When Do Tax Hikes on Rich Go Too Far?

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By Allyson Versprille

June 17 — Tax hikes on the rich to the level proposed by Democratic presidential candidate Bernie Sanders would have been “unsustainable” and prompted more cases of tax evasion, an analyst said.

Sanders's plan was a transparent and straightforward proposal to increase taxes on the U.S.'s wealthiest citizens, said Leonard Burman, the Robert C. Pozen director of the Tax Policy Center. The strategy called for raising top tax rates on capital income to 64 percent and on labor income to more than 70 percent, he wrote in a June 16 blog.

“The giant tax increases on capital are the most problematic part of Senator Sanders’s legacy,” Burman said. “While they would make the tax system much more progressive, they would also impose very large economic costs.”

Burman noted that while it is pretty clear that Sanders won't be the Democratic Party's nominee because Hillary Clinton has locked in a majority of delegates, some of his campaign ideas could outlive his presidential run.

Fueling Tax Evasion

In his blog, Burman said capital is highly mobile, making it harder to tax.

“Rates as high as 64 percent would fuel illegal tax evasion—such as not reporting sales of foreign stock—and the growth of legal but inefficient tax shelters,” he said.

The low after-tax return to successful entrepreneurial investment that his plan would have imposed could also discourage risk taking, Burman said.

And even though not included in revenue estimates, he said, “it’s a sure bet that some investors would avoid selling assets and realizing taxable gains in hopes that a future president would lower capital gains tax rates to levels closer to historical norms.”

Learning From Other Countries

As a self-proclaimed democratic socialist, Sanders could learn a lesson or two from Scandinavian countries like Sweden, Norway and Denmark, Burman said. The presidential hopeful used their “expansive social safety nets” as a model for his spending agenda, he said.

They understand “that the only plausible way to raise enough revenue to finance government spending that averages almost 50 percent of GDP is with a very efficient tax system,” he said.

Those nations rely heavily on regressive taxes—for example, imposing a 25 percent value-added tax on consumption, he noted. They also levy a dual income tax, combining “a steeply progressive tax on labor income with a low flat-rate tax on capital income.” At the same time, they fix higher payroll taxes than the U.S., he said.

Sanders's capital income tax rates would have been very high even by international standards, Burman said.

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com

For More Information

Burman's June 16 blog is at http://src.bna.com/f2a.