If you’ve consumed any news this year, you’ve heard about U.S. Congresswoman Alexandria Ocasio-Cortez’s signature proposal to raise her country’s top income-tax rate to 70 per cent. The idea, from the standard bearer for the millennial wing of the Democratic Party, has right-wing commentators apoplectic – “my God, it’s socialism!” – and many of the left cheering – “thank God, it’s socialism!”
Meanwhile, Senator and presidential hopeful Elizabeth Warren is calling for a new tax on wealth – but on capital rather than annual income. It’s generating a similar response.
Neither of these proposals, once you read into the details, is half as dramatic as their most vociferous supporters or opponents make them out to be. The 70-per-cent income tax would not apply to the average person, or the person whose salary is 10 times the average, or even 100 times the average. It would instead hit incomes of more than $10-million a year. (And, until the 1980s, the United States had comparably high income-tax rates on the very wealthy). Ms. Warren’s wealth tax would only apply to fortunes of more than $50-million, hitting them with a 2-per-cent tax.
Whether either of these ideas make sense, whether they would be enforceable or have economic downsides – those are hard questions that U.S. policy-makers are going to have to grapple with. But leaving aside specific proposals for raising taxes, the core of the Democratic Party, including its major candidates for president in 2020, is embracing the idea of tackling the country’s enormous challenges of poverty, inequality, education and health by raising the government’s capacity to spend. And that means raising at least some taxes.
It is not a crazy idea, because the United States has a serious tax problem. The problem is that its taxes are too low.
Its taxes are also less progressive than those in most other developed countries, meaning they fall comparatively harder on those lower down on the income ladder.
For example, a recent OECD study found that, when child benefits are included, the average Canadian family with children pays a far lower share of its income to the government than the same family in the United States.
The result is an American paradox. It is one of the world’s richest countries, yet, for a large number of Americans, their lives do not reflect that.
The life expectancy of the average American is nearly four years less than that of the average Canadian, according to the World Bank.
The United States once had the world’s most educated population; it still has the world’s leading elite universities, but the percentage of Americans going on to higher education has fallen below many other developed countries. And the international PISA test of high-school student skills in science, math and reading show the average American student is below average, compared to the rest of the world.
It’s the developed country with the greatest number of citizens reporting that, when they’re sick, they can’t afford to visit a doctor or take a prescribed medicine.
A figure known as the Gini co-efficient measures income inequality in a country; the United States consistently has among the developed world’s worst Gini scores.
Here’s part of the reason why: In 2015, government revenue in the United States was 33 per cent of gross domestic product.
In Britain that year, it was 38 per cent. In Canada, 40.6 per cent. In the European Union, 44.6 per cent. In the Scandinavian countries, it was 50 per cent or higher.
Low taxes are not the only reason why the United States has more poverty, inequality, poor health and all sorts of other bad outcomes when compared with other developed countries, including Canada. But it’s a big part of the story.
Washington needs more revenue because, thanks to President Donald Trump’s tax cuts, the country is looking at large deficits as far as the eye can see. It also needs a government that can do a bit more of the things that governments in other countries, with slightly more tax revenue, can afford to do – reducing poverty and inequality, and improving health.
For all the overheated rhetoric, the answer is not turning the United States into Cuba. It’s not about rounding up the wealthy and confiscating their assets. It’s not about eating the rich.
What the United States needs is not socialism. What it needs is arithmetic.