Rich People Using Loopholes to Avoid Paying Taxes?  I Think We Can Trust Elizabeth Warren to Come Up With a Plan for That!

This is something that we’ve already heard a lot about, and will continue to hear more about - that the social programs proposed by Elizabeth Warren, Bernie Sanders, and other Democratic candidates for president will cost more money than the country can possibly afford.  It seems to me that this article today in The Washington Post, titled “Warren’s ambitious agenda relies on a massive wealth tax that the rich may evade,” is pretty typical of the mainstream coverage of this issue, for good and for ill.

The article’s framework is one of the most venerable in political reporting: is a candidate over-promising to her voters?  After noting some of Warren’s pre-eminent budget proposals — free public college, universal child care, and student debt cancellation — and how she plans to pay for them via taxes on the rich, the article identifies two possibly mistaken assumptions in the senator’s logic: “First, that the country’s wealthiest taxpayers won’t find ways to evade the targeted tax hike she proposes; and second, that new entitlement programs won’t result in ballooning costs that plunge the federal government deeper into debt.”

These are reasonable questions to raise, and I think even Warren partisans know that they need to address them.  But on both points, the article feels blinkered, perhaps inevitably, by received wisdom and a lack of appropriate context.  It is a given that the wealthy will attempt to pay as little in taxes as possible, and that they will pull out the stops to minimize payments of the sizable wealth tax Warren is contemplating.  But while the article notes the success rich people have had both in the U.S. and abroad in evading such taxes, it crucially ignores a few things.  Passage of such tax policies would be both the product of, and a further catalyst for, a re-calibrated public understanding that the rich need to start paying their fair share.  It seems highly likely that this would mean both heightened public awareness of tax avoidance by the rich, and a redoubled effort to head off loopholes and other such tactics.

It also seems more than reasonable that Warren, and other Democratic candidate with similar plans, recognize that their proposals are meaningless without effective tax collection.  The wealthy are not currently aggressively minimizing their taxes simply because they can afford great lawyers and accountants (though that’s a contributor), but because our current tax laws enable this, in combination with tax evasion enabled by an Internal Revenue Service that has been gradually gutted by anti-tax Republicans over the last 20 years.  Criticism of the uselessness of taxes on the rich based on the rich’s lawlessness seems less a valid critique of such taxation, and much more an urgent wake-up call to bring the scofflaw wealthy to heel.  It’s remarkable that such a middle-of-the-road article can note law-breaking in the highest echelons of society as simply an immutable fact of life, and not the rotten result of particular political conditions that might be changed.   

The article’s second major critique — that Warren’s new social programs may involve far greater costs that will “plunge the federal government deeper into debt” — is another valid and important criticism that nonetheless is based on assumptions worth examining.  First, that increased social spending might entail deficit spending is tightly tied to the first critique that her proposed taxes on the wealthy will be insufficient; again, it seems within the realm of possibility that a political consensus that allowed such social programs to pass would also include a determination to close off tax loopholes for the rich as much as possible.

Second, does it even make sense to talk about the federal government’s deepening debt anymore without noting that the Republican Party has been explicit about its goal over the last two-plus decades of choking off social spending by cutting taxes and exploding the debt?  Or to state that debt is a problem when none of the dire consequences forever predicted ever seem to come to pass?  As many have observed, debt only ever seems to become a crisis when it can be attributed to social spending that helps broads swathes of Americans. The underlying false assumption that debt is always a bad thing also ignores what is actually a crucial premise of all this proposed spending by Warren: that it will actually help economic growth over the long haul, aiding millions to climb into or grow more secure in the middle class, and raising the overall tax base, to boot.

Finally, the article notes criticisms by some economists that higher taxes might lead to less saving and investment by the wealthy; but this only reinforces the point that an economy in which the wealthy are such outsized drivers of our economy is an economy badly out of joint.   This ties into another unexamined premise that is found not only in this article but in writing about taxation more generally: the idea that taxed money is simply taken out of the economy.  This, however, is not true.  Apart from money that goes to debt service, government spends the money it collects through taxes, so that it is not taken out of the economy but in fact put into it.  You can certainly make the case that government does not invest money as productively as private investors, but this is not an argument proponents of greater social spending should shy away from.  In fact, how you define what is productive — is it simply growing the GNP, or growing the GNP at the same time that you enhance people’s educations and health in ways that promote both long-term, sustainable growth and a happy citizenry — should be at the heart of debates about the economy and the budget.