Democratic frontrunners Bernie Sanders, Elizabeth Warren and Joe Biden present separate taxation strategies, all subscribing to a similar logic of redistributive taxation. All three propose variations of the progressive taxation method, meaning they seek to tax the rich at a higher marginal rate than those with less income.

The seemingly progressive doctrine undergirding the array of democratic taxation proposals is primarily approached through income and capital taxes. Variations of capital taxation include taxes on property, corporations or stocks, while income taxes are placed on wages, benefits and other inheritances.  Therefore, this overarching progressive framework ascribes to a simple economic logic; tax the rich at a higher rate and income will be redistributed as a result. 

Yet, when this logic is implemented as the primary source of revenue for the American welfare state, the political outcomes are not as progressive as the policies intended. This taxation paradox suggests that regressive consumption taxes are in fact, in the long run, more redistributive than progressive taxes. Political economist Lane Kenworthy notes that the primary effect of taxes on inequality are indirect, as they can fund redistributive services and transfers. Earning the highest possible revenues through taxation should be the primary aim of tax policy, rather than taxes being necessarily progressive themselves. 

These tax plans additionally fail to take into account the comparative contexts of more redistributive welfare states, such as the Scandinavian countries. Instead, the current leading democratic candidates propose the same methods of receiving tax revenues seen throughout the US’s history as one of the OECD’s four countries with the most economic inequality.

Bernie Sanders, Joe Biden, and Elizabeth Warren present a variety of positions regarding how to fund social expenditures. However, they all propose progressive taxation methods, which seek to redistribute through taxation, rather than through an expansion of the size of the American welfare state. Sanders has proposed that we must ensure the “wealthiest families in America cannot have so much wealth.” Sanders’ wealth tax applies to individuals with a net worth of 32 million dollars or more; they would have to pay a 1% tax rate on top of their already existing income taxes. This tax rate increases marginally, and hits a cap for individuals with a net worth of 10 billion dollars who would pay an annual rate of 8%. 

Comparatively, Biden has proposed to increase taxes on long term capital gains, such as money received through the sale of stocks. Biden proposes a steep increase from the current rate of 20 per cent to 39.6 per cent. This proposal would see greater revenues than Biden’s proposal to increase income taxes by a rate of only 2.9 per cent for those making more than $500,000 annually.

Finally, Elizabeth Warren’s tax plan seeks to increase government revenues through an increase in net investment income taxes. These taxes refer to income that is received by individuals not actively participating within the functioning of a specific business, but receive income from the business nonetheless.

This includes individuals receiving tax returns, owning stocks or owning real estate who have a net income greater than $200,000. The current rate of this tax for individuals is 3.8 per cent and Warren proposes to increase this rate to 14.8 per cent for individuals making $250,000 annually. This tax plan would additionally be placed on top of regular income taxes, therefore, disproportionately affecting individuals with large capital gains from ownership of lucrative industries.

The issue facing the tax plans of the politicians mentioned above is that they are seeking to redistribute wealth through taxation, rather than trying to increase overall government revenues which could expand the size of the welfare state. While taxes themselves can be progressive, such as income taxes that disproportionately target individuals with greater levels of wealth, these taxes do not necessarily reduce inequality. 

The United States is, in fact, one of the few OECD nations where taxes are more redistributive than social transfers. This means that taxes imposed within the U.S. disproportionately benefit those with less income. In the cases of Scandinavian welfare states like Finland, Sweden and Denmark, social transfers provide a much greater degree of redistribution. The revenues that fund social transfers and entitlements evidently come from taxes. Therefore, the size of a nation’s welfare state is more reliant on total revenues, rather than whether or not those revenues are collected progressively or regressively.

Interestingly, higher consumption taxes on standardized consumer goods much more efficiently raise government revenues than the progressive taxes cited above. While income, long term capital gains, and net investment income taxes are single annual payments paid in large by a small portion of the population, consumption taxes generate daily revenues from every individual buying a standard consumer product. 

In the cases of Sweden, Finland and Denmark, their tax mixes are relatively regressive when compared with the United States. This is because their tax mixes consists to a greater degree of consumption taxes where individuals pay the same amount for the product regardless of individual income. With greater revenues raised these from these taxes, the state budget can expand services like health care and education, while providing monetary power for pensions and other social transfers.

In Finland alone, consumption taxes for standardized consumer goods are taxed at a rate of 24 per cent. As a result, Finland capably provides tuition free universities for all EU citizens and universal healthcare, while the nation’s richest one per cent hold 7.5 per cent of the nations income. Comparatively, the US’s top one per cent holds nearly 21 per cent of the nation’s share of income, and this number is consistently rising.

While inequality might be greater in the American context, social expenditures would have to be implemented to a greater degree to effectively reduce rising levels of inequality. Without larger revenues, such a project would be inconceivable. Consumption taxes may be an effective tool that could help the US increase its redistributive budget, and subsequently the size of its welfare state.

Therefore, if the Democratic Party seeks to increase the spending power of its governmental budget, the current presidential candidates should focus on redistribution through revenues and social entitlements, rather than taxes alone.

Edited by Rebecka Pieder.

The opinions expressed in this article are solely those of the author and they do not reflect the position of the McGill Journal of Political Studies or the Political Science Students’ Association. 

Image via Flickr Creative Commons