Could tax increases on the rich speed up the economy? Democrats say yes
CommentJim TankersleyDecember 5, 2019WASHINGTON — Elizabeth Warren is leading a liberal rebellion against a long-held economic view that large tax increases slow economic growth, trying to upend Democratic policymaking in the way supply-side conservatives changed Republican orthodoxy four decades ago.
That argument tries to reframe a classic debate about the economic “pie” in the United States by suggesting there is no trade-off between increasing the size of the pie and dividing the slices more equitably among all Americans. Warren is making the case that the economy could benefit if money is redistributed from the rich and corporations to uses that she and other liberals say would be more productive. Their argument combines hard data showing that high levels of inequality and wealth concentration weigh down economic growth with a belief that well-targeted government spending can encourage more Americans to work, invest and build skills that would make them more productive.
Inequality has widened significantly in America over the past several decades. The Congressional Budget Office estimates that the incomes of the top 1% of Americans more than tripled from 1979 to 2016, before taxes and government transfer payments are taken into account. For the middle class, incomes grew 33%. More than a decade after the recession, wage growth for the middle class continues to run well behind previous times of economic expansion, like the late 1990s.
Some of the inequality-focused economists say they are hoping to build new economic models to predict the effects of their policies, though they acknowledge few of those models exist yet. Instead, they rely on evidence about the likely effects of individual programs, added together. Warren disagrees. In the latest Democratic debate, she said the spending programs funded by her wealth tax would be “transformative” for workers. Those plans would raise wages, make college tuition-free and relieve graduates of student debt, she said, adding, “We can invest in an entire generation’s future.”
The United States would leap from one of the lowest-taxed rich nations to one of the highest. It would collect more taxes as a share of the economy than the Netherlands and only slightly less than Italy. Researchers at the Levy Economics Institute of Bard College projected this summer that Warren’s wealth tax and spending policies would generate a 1.7% increase in the size of the economy. A preliminary study of a wealth tax like Warren’s proposal, by the Penn Wharton Budget Model, found that it would reduce the size of the economy by a similar 1.7%. The model uses the sort of classic methodology that liberals are now rebelling against and did not evaluate Warren’s spending proposals.
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