles in our 2020 Campaign and Taxes series explored some starting proposals and proposals to tax trading transactions, the reasoning behind the “tax the wealthy” trend deserves study as well. Understanding this motivation helps to provide some context in analyzing candidates’ plans.
While tax policy can be used as a way to regulate behavior by targeting specific activities (such as the recent trading tax proposal or the 2010 tax law change concerning essential health coverage), the current trend is different. Instead of targeting activities, these candidate tax proposals are aimed at one group – the wealthy. This group is not defined so much by those with exceptional compensation as it is by those with exceptional earning power.
To illustrate the difference, consider athletes and team owners. An athlete who makes annual income of $10 or even $20 million may earn an exceptional level of compensation, but that compensation is subject to the athlete’s performance and is potentially at risk if the athlete gets injured. On the other hand, a team owner often has a background in or history of wealth. In owning the team, he or she has earning power that is less contingent. And it is the earning power of this latter group that has driven most of the candidates’ proposals.
A recent study claims that the top .1% of the U.S. population possesses 20% of the wealth in this country, and the top 10% owns more than 70% of the nation’s wealth. The study further claims that this dynamic has skewed more in favor of this class during the last 30 years. Significant tax law changes also spanned this period, including the Reagan tax cuts of the 1980s, the Bush tax cuts of the early 2000s, and President Trump’s 2017 tax reform law, commonly known as the Tax Cuts and Jobs Act (TCJA). These tax cuts collectively reduced the highest marginal tax rate for individuals from 70% in 1981 to 35% in 2018. For corporations the drop was from a 46% rate in 1986 to the current 21%.
How the Candidates are Responding to Tax Trends
The recent trend in candidates’ tax proposals may be a direct reaction to this and similar data, with candidates ultimately trying to alter the wealth dynamic or disparity. Having said that, the approach under each of the proposals differs markedly.
Sen. Warren’s wealth tax was explored in the first article of this series. Another proposal from Sen. Bernie Sanders (D-VT) aims to revamp the estate tax. Senators Cory Booker (D-NJ) and Kamala Harris (D-CA) have tax plans that address this dynamic through changes to tax credits. These and any other tax plans from the 2020 candidates will be explored in future installments. But the takeaway right now is that these candidates’ proposals are reactive to the recent history of the changing wealth dynamic and tax policy over the last 30 years.
In short, these proposals are a response to a perceived correlation between the drop in tax rates over the last 30 years and the changes in the wealth dynamic.
What the Candidate Proposals Could Mean for Future Tax Changes
Understanding the history of tax rates and the trends in the wealth dynamic adds depth to the discussion of each individual policy proposal. It also helps to understand the political viability of each candidate, and at the end of the day, the viability of the proposals themselves.
For more information on the 2020 candidates’ tax plans and other tax related issues, please contact your local CBIZ tax professional.
Published on April 30, 2019