We can’t fund the progressive agenda by taxing the 1% alone

The tricky politics of taxing the 1%, the middle class, and everyone in between.

In American politics, there’s no better way to kill an idea than to assert that enacting it will require “raising taxes on the middle class.”

This framing was on full display during the first night of the Democratic primary debates this week, when CNN’s Jake Tapper pushed Elizabeth Warren and Bernie Sanders to admit they’d have to raise taxes on the middle class to pay for Medicare-for-all. The two pushed back with a somewhat confusing combination of denial and deflection, arguing that whatever extra the middle class had to pony up in taxes they’d get back in lower premium costs.

The “raise taxes on the middle class” specter, which Republicans and the media have used over the years when discussing liberal priorities, has prompted Democrats to emphasize that they would focus on taxing solely the richest of the rich to finance their plans.

For instance, Warren’s proposed wealth tax doesn’t bite until $50 million in net worth, the top 0.1 percent of the wealth scale. When President Obama campaigned on ending some of the Bush II income tax cuts, he set the cutoff at $250,000 — the top 5 percent. When the cut was implemented, that cutoff ended up being $450,000, around the top 1 percent at the time.

Thus, we have the impossibly cramped politics of taxation. Republican tax policy is a one-way ratchet: Cuts are allowed and encouraged, preferably at the top of the scale. Any increases are verboten. Democrat’s tax policy is only slightly less prohibitive: Tax increases are allowed, but only on a tiny sliver at the tippy-top of the income distribution.

But setting aside the Republican-friendly frame of Tapper’s question, there is a real issue at stake here. How can Democrats finance their ambitious priorities? Will taxing the richest be enough? Who exactly is in the middle class? And should they be immune from tax increases?

Who is middle class?

The problem begins with the definition of middle class: There isn’t one.

Politicians say it a lot, and people from all over the income scale identify as middle class, but the fact is there’s no consensus view of who the middle class is, not even among economists.

So let’s start with pinning down who exactly is in the middle. Any definition must include the median household income (the one smack in the middle of the income scale), which was about $61,000 in 2017, according to the most recent data.

In the places where most American families live, that median is not a lot of money, especially for working families paying for child care, health care, housing, college education, and so on. For example, the Economic Policy Insitute’s Family Budget Calculator finds that in the Detroit metro area, a single parent with two kids needs $70,000 to pay for the above list of basic needs.

Thus, based on current earnings levels and the fact that pay has long stagnated for those in the bottom half of the pay scale, it makes sense to not raise taxes on those taxpayers. To the contrary, good ideas abound on how to increase their post-tax incomes through expanding tax credits to low- and moderate-income families.

But that still leaves us with the progressive agenda and how to pay for it. Those progressive proposals the candidates talked about — like the ones for health care, infrastructure, free college, debt forgiveness, climate mitigation, and guaranteed jobs — cost money. But thanks to this constrained debate, and, of course, the Trump tax cuts, revenues to support them are historically extremely low given underlying economic conditions.

Can we finance them anyway and just go into deficit? I’m no deficit hawk — to the contrary — but doing so simply would not be sustainable. If interest rates or inflation spike, that pathway to financing government activities will become much harder to pursue. We still need to find revenue to finance our priorities.

Who should we tax?

So, raising taxes on the bottom 50 percent of households is a bad idea, and doing so on the top 1 percent is a good idea. Is that the end of the story?

Of course not! There’s the remaining 49 percent of the country, those households between the median of around $60,000 and the top 1 percent, north of $500,000. According to CBO data, even before the Trump tax cuts, average tax rates for many in this group were falling as their income was rising.

Consider households in the 80th to 90th percentile. According to the CBO, their pretax income is up 40 percent from 1989 to 2016, to about $160,000, but their average federal tax rate is down 2 percentage points, from about 23 percent to 21 percent. That’s before the Trump cuts, which further lowered average tax rates for those above the 80th percentile by another 1-2.4 percentage points. I’m not saying that every household in the top half of the income scale is cruising down easy street. But many of us (that’s right, I’m in there) below the top 1 percent but still in the upper reaches should be on the table when it comes to raising more revenues.

How to best do so is another discussion, but one good idea is to reset some of the upside-down deductions taken at the top rate, like those for mortgage interest, retirement, and college savings (about three-quarters of such benefits go to the top 40 percent of households). We can allow the deductions to live on, but reduce the rate at which they’re claimed, which could raise around $700 billion in revenues over a decade.

But the key point is there’s a way out of this no-tax cul-de-sac. It starts by recognizing that we’re not going to raise taxes on those in the middle and bottom half of the pay scale. They’ve been beset by years and income inequality, stagnation, and have a hard enough time already making ends meet. And, as the current debate maintains, the right place to start raising revenues is at the very top of the scale, where the vast share of growth has accrued in recent decades, a trend that’s been exacerbated by Trump’s wasteful, regressive tax cuts.

That’s where we start to find new revenues — but it’s not where we stop. There are many others in the top half of the income scale but below the top 1 percent who’ve done well and can help us pry open this constricted debate. It’s a debate that has for too long blocked the progressive agenda and led candidates with perfectly reasonable proposals to needlessly tie themselves up in knots fending off an attack that is long past its sell-by date.

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities and was the chief economic adviser to Vice President Joe Biden from 2009 to 2011.