Bernie Sanders' tax legacy

Bernie Sanders, the democratic socialist Senator from Vermont, surprised almost everyone by waging a very strong campaign for President.  However, it is now clear to almost everyone that he won’t be the Democratic Party’s nominee. 

While it is sometimes hard to notice, this election campaign has been full of interesting ideas, and Sanders has contributed a fair share. Some may even outlive his political aspirations. Here are a few of his best and worst ideas.

• A carbon tax. Sanders was the first presidential candidate to propose a carbon tax, which is a market-based approach to addressing climate change. The idea is a favorite among economists from across the political spectrum. It might command bipartisan support if the two parties actually could work together and Republicans could cure their pathological aversion to taxes of any kind. Indeed, in 2008, Republican presidential candidate John McCain proposed his own market-based solution to climate change—an emissions trading system.
• A financial transactions tax. Sanders was also the first presidential candidate to propose a significant tax on securities transactions. (Hillary Clinton proposed a vague but tiny tax on high-frequency trading.) Sanders’s rhetoric suggests that he thinks that Wall Street is the financial equivalent of air pollution, and his proposed tax rate was so high that it would discourage productive as well as unproductive trading and bring in much less revenue than he hoped. Nonetheless, many other countries are considering financial transactions taxes and a well-designed version could be a significant source of revenue in the US without an undue toll on the economy.
• Huge, transparent tax increases on the rich. While Clinton would raise taxes on high-income households through various minimum taxes and other obfuscations, Sanders gets credit for relative transparency with his straightforward higher tax rates on the rich. No sleight-of-hand and needless complexity. His plan would have raised top tax rates on capital income to 64 percent and on labor income to over 70 percent. The drawback, however, is that such high rates are almost surely unsustainable.

The giant tax increases on capital are the most problematic part of Senator Sanders’s legacy.  While they would make the tax system much more progressive, they would also impose very large economic costs. 

Capital is highly mobile, which makes it harder to tax.  Rates as high as 64 percent would fuel illegal tax evasion—such as not reporting sales of foreign stock—and the growth of legal but inefficient tax shelters.

The low after-tax return to successful entrepreneurial investment could also discourage risk taking.  And—even though we didn’t build this into our revenue estimates—it’s a sure bet that some investors would avoid selling assets and realizing taxable gains in hopes that a future president would lower  capital gains tax rates to levels closer to historical norms.

A future Bernie Sanders might learn a lesson from the Scandinavian countries whose expansive social safety nets served as a model for his spending agenda. Swedes, Norwegians, and Danes know that the only plausible way to raise enough revenue to finance government spending that averages almost 50 percent of GDP is with a very efficient tax system.

Perhaps surprisingly, those nations rely heavily on regressive taxes; for example, they all impose a 25 percent Value Added Tax on consumption. They also levy a so-called dual income tax, which combines a steeply progressive tax on labor income with a low flat-rate tax on capital income, and assess higher payroll taxes than the United States.  Sanders did propose to increase payroll taxes, but his capital income taxes rates would be very high by international standards.

The next Bernie Sanders would do well to look at Scandinavia’s tax systems, not just their spending.  And that might make for a very stark and revealing presidential choice, especially if the next Republican candidate emulates Marco Rubio’s or Ted Cruz’s intriguing proposals for efficient consumption taxes combined with much, much smaller government.

This article first appeared at TaxVox.