How taxing the wealthy could work

0:01tax policy expert:NPR.

0:11Chris Van Hollen:All across the country, there are efforts to tax the wealthy more. From California voting on a billionaire wealth tax to Washington State. In March, it just approved a new tax on individuals or couples earning a million dollars or more a year.

0:27tax policy expert:Now, a common criticism of these state policies is that wealthy people would just move out of state to avoid those taxes. But avoiding taxes by moving is a lot harder if those taxes are set at the federal level.

0:40Chris Van Hollen:In March, Bernie Sanders introduced a bill for a 5 % wealth tax on billionaires. And Democratic Senator Chris Van Hollen has a bill to make high earners pay more tax. What's interesting about Chris's bill is that it's also a bill for big tax cuts for lower earners.

0:59tax policy expert:My goal is to ensure that people who are working paycheck to paycheck, in other words, struggling to make ends meet, that they don't have to pay a federal income tax.

1:11Chris Van Hollen:This is The Indicator from Planet Money.

1:13tax policy expert:I'm Darian Woods. And I'm Adrian Ma. Today on the show, tax cuts for the middle and working classes and tax hikes for the rich. What's behind this trend? Well, we'll ask Senator Chris Van Hollen to explain his bill and hear from a tax expert who has some reservations.

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3:02Chris Van Hollen:Senator Chris Van Hollen's big idea is more progressive income tax.

3:07tax policy expert:We have a skewed tax system. It is really stacked toward the very wealthy and people who make money off of money and stacked against people who are making a paycheck, you know, day by day. What Chris's bill does is make earnings below$46 ,000 tax-free at the federal level. You'll still have to pay Medicare and Social Security, but no federal income tax. Then you slowly lose this tax-free amount once your income hits around$80 ,000. This was the best design to accomplish our goal. This is deficit neutral, meaning the money we raise from the surtax on millionaires is enough to cover the costs of providing tax relief to working Americans.

3:56Chris Van Hollen:That's largely true, according to Garrett Watson, director of policy analysis at the Tax Foundation. That's a think tank that analyzes taxes and advocates for a simpler tax system.

4:07P. J. Vogt:Our numbers are fairly similar. So we find a very small net revenue loss, but fairly close.

4:12tax policy expert:The Tax Foundation estimates that with this proposal, many low - and middle-income earners will have more of incentive to work because they'll be able to keep more of their earnings. But this benefit to the wider economy is offset by the surtax on the very wealthy.

4:28Chris Van Hollen:Yeah, that surtax is going to make some of those high-earners' accountants sweat. For a single filer, it's an extra 5 % on income above$1 million, 10 % on income above$2 million, and 12 % on income above$5 million. Garrett says the rich then face a choice.

4:47P. J. Vogt:Ultimately, you have that trade-off of earning more, working more, and as your tax rate increases all in, you may have an incentive to, hey, I'm just going to engage in leisure and enjoy my existing wealth rather than working more.

4:57tax policy expert:So a top AI researcher or a law firm partner, they might decide to work a little less. And that's why the Tax Foundation estimates there'd be a small hit to the economy.

5:08Chris Van Hollen:Another fear is that the wealthy will just play accounting games to avoid the tax. One way this bill tries to minimize game playing is that the taxes on the wealthy are taken before deductions. So you can't say, I don't know, donate thousands of dollars to charity to try to avoid the tax. Still, Garrett worries about what's going to happen if even more taxes were to pile on afterwards.

5:31P. J. Vogt:Yes, you can impose a surtax, say, of 12 % of the top, add it to the existing 37 % top income tax rate, add it on top of all the other taxes they pay. How much more can you throw onto them before you actually do start seeing major changes in behavior is the big question.

5:45tax policy expert:At what point does the lemon run out of juice? The top 1 % of American taxpayers currently contribute roughly 40 % of all federal income taxes.

5:54Chris Van Hollen:And with this proposal, it'd be even higher. So what really concerns Garrett is what that tax on wealthy earners is used for. In the United States, the federal government is going deeper and deeper into debt, even in the boom times. Garrett sees what he calls an entitlement crisis coming in the future. The main Social Security trust fund is projected to run out of money within about a decade.

6:18P. J. Vogt:We know a crisis is coming in that the entitlements are insolvent. And, you know, raising revenue to cut more American taxes yet again is going to make that political and policy challenge even harder.

6:31Chris Van Hollen:We raised Garrett's concerns with Senator Chris Van Hollen. Given these trends and potential future crises that America may face, could you imagine putting all of that money somewhere else?

6:45tax policy expert:Well, this is one piece of an overall plan. And there are certainly other ways to raise revenue, which I support. So, for example, the Senator Sanders wealth tax would raise$4 trillion over 10 years. I also support closing lots of corporate tax loopholes that still encourage U.S. businesses to move their operations overseas. So there are lots of other things we can do to raise revenue for other purposes. But my view is that it's important to say to people who are working paycheck to paycheck, who are meeting the definition of a liveable wage, that you should be able to live off of that.

7:30Chris Van Hollen:But is there a risk of with all the other proposed taxes that you do kill the golden goose in the sense that, you know, this is 12 percent for those very high earners on top of the 37 percent taxes they pay. Then you add in all these state proposals. Is there a point where you just may not be able to squeeze more? And so in the sense that this money is not limitless for future reforms.

7:54tax policy expert:Well, certainly money is not limitless. But I would remind everybody that when JFK, President Kennedy, was in the White House, the marginal tax rates were 90%. And the big Kennedy tax cut took them down to about 70 % marginal tax rates. As you're pointing out, under this plan, if you're in the top, top tier, over$7 million for a couple, you'll be around a 50 % marginal tax rate. What Chris seems to be tapping into is the sense by Americans that they're paying too much in taxes. Lydia Saad is the director of U.S. social research at Gallup, the big polling agency. And she says the early 2000s were a high point for American satisfaction with taxes.

8:38tax policy expert:And that's largely due to George W. Bush's tax cuts. People were feeling much better about their taxes than they had been leading up to that point. And that persisted for really the next decade.

8:49Chris Van Hollen:That's not true now. Since 2022, we've seen a real decrease in positivity among taxpayers about paying taxes and the amount they pay.

9:00tax policy expert:Lydia thinks this is largely due to the lingering effects of inflation. Now, about half of Americans don't think the tax they're paying is fair. And that's true up and down the income ladder.

9:11Chris Van Hollen:Chris Van Hollen believes he's found a way to ease some of those frustrations by getting the people at the very top of the economic pyramid to pay for people lower down. It's a plain fact that there are more voters there than at the peak.

9:30Chris Van Hollen:This episode was produced by Angel Carreras with engineering by Robert Rodriguez. It was fact-checked by Sierra Juarez. Kate Concanon is our editor and The Indicator is a production of NPR.

10:05tax policy expert:Thank you.

10:26tax policy expert:EasyCater.