A version of this article appeared on the Washington Examiner.
With Sen. Bernie Sanders even with Hillary Clinton in some national polls and his strong showing in Nevada on Saturday, his tax proposals warrant serious examination. Even if he does not win the primary, his popularity is encouraging Clinton's move to the left.
Sanders wants to increase individual, capital gains, corporate, and payroll taxes — and use the proceeds for programs such as free college and universal Medicare. Such tax increases, if passed, would slow economic growth.
A candidate who proposes such a radical tax plan undoubtedly has other extreme ideas. Sanders' plan might not get passed, but it would affect what bills a President Sanders signs into law.
Income Taxes. Sanders proposes to raise all rates by 2.2 percent and create four new tax brackets for upper-income earners: 39.2 percent for income above $250,000, 45.2 percent for income above $500,000, 50.2 percent for income above $2,000,000, and 54.2 percent for income above $10,000,000. The Tax Foundation estimates that this would bring in $3.3 trillion over ten years using a static methodology, or $2.4 trillion using a dynamic methodology.
In addition, Sanders places a 28 percent limit on the value of itemized deductions for households earning above $250,000 per year. Taxpayers in brackets above 28 percent would see the value of their deductions go down.
Payroll Taxes. Sanders applies the Social Security payroll tax to all income above $250,000, resulting in an additional 7.5 percent tax for those above $250,000. This creates a gap between the current cap of $118,500 and $250,000. Over that range, individuals would not pay the extra tax. Employers would face an additional 6.2 percent payroll tax on all wage and salary income to fund a new single payer healthcare program. Employers and employees would face a new 0.4 percent payroll tax, split evenly between employers and employees. Most economists agree that the incidence of payroll taxes is passed fully on to wages.
Capital Gains. Preferential treatment for capital gains and dividends for those earning about $250,000 in adjusted gross income would be eliminated.
Estate Taxes. The estate tax would be expanded by lowering the threshold to $3.5 million, with a rate of 45 percent. Estates over $10 million would be taxed at 50 percent, over $50 million at 55 percent, and over $1 billion at 65 percent.
Business Taxes. Since 95 percent of businesses file under the individual tax code, individual income tax proposals would affect business operations. Taxes on corporations would also rise. Sanders would end deferral on profits of offshore subsidiaries and prevent corporations from inverting if their management and control operations are located in the U.S., or if the company is majority owned by U.S. interests.
An additional financial transactions tax with rates of 0.5 percent for stocks, 0.1 percent for bonds and 0.005 percent for derivatives would also be imposed on the financial sector.
According to the Tax Foundation, the Sanders tax plan would reduce all after-tax income by 10.6 percent on a static basis and 18.2 percent on a dynamic basis. GDP would decline by 9.5 percent over 10 years. Taxpayers in the fifth decile, hardest hit by payroll tax increases, would see their income fall by 8.0 percent on a static basis and 16.3 percent on a dynamic basis.
Sanders sees himself as a champion of the poor, but heavily-taxed individuals, particularly the wealthy, have the power to avoid high tax rates through several channels. Whatever the case, the reality is that it is hard to raise much revenue from punitively high tax rates.
In contrast, the poor would not be able to escape the increases in payroll taxes that Sanders wants to impose. Although Sanders might see himself helping the poor, his plan would have the opposite effect. The rich would avoid taxes, and the poor would pay not only in higher payroll taxes but in lost job opportunities.
Diana Furchtgott-Roth is a senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter here.
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