The path to victory: How Democrats can win over skeptical voters with tax reform

Let me be clear from the start: Whatever the shortcomings some may find with the candidacy of Kamala Harris, Donald Trump is so manifestly unfit to hold the office of the presidency that the choice of whom to vote for should be a no brainer. Moreover, those who fail to appreciate how destructive a second Trump presidency would likely be demonstrate a profound lack of judgment that should disqualify them from holding office, as well. My feelings notwithstanding, a decisive win by the Democrats is no sure thing, especially in the Electoral College. The Democrats need to attract additional support to assure their victory.

I believe the biggest obstacle to the Democrats’ effort to expand their support is the widely held belief on the part of Republicans writ large that Democrats don’t have the fiscal discipline that’s critical to protecting the long-term viability of our nation’s wellbeing. While some may view the Democrats’ wish list of social safety net programs as benefiting the underserving, I expect that a significant portion of voters would be more supportive of these programs if they could be assured that they wouldn’t be overly reliant on deficit spending. These concerns have merit, and the Democrats would be well served to address them if they want to win in November.

Democrats have expressed an intent to raise taxes on high-income households and corporations, while also promising that households earning less than $400,000 will not face higher taxes. All well and good, but additional specificity is needed if these “plans” are to be taken seriously. I don’t think it’s all that hard. Here are three specific policy initiatives that would go a long way toward demonstrating the Democrats’ resolve to be fiscally responsible:

1. Eliminate the cap on wage and tip income subject to Federal payroll taxes

Federal payroll taxes have been set up to be the funding source for Social Security and Medicare benefits — both of which are projected to be facing financial pressure in coming years. As the program currently works, employees and employers each pay the Treasury 6.2% of wage and tip income to pay for Social Security and 1.45% to pay for Medicare benefits. With respect to the portion dedicated to Social Security, only the first $168,600 of employment income is subject to this tax. The cap effectively converts payroll taxes from being a proportional tax, to a regressive tax — i.e., one where individuals with incomes above the $168,600 cap bear declining effective tax rates as income levels rise. (No such cap exists for the taxes dedicated to Medicare.)

Eliminating this cap is fully consistent with the party’s orientation to impose higher taxes on higher income taxpayers. Such a change, however, would compromise the promise that no one making less than $400,000 would face higher taxes. To be faithful to the commitment to not raise taxes on households making less than $400,000, income between $168,600 and $400,000 could continue to be exempt from payroll taxation, but the 12.9% tax rate would still be applied to income above $400,000.

2. Impose limits on income currently subject to preferential (i.e., reduced) income tax rates or income exempt from Federal income taxes, altogether

While there are reasons that certain types of income are subject to reduced (or zero) tax rates relative to the rate that applies to “regular” taxable income, enough is enough. Taxes on dividends, capital gains, and interest on tax-free bonds and notes fall into this category. Drawing the line is the hard part, but it doesn’t seem unreasonable to put a limit on the size of the tax reduction or exemption that a taxpayer may be entitled to. Again, bearing in mind the commitment not to raise taxes on those making less than $400,000, Congress limit the benefit that preferential tax rates to $400,000. After achieving that level of tax saving, any additional income would be fully taxable as regular income. (This change would be the one that would get Warren Buffett to no longer be subject to an effective tax rate lower than his secretary’s.)

3. Do away with the “carried interest” tax treatment for hedge funds

This one is a no-brainer. Hedge fund managers have somehow convinced Congress to wink and nod and allow their fee income to be taxed as if it were capital gains. It’s not. These fees are charges for money management services performed using other people’s money. By all rights this income should be taxed as regular income, consistent with the taxation requirements applicable to every other service provider It’s time to correct this gross misrepresentation and adjust the tax code to reflect the true economic nature of this fee income.

I don’t have the bandwidth, nor the necessary data, to project how much additional revenue these changes would add to the Federal coffers, but it’s safe to say that they would surely make a considerable dent in the deficits that are currently projected under current law.

Beyond the deficit consideration, however, these changes would also help mitigate what Michelle Obama dubbed, “the affirmative action of generational wealth.” This phrase really stood out for me as one of the highlights of Michelle’s speech at the Democratic National Convention. We talk about America being a land of opportunity; but let’s face it, children lucky enough to be born into households with inter-generational wealth have advantages and opportunities denied to others. That’s exactly what Michelle was talking about. A change in inheritance taxes could certainly alleviate this disparity; and in fact, some changes in this direction seem likely to happen in time, due to sunset provisions of existing tax law. Still, the disparities in wealth across America are large enough so that more can be done. The above three suggested changes would certainly help, and they’re long overdue.