With all the attention given to whether Donald Trump would accept the results of the election, one major claim made by Hillary Clinton at last week’s Presidential debate was all but overlooked by the general public. Three times during the proceedings, Clinton asserted that her economic proposals—which call for about $1.65 trillion in additional spending over the next ten years on infrastructure, health care, education, and other items in the federal budget—wouldn’t “add a penny” to the national debt.
Clinton’s words prompted some dismissive scoffs from conservative observers, and they sent me searching for independent analyses of her plans. Fortunately, there are at least three of them, and they all indicate that while Clinton is probably exaggerating when she says she won’t “add a penny” to the debt, her campaign has, in fact, gone to great lengths to find ways to pay for her proposals. Most notably, Clinton has proposed a series of tax hikes on the ultra-rich. If all these tax increases were enacted, her economic plan may still increase the national debt, but only by about twenty billion dollars a year—a small fraction of the over-all level of debt, which is about $19.7 trillion.
Where Clinton’s plan would have a big impact is on the after-tax incomes of many of the richest people in the country. Here are some numbers from a new analysis by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute:
• About ninety-two per cent of the Clinton tax increase would fall on the richest one per cent of the population—people who earn at least $699,000 a year.
• These high earners would face, on average, a tax increase of $117,760. They would see their after-tax incomes reduced by 7.4 per cent.
• Nearly two-thirds of the Clinton tax increase would fall on the richest 0.1 per cent of the population—people with annual incomes greater than $3.75 million.
• These ultra-high earners would face, on average, a tax increase of about $800,000. They would see their after-tax incomes reduced by 10.8 per cent.
Clinton has made no secret of her intention to raise taxes on the rich. Understandably, she has spent little time laying out the details of the increases she is proposing. If she spelled out how much more money the wealthy would be paying to the U.S. Treasury under a Clinton Administration, some of her well-heeled donors might have second thoughts. In any case, there are five main ways in which the Clinton tax plan would hit the very rich:
1. It would limit the amount of tax relief that high-income taxpayers can get from itemized deductions, such as mortgage-interest payments, state and local taxes, and contributions to pension plans. Since people who earn millions of dollars a year tend to arrange their finances so that they are eligible for a lot of deductions, this proposal would have a substantial impact on their tax liabilities.
2. It would enact a version of the “Buffett Rule,” named for Warren Buffett, which states that no household making more than a million dollars a year should pay a smaller share of its income in taxes than middle-class families do. Specifically, Clinton would make wealthy households pay at least thirty per cent of their income in federal taxes, with the provision being phased in so that it doesn’t take full effect until incomes top $2 million.
3. It would impose a new four-per-cent tax surcharge on all households with taxable incomes of more than five million dollars (or $2.5 million for married couples who file separate returns). For many ultra-rich households, this would make their top marginal tax rate 47.4 per cent. The current top rate of income tax is 39.6 per cent. The Affordable Care Act introduced a 3.8-per-cent “Obamacare tax” on investment income. Add Clinton’s proposed four-per-cent surcharge on top of that and you get to 47.4 per cent. That’s much lower than the top rate in the Eisenhower era, which was more than ninety per cent, but it’s much higher than the top rate at the end of the Reagan era, which was twenty-eight per cent.
4. It would broaden the base for the Obamacare tax on investment income, which applies to taxpayers with over-all incomes of more than $200,000 a year. At the moment, some so-called pass-through income, which rich people earn from investment partnerships and other sources, escapes the Obamacare tax. Clinton’s plan would close this loophole.
5. It would expand the estate tax in three significant ways. First, the tax would apply to all bequests larger than $3.5 million ($7 million for married couples), whereas the current system exempts bequests up to $5.45 million ($10.9 million per married couple). In addition, Clinton would eliminate the “step-up in basis” loophole, which allows heirs to avoid paying capital gains tax on assets that have appreciated in value under the ownership of the deceased. And, third, Clinton recently adopted a proposal from Bernie Sanders to impose higher tax rates on very large bequests. Right now, the estate tax rate is forty per cent, no matter the size of the bequest. Clinton wants to introduce a graduated rate, which would start at forty-five per cent and rise to sixty-five per cent for estates worth more than $500 million (or a billion dollars for a married couple).
How did a candidate who describes herself, at least in her paid speeches to bankers and corporations, as a moderate pragmatist get to the stage where she has adopted an estate-tax proposal that Sanders supporters should love, and that the editorial board of the Wall Street Journal lambasted as “Clinton’s 65% Killer Death Tax”? For one thing, she boxed herself in. From the beginning of her campaign, Clinton has followed the playbook that President Obama used in 2008, promising that any household earning less than $250,000 a year won’t face any tax increases. Designed to inoculate Democratic candidates against Republican efforts to portray them as inveterate tax raisers, this pledge means that about ninety-seven per cent of American taxpayers can sleep soundly in the knowledge that a Clinton Administration won’t hit them up them as sources of additional revenue. But as Roberton Williams, a senior fellow at the Tax Policy Center, pointed out to me, the pledge also implies something else: “If you want to raise a good amount of revenue”—as Clinton does—“you’ve got to hit the rich pretty hard.”
Taken together, the five tax hikes on the rich would bring in about $1.1 trillion over ten years, according to a recently updated analysis by the Tax Foundation, an independent research group. The foundation also estimates that higher corporate income taxes and payroll taxes would raise another $300 billion, bringing total new revenues to $1.4 trillion. The Tax Policy Center agrees with these figures. A third independent watchdog, the Committee for a Responsible Federal Budget, has produced a slightly higher total revenue figure: $1.5 trillion. That’s not too far short of the $1.65 trillion estimate for the over-all cost of Clinton’s spending plans, which came from the same organization. (I should point out that these tax-revenue figures are “static,” or first-round, estimates. Two of the analyses also reported so-called dynamic estimates, which seek to take into account behavioral changes, such as changes in hours worked, that the reforms might spark. Since economists can’t agree on how these dynamic estimates should be constructed, I’ve relied on the static estimates, which have the virtues of being comparable, simpler, and pretty similar in size.)
Political arithmetic, however, can’t fully explain Clinton’s eagerness—or willingness, at least—to soak the rich. These proposals also reflect a broader leftward shift in the Democratic Party, and in the sort of policies it is willing to countenance. In a recent essay at Vox, Mike Konczal, a fellow at the Roosevelt Institute (and the author of the Rortybomb blog), pointed out that taking positive measures to tackle rising inequality is a central tenet of a “new liberal economics,” to which practically all Democrats now adhere.
That includes the Obama Administration, especially the second-term version. Indeed, a number of Clinton’s proposals—the Buffett Rule, for one—were lifted straight from Obama’s recent budget proposals. Other Clinton ideas, such as the four-per-cent tax surcharge on people earning more than $5 million, are unique to her campaign, but they are rooted in the same desire to tilt the economic playing field away from the top one per cent, which in recent decades has captured more than half of all income growth.
Of course, many liberals and Democrats have long supported efforts to ameliorate inequality by raising taxes on the rich. What has changed is that politicians in the center of the party, such as Obama and Clinton, are now publicly rejecting the old argument that this has to be done lightly for fear of reducing the incentives to work hard and make capital investments, which, in turn, could crimp economic growth. Rather than being forced onto the defensive by conservative economic arguments, Democrats in 2016 are making the case that using the tax system fairly aggressively to counteract inequality and boosting G.D.P. can actually be complementary.
“We are going to ask the wealthy and corporations to pay their share,” Clinton said during last week’s debate. “And there is no evidence whatsoever that that will slow down or diminish our growth. In fact, I think just the opposite. We’ll have what economists call middle-out growth. We’ve got to get back to rebuilding the middle class, the families of America. That’s where growth will come from.”
Assuming Clinton defeats Trump on November 8th, the results of the Senate and House elections will determine whether her tax plan serves as a starting point for negotiations with Republicans or as an actual blueprint for governing. Either way, though, it has laid down a significant marker.