Winning the Fight Over Tax Reform
September 14, 2017
By Steph Sterling
This week, President Trump and his allies in the Senate are ramping up their campaign to reform our nation’s tax code. In Finance Committee hearings and over bipartisan dinners, the talking points are familiar: A White House press release described their tax plan as a way to “unleash America’s economic potential,” and just yesterday, the President repeated—nearly half a dozen times—that the administration is “looking at jobs” as a focus of tax reform.
Because Republicans frame the tax debate in explicitly economic terms, their message works. According to a June 2016 survey conducted by Hart Research for Americans for Tax Fairness, 49 percent of those surveyed said that “growing the economy and creating jobs” is the most important goal for changing the tax system.
Democrats, however, have avoided framing tax reform as an issue that affects wages, jobs, and the economy. A letter signed by 45 of the 48 Senate Democrats said they would oppose any reform effort that would “benefit the wealthiest individuals, who have already seen outsized benefits from recent economic gains while working-class wages have remained stagnant.” And they would oppose tax cuts that “endanger critical programs like Medicare, Medicaid, Social Security, and other public investments in the future.”
These are sound principles, and it’s encouraging to see such broad agreement among the Democratic caucus. But this implicit focus on the unfairness of tax cuts for the rich and the trade-offs at stake from revenue lost risks winning the tax reform battle while losing the larger political war. Cutting taxes for the wealthy isn’t just unfair or bad for government revenues; it’s bad economics—and the public knows it.
First, the substantive case. Recent evidence suggests that, worse than simply failing to unleash the growth Republicans have promised for decades, our historically low effective tax rates are, in part, responsible for the low corporate investment at the heart of our economic malaise. In the thirty years before the Reagan Revolution, with effective tax rates on the rich substantially higher than they are today, CEOs and corporate managers had less incentive to pay themselves exorbitant salaries. Instead, they re-invested in their workers and the long-term growth of their businesses, which led to more jobs and higher wages. Today, the tax code is structured in a way that encourages the highest earners to extract money from their companies through outsized compensation packages. Put differently, our low individual rates on the wealthy have created incentives for corporate executives to bargain for higher wages. Furthermore, the current system motivates corporate boards to reward managers by paying them with stock and then issuing large dividends—turning managers into owners and aligning the interests of shareholders with CEOs, by design. These behaviors all privilege payouts to shareholders at the expense of private investment, ultimately harming the overall economy. If corporate tax cuts lead to higher payouts to shareholders—as past cuts have done—and if payouts to shareholders come at the expense of economic growth—as studies have shown—then cutting taxes could worsen the problem of low corporate investment.
There’s more. Shifting the tax burden from the middle class to the wealthy would create more purchasing power for middle-class families, allowing them to drive the economy forward. Increasing the progressivity of the tax system not only improves the distribution of income—reducing the inequality that has come to mark the country—but also stimulates the economy, because taxes on the rich and superrich, who save a large fraction of their income, have the least adverse effect on aggregate demand, while taxes on lower income individuals have the most. And we know that low aggregate demand is the reason for the economy’s lackluster performance.
Not talking about how taxes affect the economy is not only a substantive mistake; it’s also a political one. First, voters overwhelmingly oppose tax cuts for the rich, and the majority believe that making sure the wealthiest Americans pay their fair share would help grow the economy. According to a survey conducted by Global Strategy Group in April of this year, 88 percent agree that making sure those at the top pay their fair share in taxes would help grow the economy. Notably, another Global Strategy Group survey commissioned by Priorities USA found that both Obama drop-off voters and Obama-Trump voters think that making corporations pay their fair share of taxes is economically beneficial—a message that, unlike others, can both persuade voters and increase turn-out. Building a more equitable tax code is as crucial to the health of our economy as it is to voter support.
Furthermore, Democrats continue to underperform Republicans on the core question of who voters trust more to handle the economy, and the economy remains voters’ greatest concern—as it should, given the stagnant wages, increasing costs, and economic anxiety most Americans face. A high-profile fight that both the Republican campaign machine and voters themselves frame in terms of the economy should be fought squarely on those terms. Even if a narrower issue campaign can be fought on marginally stronger grounds, the broader point remains: It’s a political mistake to lean away from the narrative that matters most to voters on the core issue of which the party needs to gain traction.
Democrats cannot continue to cede territory on connecting the fight over tax reform to the strength of the economy. It’s not enough to roll out a new economic agenda and hope that voters will pay attention or that it will rise above the din. Democrats must take the upcoming fight to Republicans on the correct terms—one that is both politically salient and economically sound. Making corporations and the wealthy pay their fair share of taxes will strengthen the economy. Learn it. Say it. Love It.