The Hot Debate Over Soaking the Rich

Plus, rethinking the 355-ship Navy

Soaking the Rich: Your Guide to America's Next Big Debate

Sparked by progressive proposals from Sens. Elizabeth Warren and Bernie Sanders and Rep. Alexandria Ocasio-Cortez, the great fiscal debate of the moment is over taxing the wealthy to reduce economic inequality and, to some extent, raise money for ambitious government programs.

“This is quite a moment in American economic history where all of a sudden in a matter of months this thing has kind of exploded like this,” Michael Cembalest, chairman of market and investment strategy at JPMorgan Asset Management, told Politico’s Ben White.

The Washington Post’s editorial board says the debate that’s bubbling over the new proposals is likely just the start of a discussion Democrats, and the rest of the country, will be having for at least the next 22 months leading up to the presidential election: “It will not be a question of whether prominent 2020 Democratic presidential candidates favor hiking taxes on the very wealthy. It will be a question of how they propose to do it.”

To recap the leading progressive proposals:

  • Ocasio-Cortez suggested a 70 percent marginal tax rate on incomes over $10 million, up from the top current rate of 37 percent.
  • Warren proposed a wealth tax of 2 percent on those with a net worth above $50 million, with an additional 1 percent for those worth more than $1 billion. Warren worked on her plan with economists Emmanuel Saez and Gabriel Zucman, who estimated that it could raise $2.75 trillion over 10 years.
  • Sanders proposed expanding the federal estate tax to cover those who inherit more than $3.5 million, up from the current $11 million threshold introduced by the GOP tax plan. His plan would require estates to pay at least 45 percent on amounts over the new threshold, and would restore a 77 percent top tax bracket for estates worth more than $1 billion. Sanders estimates that the plan would raise $315 billion over 10 years.

The proposals have, of course, brought cries of “socialism” and warnings of an envy-driven war on wealth.

Here’s what you need to know right now:

Americans Like the Idea of Taxing the Rich: A Morning Consult-Politico poll released Monday finds that 76 percent agree that “the wealthiest Americans should pay higher taxes,” including 54 percent who “strongly agree.” The poll also found that 57 percent say “low-income people” (the pollster’s term) pay too much in taxes, and 58 percent say “middle-income people” pay too much. About two-thirds of respondents say that corporations pay too little in taxes, and 75 percent say they should pay more. The poll surveyed 1,993 registered voters and has a margin of error of 2 percentage points.

Similarly, a Fox News poll conducted last month found that 70 percent of registered voters, including 54 percent of Republicans, favor raising tax rates on those with incomes over $10 million a year. And 65 percent of voters, including 47 percent of Republicans, favor hiking taxes on those making more than $1 million. More than half of the respondents said the federal government should be increasing spending, compared to 40 percent who prefer the government cut taxes and spending.

And They Still Don’t Like the Trump-GOP Tax Overhaul: Only a third of poll respondents say the tax changes implemented in 2017 helped the economy, while 23 percent say it hurt and 18 percent say it hasn’t made a difference. Just 27 percent say they’ve seen more money in their paycheck as a result of the tax cuts, while 55 percent say they haven’t seen a bump.

These ‘Soak the Rich’ Proposals Aren’t Really Radical: For the most part — and contrary to what you might hear from the many critics who have come forth to attack these plans — Democratic proposals to raise taxes on the rich aren’t really radical, writes David Leonhardt in The New York Times. They’re much-needed attempts, he says, to reverse the 40-year trend that has seen most of the benefits of economic growth flow to the wealthy. “Do you know who already pays a wealth tax? Middle-class Americans. It’s called the property tax, as Noah Smith of Bloomberg Opinion has noted. … If middle-class families can pay an annual tax on their main source of wealth, wealthy families can, too.”

Warren’s Plan Is More Popular Than Ocasio-Cortez’s: The Morning Consult-Politico poll found that 61 percent of registered voters strongly or somewhat favor Warren’s plan, while 20 percent strongly or somewhat oppose it. Support for Ocasio-Cortez’s idea was lower, with 45 percent supporting it and 32 percent opposed.

But Warren’s Plan Wouldn’t Be Easy to Implement: Warren’s plan faces at least a few major challenges. There are questions about whether it’s constitutional, for starters. Also, it could be a logistical and administrative nightmare to implement since net worth is difficult to measure. Warren’s plan also fails to distinguish between different types of wealth, Alan Cole writes at The Wall Street Journal. And it could raise more money if it was structured differently. “As it stands, billionaires would contribute just $300 billion of the $2.75 trillion the higher rates are projected to raise over 10 years,” Paul Sullivan writes in The New York Times. And Daniel Hemel, a tax expert at the University of Chicago Law School, writes at Time.com that, “Instead of fixing the income tax system that we already have, Senator Warren’s proposal would leave our broken income tax in place while layering on an entirely new and unwieldy wealth tax regime.”

Some Say Sanders’ Plan Makes More Sense: The estate tax cuts pushed through by Republicans will cost the federal government $83 billion over a decade. By contrast, Sanders’ estate tax proposal “would reduce the federal debt and help even the playing field,” says The Washington Post’s editorial board, which calls the plan better than Warren’s.

There Are Plenty of Other Ways to Tax the Rich: Greg Leiserson of the Washington Center for Equitable Growth laid out some other options for Politico’s Morning Tax. The list includes “an imputed income tax that would treat a certain amount of wealth as income, an inheritance tax, financial transactions taxes and a number of approaches on investment income, including taxing capital gains as regular income, ending stepped-up basis (which reduces taxes on assets passed along at death) and treating gains as mark-to-market (or logging gains or losses every year).”

And The Washington Post’s editorial board pointed out that an OECD report from last year “suggested an optimal system would target capital income and inheritance of wealth, which could be done here by reducing the current code’s favorable treatment of capital gains and eliminating the huge break for profits on the sale of inherited stock, while putting some teeth back into the estate tax. That would discourage what’s most contrary to American ideals, dynastic wealth accumulation, while encouraging what’s most consistent, getting rich on the merits.”

Hemel, the University of Chicago tax expert, outlines three steps lawmakers could take: “First, Congress should set the tax rate on long-term capital gains and dividends so that it is the same as the tax rate on ordinary income. Second, Congress should repeal stepped-up basis and tax unrealized capital gains at death. Third, Congress should claw back the benefits of deferral from high-net-worth taxpayers.”

The Bottom Line: Get ready for plenty more discussion and debate over whether we should tax the rich more, and how best to do it.

Poll of the Day: What Voters Want to Hear About in Trump’s Big Speech

The Morning Consult-Politico survey asked 1,993 registered voters over the first two days of February to find out what they wanted to hear about in President Trump’s State of the Union address on Tuesday. Tops on voters’ minds: improving the health care system (cited by 61 percent of respondents) and the economy and job market (60 percent). Only a third of voters said it was “very important” for Trump to talk about building the wall on the U.S.-Mexico border, though that number jumped to 63 percent among Republicans — and 70 percent of GOPers said that it’s very important for Trump to talk about reducing illegal immigration, making it the top issue for party voters.

So what’s the president planning to say? “Although the fight for a border wall has been a chief focus of Trump’s for the past two months, the president’s advisers said his address would not be an immigration-centric jeremiad, but rather would set a governing agenda for the year ahead. For instance, Trump plans to talk about infrastructure development and prescription-drug pricing, two issues with broad bipartisan appeal, according to a senior White House official,” The Washington Post reported.

Tax Cut's Benefits Shrinking for Some Businesses

Some U.S. corporations have overestimated the windfall they’ll receive from the 2017 tax law, The Wall Street Journal’s Theo Francis and Richard Rubin report. In one example, Las Vegas Sands Corp. had to reverse a $670 million tax benefit based on foreign tax credits claimed in early 2018 after new regulations released in November limited their use. In another example, FedEx recently reported a 2-cents-a-share charge based on a recalculation of its deferred tax liabilities.

One big factor is that the interpretation of the hastily written tax legislation by the IRS is still a work in progress. “Treasury is still writing regulations for the new corporate tax law, and that means corporate earnings are going to bounce around for a while,” Rubin said.

A Fiscal Hawk Argues That Now Is the Time Infrastructure Investment

The stimulus from the GOP tax cuts and the bipartisan increase in federal spending in 2018 is starting to fade, says Diane Swonk, chief economist at the tax and advisory firm Grant Thornton. Writing in The New York Times Monday, Swonk says that further increases in government spending are unlikely, raising the risk of recession as we head into 2020, but Washington has a tool at its disposal that could keep the economic growth going as we approach a slowdown: public investment in infrastructure.

While investment in human capital provides the greatest return, education and training is largely a state and local matter. But Washington can provide funds to build and repair infrastructure, which “has the potential to increase productivity growth, stimulate more private investment, gain bipartisan support and connect, instead of further divide, rural and urban Americans,” Swonk says. And lawmakers can pay for the investment through gradual tax increases.

“I have been a fiscal hawk my entire professional career, and I don’t usually support deficits in times of prosperity,” Swonk writes. “But there is a small window of opportunity for policymakers to act, while interest rates remain low and we have some wiggle room on taxes.”

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Rethinking Plans for a 355-Ship Navy

The U.S. Navy set a goal in 2016 of growing the fleet to 355 warships, a big jump from the current fleet size of 287 ships. Experts, however, say the goal is unrealistic in the absence of a significantly bigger Navy budget. In October, the Congressional Budget Office said that if the Navy sticks to its current shipbuilding and retirement plans, “it would not meet its goal of 355 ships at any time over the next 30 years.”

On top of the budgetary constraints, the goal of a bigger fleet is in conflict with the National Defense Strategy released just over a year ago, says Todd Harrison, the director of defense budget analysis at the Center for Strategic and International Studies. The new strategy emphasizes great-power competition with China and Russia, calling for a different mix of naval warfare capabilities, including more large — and expensive — surface combatants. That means the Navy shipbuilding budget will cover fewer ships overall. “Fully implementing the National Defense Strategy means you’ll need tradeoffs,” Harrison said last week. “Things have to go. The 355-ship Navy is out the window if you want to implement the plan.”

Speaking to reporters last week at the Pentagon, Adm. John Richardson, the chief of naval operations, said, “In light of the new National Defense Strategy and changes in the security environment since that was put out, we’re doing a new force structure assessment.”

One possibility, Richardson said, is that the fleet continues to grow, but to fewer than 355 ships. Another possibility is to redefine what a combat ship is. Currently, unmanned ships don’t count. But as the Navy continues to experiment with unmanned ships, including submarines, that definition may change.

The Chaos of Hospital Pricing

The Trump administration now requires all hospitals to list their prices online, but the numbers can be hard to interpret, according to Kaiser Health News’ Julie Appleby and Barbara Feder Ostrov. The writers describe the newly released hospital data as “a dog’s breakfast of medical codes, abbreviations and dollar signs — in little discernible order — that may initially serve to confuse more than illuminate.”

Kaiser’s Harriet Blair Rowan took a closer look at the data and found huge differences in prices for some basic supplies and procedures. In one example, the list price for a container of saline fluid ranged from a low of $56 at Kaiser Permanente in Oakland to $383 at Cedars-Sinai Medical Center in Los Angeles to a high of $472.50 at New York-Presbyterian Hospital in Manhattan — a difference of roughly 700 percent.

Why it matters: As is the case with drug prices, transparency is important — but it’s not enough, by itself, to bend the cost curve.

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