In defense of the White House strategist’s call for a higher top tax rate
At the start of the Trump presidency, Steve Bannon dominated the headlines. He was seen as the president’s chief ideologist, and the entire White House press corps hung on his every word. But in the months since, his influence has faded as other figures have taken center stage — H. R. McMaster on foreign policy, Gary Cohn on economic policy, and Jared and Ivanka on everything under the sun. So there was a frisson of excitement when Jonathan Swan of Axios reported in early July that Bannon was asserting himself once again, this time by urging that President Trump play against type for a Republican by calling for higher taxes on the rich. Specifically, Swan reported that the White House’s chief strategist wanted the top income-tax bracket to “have a 4 in front of it,” making it higher than the current 39.6 percent top bracket first established during the Clinton years and brought back to life under President Obama. The idea is nothing if not Bannonesque. How better to prove that you’re the scourge of the GOP establishment and the champion of the working class than by outflanking Democrats to the left on the taxes paid by millionaires and billionaires?
It didn’t take long for others in Trumpworld to pour cold water on Bannon’s call for soaking the rich. When asked about Bannon’s proposed tax hike, a senior administration official told The Weekly Standard simply that “we’re beyond that.” Speaking anonymously, another White House insider was even more brutal, telling the Daily Beast that Bannon “says a lot of things.” Ouch. In other words, Bannon was doing little more than showboating for his friends in the media. Anti-tax pressure groups such as FreedomWorks and Americans for Tax Reform were similarly dismissive of the idea, and it’s easy to see why: All indications are that the Trump White House wants deeper tax cuts on the rich than were on offer just a few months ago, and that Cohn and Treasury Secretary Steve Mnuchin, the chief drivers of Trump’s tax-reform agenda, are no longer wedded to a revenue-neutral approach.
So we can safely dismiss Bannon’s populist trial balloon. It’s done. Kaput. There’s only one small wrinkle: Given where we are, it’s not such a bad idea.
First, consider the politics. The coalition that elected Donald Trump is unusual. He lost a fair number of affluent, college-educated Republicans, but he mostly made up for them by winning over non-college-educated independents and disgruntled ex-Democrats who are normally deeply suspicious of Republicans. As it happens, the GOP defectors were concentrated in places where their votes didn’t matter all that much. They lived either in well-off suburbs of Sun Belt cities such as Atlanta, in states Trump already had in the bag, or in well-off suburbs of coastal cities such as New York and Los Angeles, where Trump never had a chance. Trump’s anti-establishment voters, meanwhile, were concentrated in Rust Belt swing states, where they made all the difference between victory and defeat.
The danger for Trump is that these anti-establishment voters are fickle. Stanley Greenberg and Nancy Zdunkewicz of the Democratic polling firm Democracy Corps argue that this non-GOP Trump constituency backed the president precisely because of his departures from small-government orthodoxy on Medicare and Social Security, free trade, and taxes on the rich. The danger for Trump is that if he sings out of the traditional GOP hymnal on the safety net and taxes, he’ll risk losing his anti-establishment supporters. That wouldn’t be such a disaster if he won back well-heeled GOP defectors in the process. The trouble is that anti-Trump Republicans are at least as offended by the president’s style as they are by his policy positions.
The narrative that Trump is a fake populist who is spending his days lining his own pockets and those of his rich cronies is saturating the airwaves, and the president and his allies have done precious little to combat it. Bannon’s tax gambit could help change that, especially if Trump made the case for it by employing some of his scorched-earth campaign rhetoric targeting Wall Street bankers and corporate elites. I can’t say I’m a fan of this kind of pugnacious elite-bashing. But it’s hard to imagine Trump winning the presidency in 2016 without it, and it’s hard to see him keeping his coalition together by campaigning as a potty-mouthed Jack Kemp.
By calling for a tax hike on the rich — even a relatively modest one — Trump might strengthen his anti-establishment bona fides while at the same time disorienting his critics on the left. There is a real risk that he’d alienate some of his GOP supporters by backing higher taxes, but fewer than you might think. A Gallup survey from 2016 found that 46 percent of self-described conservatives felt that upper-income taxpayers weren’t paying enough in federal taxes, while 67 percent of moderates felt the same way. A survey conducted by the RAND Corporation that same year found that 51 percent of GOP-primary voters favored raising taxes on households earning over $200,000. It’s not unreasonable to assume that support would be even higher among the broader GOP electorate, especially if the threshold for higher taxes were set at a higher level, since primary voters are on average more affluent and ideological than voters at large.
Of course, there is more to life than politics. Even if we were to accept that hiking taxes on the rich would yield short-term political benefits, doing so would be self-defeating if it caused the economic expansion to sputter by badly undermining incentives to work, save, and invest. Here is where hard choices come in.
Donald Trump has made clear time and again that he is firmly opposed to reducing Social Security and Medicare benefits. And while members of the Trump administration, led by Office of Management and Budget Director Mick Mulvaney, have called for deep cuts in future federal Medicaid expenditures, Trump has implied more than once that he finds such cuts “mean.” One can disagree with Trump — I believe that there’s plenty of room to find savings in Social Security, Medicare, and Medicaid — while acknowledging that he has never been terribly enthusiastic about slashing spending and that it is very unlikely he’d be willing to take political heat for doing so. What this means is that without meaningful tax increases, we’re headed for large budget deficits that will push federal debt over 90 percent of GDP by 2027. Once you take meaningful entitlement reform off the table, as Trump effectively has done, increased federal revenues and hyperinflation are your only options for heading off a debt explosion.
How can we boost federal revenues without doing too much damage to the economy? What you definitely don’t want to do is raise corporate taxes. If anything, you want to do something like allow businesses to immediately deduct the full cost of their investments, a reform that has the potential to greatly increase the size of America’s economic pie. But if you’re going to do that, you have to make up the revenue loss somewhere.
That’s where Bannon’s tax hike on the rich comes in. The economists Emmanuel Saez and Peter Diamond have estimated that the revenue-maximizing top rate on ordinary income is 73 percent, but that’s almost certainly an excessive estimate. It doesn’t take into account the fact that high-income households can take advantage of differences between the tax rates on ordinary income, capital gains, and corporate income through the use of shrewd tax-planning strategies. That said, there’s good reason to believe that the rate can go higher than today’s top rate of 39.6 percent before hitting the high end of the Laffer curve. If we were to take Bannon literally, we could adopt a top tax bracket that “had a 4 in front of it” to help pay for growth-boosting cuts in corporate taxes.
There are other tax hikes that might be less economically damaging than increasing the top tax rate. For example, some economists have proposed moving in the direction of a mark-to-market income-tax-accounting system, which would require people to pay taxes on increases in the value of their assets when those increases occurred instead of when the assets were sold. The transition would be ugly, but we’d put an end to the “lock in” effect of people’s holding on to assets simply to avoid paying capital-gains taxes, which hurts the economy by keeping productive assets from being sold to those best positioned to put them to good use. And because high-income households earn the lion’s share of capital income, this approach would accomplish Bannon’s ostensible goal of getting the rich to cough up more in taxes. You can bet that it would meet with fierce resistance, however.
Should conservatives welcome the prospect of higher taxes on the rich? Hardly. Regardless of the economic consequences, raising taxes is always lamentable, if only because of the cost to personal freedom. Bannon’s brand of class warfare is no more noble than its left-wing equivalent. At the same time, we need to recognize that with a rapidly aging population and a president who has shown nothing but hostility to entitlement reform, we’ve run out of easy options.