Can We Find Healing Power in Income Taxes?

By Mike Koetting January 31, 2023

A couple posts back, I wrote that it was hard to imagine what could bridge the divisions in our country. The issues are only occasionally, and usually incidentally, about policies. Tom Nichols, in The Atlantic, opines that there is no principle dividing the country. He contends that although people will say the issue is “liberty” or “freedom, ” those are merely smokescreens for racial and class resentments, personal grudges and a generalized paranoia that dark forces are manipulating their lives. These, I believe, have come to play such an outsized role in our politics because there has been a profound loss of societal coherence.

I don’t want to idealize a past that never was. Our society has always had warts a plenty. And some of them were generated by the foundational principle of individualist striving. The emphasis on individual freedom and the ability of people to have mastery of their own destiny made America both a unique place in the world and uniquely successful as a country. But, for individualism to work its magic, it needs to be balanced by strong local ties and a generalized sense of social solidarity. Without those guardrails, the logic of individualist striving corrodes any larger scale sense of well-being. And without that, society disintegrates. We turn into a nation of Marlboro cowboys riding the range by ourselves—carrying guns and chasing dreams that can never be realized.

I honestly don’t know if that balance can be re-created. I could offer a broad set of prescriptions as to what might do it, but most them are well beyond what can be managed through politics or policy. But let me propose a modest starting spot: a change in our tax system.

Probably not what you expected. Fair enough. It’s not the first thing that leaps to mind. And there’s a good argument that we could never get to a different tax system without a broader sense of social cohesion.

Perhaps, but what would we want in any policy to help heal the national divides? Here’s my list:

• It could be readily understood
• It could be easily seen as a policy for the entire society
• It would have substantial impact
• It should be possible to get there

It could well be that a proposal to make major changes to our tax system in the current political climate is political daydreaming. Still, it just might be that the first three are sufficiently powerful that it might not be impossible. Even if the effort failed, it might facilitate more focused discussions on what as a society we want for ourselves.

Basic Context

Before sailing into more controversial matters, I will assert two facts that are non-assailable.

First, relative tax collections in the United States are materially lower than other developed countries.

Source: Hamilton Project at Brookings Institution, 2020 (Data from OCED, Revenue Statistics, 2018)

Second, the United States government is running a substantial and growing deficit. To put this in perspective, the deficit is more than 31 trillion, but the entire amount collected by Federal Income Tax in 2022 was only 2.6 trillion.

Broader Context

Of course, as soon as we start to assess these facts, the going gets somewhat stormier. For instance, there are those who argue that the U.S. is stronger by collecting fewer taxes. And those who say “Deficits aren’t important.” There is some degree of argument among economists about the latter. Although there is a strong consensus that time-to-time deficits, particularly countercyclical, are no problem, but persistent and growing deficits sooner or later cause trouble. Most economists, for instance, agree that it was cause for concern when we had a strong economy in the first part of Trump’s presidency, but the deficit continued to increase under the influence of major Republican tax cuts this century.

Setting aside the minority opinions, these two facts alone suggest we need to address the deficit and, if we are going to continue to provide the services we are providing, we will need to increase taxes. I would go further and suggest that we should increase our taxes enough to provide social welfare benefits closer to other countries. I think America’s historical orientation toward letting individuals solve their own problems is an important part of the centrifugal force that is disintegrating our society.

But expanding government responsibilities would jump right into the heart of the partisan debates. (If we can’t make a child tax credit permanent, it’s hard to imagine something even bigger.) Instead, I’m talking about something much more modest: whittling away at the deficit in a way that adds to social solidarity rather than tears at it. The general sense of the unfairness of our tax system exacerbates a deep resentment about the large and growing income and wealth disparities. About 60% of Americans are concerned that wealthy people and corporations do not pay enough in taxes, although there are substantial differences among Democrats and Republicans. No one likes paying taxes, but there is strong sentiment that the current system has way too many ways for the wealthy to avoid paying their fair share.

A Gallup poll from last year found that support for higher taxes on the wealthy has been growing fairly consistently since the end of the Great Depression. Analysis accompanying this poll listed seven other polls that found substantial support (over 60%) for higher taxes on the wealthy, leading Money magazine to start an article with the headline “Most Americans Want the Rich to Pay Higher Taxes, According to Every Poll Everywhere.” Granted, it is a long way from headlines or poll findings to a tax increase on the rich, who unsurprisingly have disproportionate political power. Still, it is an argument that builds on a significant base of support.

Why Start with Taxes

As radical as my proposal would be portrayed, in truth they are radical mostly in labeling and process rather than truly radical. I will be a little specific about what exactly I have in mind in my next post—I am sure that will keep most of you on the edge of your seats until then. But mostly what I am proposing is substantially increasing income taxes on the top 10% of the income distribution specifically to reduce the deficit. Given the extremity of wealth differences that have developed in recent years, even materially higher taxes on the wealthy will leave plenty of differences between them and the rest of the country. Arguments that it will kill the American entrepreneurial spirit will simply be hogwash.

Remember again that I am proposing this change in taxing explicitly as a means to increase social solidarity. If my changes could be enacted, they would make the distribution of wealth and income somewhat more equitable. But major progress on that important goal will require much more change than can be accomplished with the income tax alone.

However, increasing income taxes on the wealthy and making the tax system clearer to reduce the deficit makes sense for several reasons:

• As these things go, it starts off with a strong base of support. It has the advantage that a great many of the people who will oppose it most strenuously are arguing from the obviously self-interested position of having won the wealth lottery.
• Done right, it can be made to be easily understood. And on its face, it can be seen as a meaningful attempt to balance the scales. Most Americans have an innate discomfort with both the extremes of wealth and the size of the deficit. They will be supportive of efforts to address both without raising their taxes.
• This is a particularly good position for Democrats. It has overwhelming support among Democrats, well into the 70% range, and it is a direct counter to the Republican rhetoric that Democrats represent “the elites”.
• It would also make it more difficult for Republicans to hide behind the idea that they are the only ones who care about the deficit. (And while, as a factual matter, Democrats have been more fiscally responsible than Republicans for the last 40 years, few people realize this.)
• Republicans will counter anything along these lines, first, with the claims it is “socialism.” Along side this, they will imply (or simply assert) that Democrats just want more money to give to “minorities and immigrants”. The factual arguments against these positions are strong. Hopefully, they will be enough to allow the focus to be shifted to why rich people oppose them, particularly if the proceeds remain narrowly focused on deficit-reduction.

Almost 100 years ago, Oliver Wendell Homes, Jr, wrote that “Taxes are what we pay for a civilized society…”  I am arguing we can better preserve that civility with a tax system that generally balances the budget, is more transparent, and has the better off paying a fairer share.  This will not be a politically easy lift, but no one ever said democracy was easy.