(Bloomberg View) — Is $250,000 a year in household income “middle class”?
That sort of income puts a family in the top 5 percent of American earners, which seems like an overgenerous definition of “middle class.” Why, then, are Democrats so allergic to raising taxes on people who make less than this fabled cutoff? Hillary Clinton and Bernie Sanders want to spend money on a lot of stuff: single-payer health care, more generous Social Security benefits, universal preschool, free college, worker training. They are probably not going to be able to pay for it with the piddly sums one can raise from even large tax hikes on the very highest earners. Yet both of them seem wedded to the idea that taxes should not rise significantly for anyone who makes less than $250,000 a year.
In the New York Times, Bryce Covert of ThinkProgress argues that this is a mistake. The middle class is suffering, she says, and it’s time to tap the merely affluent as well as the fantastically well off. She does a good job of making the case that Democratic priorities can’t be funded without broader-based taxes. What she does not do, however, is explain why Democrats are avoiding this obvious arithmetic.
One answer is that they get a lot of their support in high-cost states where, say, $125,000 a year does not feel like riches beyond dreams of avarice. Over the past five years or so, the commentariat has been periodically convulsed by arguments over whether high earners have any right to feel pinched because their “basics” — a decently sized home in a good school district, a diet filled with lean protein and fresh produce, and an amenity-filled coastal city nearby in which to enjoy their hard-won socioeconomic status — are very expensive.
Living in a coastal city is actually not a civil right; it is a consumption good, and therefore, yes, you are still very affluent if you make $250,000 a year and choose to spend it on living near Manhattan. But this is neither here nor there; most people do not feel this way, in part because they compare themselves with people they know, and their own expectations from growing up, not everyone in the country. Those people are going to freak out if you tell them that they have to pay higher taxes.
And Democratic priorities, particularly Sanders’ plans, would cost a great deal of money. He says he favors single-payer health care, which would involve funneling through government coffers most of the $3 trillion a year that Americans currently spend on health care; $1 trillion of new spending on infrastructure; expanded Social Security benefits; and free tuition at public colleges. Enacting his agenda would require something on the order of $1.5 trillion a year in new revenue.
That’s a lot of money. That’s not “whack up taxes on the rich” money: His Social Security plan to modestly increase benefits, for example, appears to consume all of the revenue from lifting the cap on Social Security earnings above $250,000 a year. Maybe that sounds like a little itty bitty change to you, but in fact it is a 12.4 percent tax hike on all wage and salary income for high earners, who already have a marginal tax rate of about 40 percent, not including state and local taxes. That’s just to pay for one proposal. Covering the estimated $1 trillion a year in private health insurance expenditures would need something many times larger than that.
That means taking money from the middle class, because while the middle class does not have oodles of the stuff lying around, there are so many more of them that in aggregate, taxing them raises more revenue than taxing the rich. (That’s why extending the Bush tax cuts for the middle class cost three times as much as extending the tax cuts for the wealthy would have, even though investment bankers got a much bigger individual benefit from the tax cuts than a bus driver making $45,000 a year.) Just paying for Sanders’ single-payer plan would, for example, conservatively require between 25-35 percent more tax revenue than we currently collect. Other plans require expenditure from other parties — employers, state and local governments — that are likely to end up being collected from the paychecks of workers, one way or the other.
Now, you can argue that middle-class people ought not to care about this, because we’re mostly taking costs that they already pay and transferring them to the government. The strong form of this argument is false, because it ignores deadweight loss, frictions in the transition (taxes would rise well before wages) and a probable increase in utilization, which will require putting more money into the system. The weaker version of this argument is irrelevant, because whether or not people should think this way, they don’t. Tell them that you need another 10 percent of their paycheck for new goodies, and they will freak out.
And of course the more progressive you try to make the taxes, the bigger the hit individual paychecks at the high end have to take — and the more that hit will be concentrated in expensive blue states where average incomes are higher, and taxes are already quite high.
The existing level of taxes matters a lot. Here’s why: As your starting tax rate increases, incremental hikes sound smaller but in fact take a larger share of your remaining income. If your tax rate is 5 percent, a hike of 5 percent sounds enormous: you’re doubling the rate! On the other hand, if your tax rate is 50 percent, an additional 5 percent hike sounds pretty small.
But even as a 5 percent hike from 5 percent decreases your take-home by just a smidge over 5 percent, a 5 percent hike from 50 percent actually decreases your take-home income by 10 percent. If you’re already giving 40 percent of your paycheck to the government one way or the other — and it’s not hard for a single making $150,000 in someplace like New York City to get there — then the kind of tax hikes needed to pay for Sanders-type government wouldn’t sound like a new and better deal; they’d sound crippling.