The Sanders Tax Plan and its Implications Part 2

WHERE TAXATION IS CONCERNED, CITIZENS WANT FAIRNESS AND ECONOMISTS WANT EFFICIENCY

Part 2:
Does The Sanders Plan Meet These Tests?

By Edward J. Dodson, M.L.A.

Changing the way governments at all levels raise revenue to pay for public goods and services will not solve every social, economic and environmental problem we are facing. But failing to change the way revenue is raised will prevent all other measures from achieving meaningful and lasting results. Systemic problems require systemic reforms. To date, I have read nothing that suggests any of the leading Presidential candidates possesses a sound understanding of the effects taxation has on our communities and our nation. To be fair to political leaders, the advice they receive from members of the Economics profession is plagued by ideological bias and a long history of theoretical analysis detached from real world dynamics. One of the most serious analytical problems is caused by the general failure to treat nature as a distinct factor of production, a factor responding to taxation in a manner quite different from the taxation of labor, capital goods or commerce.

No less an authority than Nobel Prize winner Joseph Stiglitz, former World Bank economist, has joined the camp of economists challenging conventional measures of the health and stability of the nation’s economy. An indication that conventional economic assertions are losing their hold is evidenced by the fact that Stiglitz’s views were solicited in mid-2019 by The Economist. In this interview, Stiglitz said:

“There is not the competitive, level playing-field described in textbooks: in sector after sector, there are a few dominant firms that create almost insurmountable barriers to entry. Too many become wealthy not by adding to the size of the nation’s economic pie, but by seizing from others a larger share, through exploitation, whether of market power, informational advantages or the vulnerabilities of others.”[1]

This kind of criticism by Joseph Stiglitz and many others has opened the door for Presidential and other political office candidates critical of the status quo. And there is no candidate whose criticisms are more substantive than Bernie Sanders.

What is certainly true is that Bernie Sanders has focused public attention on the results of a system of socio-political arrangements and institutions that, in practical effect (if not by conscious design), have secured and protected the kind of rent-seeking advantage [2] increasingly identified by economists now frequently described as heterodox, the implication being that their views are counter to that of more mainstream members of the discipline. Of course, the remedies proposed by economists in the heterodox camp are also not uniformly consistent. The reforms I have identified in how governments ought to raise revenue as system-changing are embraced by some, downplayed or ignored by others.[3] To achieve a high level of equality of opportunity in our society, there must be an end to continued redistribution of income and wealth from producers to non-producer (i.e., rentier) interests. The Sanders Plan moves the U.S. in this direction but will not be system-changing. Here is why.

TAXING FINANCIAL TRANSACTIONS

Senator Sanders calls for forgiveness of $1.6 trillion of outstanding student loans, paid for by a new tax on financial transactions. It is worth noting that the Consumer Financial Protection Board found in 2017 that Americans age 60 and older owed an average of $23,500 in student loan debt, double the average from a decade earlier, though most of those loans were used to pay for children’s and grandchildren’s educations. Proponents of the proposed tax conclude that such a tax could both raise a considerable amount of revenue and “reduce asset price volatility and bubbles” by encouraging “patient capital and long-term investment.”[4] Opponents argue the tax would stimulate ways to avoid the tax and thereby distort economic activity. As is almost always the case, the devil is in the details.

TAXING CORPORATE PROFITS

Corporate profits and executive compensation are primary targets in The Sanders Plan for raising the revenue necessary to fund the programs his Adminstration would direct to improve the lives of the poor, of working families and students pursuing higher education. Nothing in The Sanders Plan distinguishes between profits earned by producing goods or providing services and profits derived from rent-seeking subsidies, speculation or creative accounting.

TYING EXECUTIVE COMPENSATION TO WORKER PAY

Senator Sanders would require corporations to establish maximum levels of executive compensation based on a multiple of “median worker pay” enjoyed by the company’s workforce. Companies would be taxed at rates determined by this ratio. The greater the ratio, the higher the rate of taxation. The analysis by the Sanders team concludes that under their plan the revenue captured by the Federal government for firms with annual revenue greater than $100 million would be sufficient to essentially “eliminate medical debt.” The source of additional revenue would come from increased taxes on the truly wealthy.

That today’s corporate executives are excessively compensated at the expense of most other employees is hard to dispute, as I comment on below. That said, the problem I find with The Sanders Plan is, once again, the absence of any distinction between earned and unearned income. Moreover, firms engaged in some types of enterprise must establish large reserves to provide funds for systems upgrades, losses associated with uncollectible receivables and other purposes. Profit margins differ considerably for firms generating the same annual revenue. I will not pretend to have a solution to offer. The Tax Foundation’s analysis of “gross receipts taxes”[5] raises a number of important considerations which the Sanders team needs to consider.

TAXING HIGH NET WORTH INDIVIDUALS AND HOUSEHOLDS

The Sanders Plan would also impose a surtax on households with a net worth over $32 million, forecasted to raise $4.35 trillion of a ten-year period “and cut the wealth of billionaires in half over 15 years.” The Sanders campaign website provides additional details for what would be his administration’s “Income Inequality Tax Plan.”[6]  I cannot help but wonder what significance there to this $32 million net worth figure. The households with this level of net worth would generate an annual income of $640,000 if they just purchase (i.e., loan to government) Treasury securities yielding 2% per year. They would pay half of this in a wealth tax and keep $320,000 with essentially no risk of loss. If interest rates happen to increase, the funds can be reinvested with an even higher after-tax return. Does anyone else see a problem with broad-based taxation to pay interest to public creditors so they can pay this net worth tax?

TAMING THE EXCESSES OF CAPITALISM WITH COOPERATIVE ENTERPRISE

There are many reasons why corporate executive compensation has skyrocketed over the last several decades. To some extent, the intense competition in the arena of global business has contributed to the competition for executives with a strong track record of success navigating the cyclical character of the business environment. There are also less quality-based reasons, such as the prevalence of board positions occupied by executives of other firms and institutions. Critics such as Richard Wolff, a former professor of economics at the University of Massachusetts and now at the New School, argues that social democracy requires a meaningful worker participation at the board level. Senator Sanders sees this reform as crucial to the establishment of a viable social democracy:

“The establishment tells us there is no alternative to unfettered capitalism, that this is how the system and globalization work and there’s no turning back. They are dead wrong…Instead of giving huge tax breaks to large corporations that ship our jobs to China and other low-wage countries, we need to give workers an ownership stake in the companies they work for, a say in the decision-making process that impacts their lives, and a fair share of the profits that their work makes possible in the first place.”

Professor Wolff’s advice to Senator Sanders is to add an additional objective to this scheme, which is to promote the formation of worker-owned cooperatives. There are around 400 such cooperatives in the United States. They are a small part of the U.S. economy, employing some 7,000 people and generating roughly $400 million in annual revenues. Globally, the most successful cooperative enterprise is the Mondragon Corporation, located in the Basque region of Spain. Founded in 1956, the Mondragon federation of worker cooperatives employs nearly 75,000 people and generated revenue of 12.1 billion EUR in 2015. An issue for a Sanders Administration is whether worker-cooperatives should be tax advantaged over shareholder-owned corporations. Another possibility is for the Federal government to establish a public banking function to provide financial resources to support cooperative start-ups or cooperative spin-offs from firms committing to abandon the corporate form of ownership.

WHAT ABOUT BERNIE’S “TAX ON EXTREME WEALTH”

Redistributing the accumulated financial assets of the wealthy appeals to me even if only as a mitigating, short-run policy necessary to prevent the collapse of political and economic stability in the United States. My view, as already expressed, is that a high percentage of these asset values are derived from legal privileges, subsidies and tax advantages rather than earned producing goods or providing services. That said, the proposals do not seem to be very well thought out in the context of systemic change. I have, in an earlier essay contributed to the Robert Schalkenbach Foundation’s blog, provided a fairly detailed proposal for changes in how government raises revenue that is designed to be both transitional and systemic. Readers learned in the economics of taxation are encouraged to offer constructive criticisms. We need to finally get this right before it is too late.

THE BOTTOM LINE

In summary, I would characterize The Sanders Plan as moderately corrective, highly optimistic, and not systemic in its effects. A Sanders Administration would likely face one of the most stressful periods of economic instability since the Great Depression of the early 1930s.

_____

[1] Joseph Stiglitz. “If Capitalism is broken, maybe it’s fixable,” The Economist, 8 July, 2019 : https://www.economist.com/open-future/2019/07/08/if-capitalism-is-broken-maybe-its-fixable

[2] Rent-seeking is best defined as activities that generate gain without having to produce anything or provide any service in exchange

[3] The reader interested in learning more about heterodox economics are directed to a 2012 faculty panel discussion held at The New School: https://www.youtube.com/watch?v=I-gPi18gp0c

[4] Quoted from: Leonard E. Burman, et al., “Financial Transaction Taxes in Theory and Practice,” Tax Policy Center, Urban institute & Brookings Institution, June 2015,  p.2

[5] See: Garrett Watson. “Resisting the Allure of Gross Receipts Taxes: An Assessment of Their Costs and Consequences,” Tax Foundation: https://taxfoundation.org/gross-receipts-tax/

[6] See: https://berniesanders.com/issues/income-inequality-tax-plan

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