Rhetoric around the hating of taxes is far too simplistic and often leads to the worst kind of tax policies with a series of negative downstream effects on society.
Amongst the sporadic and no doubt inconsistent plans that former president of the United States, Donald Trump, has campaigned on for the 2024 U.S. general election is to scrap income taxes entirely and replace the lost revenue with tariffs. While this anachronistic policy proposal may excite some people, it’s because they aren’t thinking about the implications of removing income tax revenue entirely from the U.S. government. Doug Henwood gives a strong breakdown in Jacobin outlining exactly why there shouldn’t be optimism that this policy proposal — and a slew of other economic policies that Trump is flirting with in his campaign proposals — would be good for the U.S. economy at all.
Despite the lack of economic sense behind the idea, Trump’s bid to slash income taxes might be smart electorally speaking because many people, especially Republicans, vote simply based on who will lower their tax burdens. According to a recent poll from Gallop, about one in three Americans cite taxes as “extremely important” to how they vote in the U.S. election.
Beyond the corroborative data, I’d wager most people have had experience in political discussions around middle-class company where the subject of highest concern in the political sphere for said individuals is their personal taxes. Typically, this scenario goes, these individuals say they vote based on whoever will lower their taxes without any thought into the economy-wide ramifications of those lowered taxes. Said taxes for middle-class folks are often always income taxes because the middle class usually don’t own much capital beyond the equity they’ve built through their mortgage.
So again, Trump is showing a fair degree of campaigning savviness with the way he’s specifically attacking income taxes.
Of course, there’s a reason why Trump isn’t mentioning taxing capital to reduce the tax burden on lower earners: that’s the class he truthfully represents despite portraying himself, often in comedically unbelievable fashion like his latest campaign stunt where he worked a fryer at a McDonald’s, that he’s a populist for the average American that he’s a populist for the average American.
Trump, and basically all modern U.S. presidents, cynically disregard how capital and high incomes can be taxed disproportionately to ease the tax burden of low-income earners gets to the heart of the lack of nuance with which the average voter approaches their political views on taxation. The average voter often never consider how lower taxes on high earners and capital will inevitably place higher burdens on their own taxes and worsen the economy by keeping a majority of people locked into various forms of debt and subsistence costs and not able to stimulate market demand through consumption, a dynamic that spurs the growth of credit demand in the economy which is essentially private debt and private debt is often what fuels economic crashes.
Broadly speaking, there are two kinds of taxes: labour and capital taxes. Labour taxes are taxes placed on the remuneration of labour, so income taxes. Capital taxes are taxes placed on value-accruing assets or assets with the potential for value-accruement. This latter category includes taxes on buildings, real estate, corporate profits, dividends and capital gains.
An OECD report from 2023 showed that capital-earning income like dividends are often taxed far more favourably as compared to labour taxes in many countries. There’s several plausible reasons for this phenomenon: political lobbying from special interests who throw campaign money at politicians they know won’t, or imply shouldn’t, touch their wealth; governments’ fears — which are somewhat dubious — that taxing wealth too much will cause capitalists to leave their country; and policy creators genuine belief in laissez-faire principles which are reified in low capital taxes as a way to not disturb the “invisible hand” of market mechanisms. These are all likely culprits.
Remember, the period in history in the Western world where the middle class grew the most, known by historians as the Great Compression, was roughly the period spanning the end of the Second World War and the beginning of the 1970s. Now a key feature of this successful building of the middle class in this period were factors like tight controls on the financial sectors of the economy, the general strength of unions and the demand for unskilled labour — but also that this period had the highest levels of progressive confiscatory taxation at the top income brackets in history, hovering at 90 per cent in the top bracket in the U.S. from the mid-‘40s to the ‘60s for example. Additionally, the highest consistently sustained levels of capital gains taxes — corporate and personal — in the US existed in this period.
And yet, capital gains taxes are still fairly low in most OECD countries, with an average top rate of 19.1 per cent as of 2021.
A shift of the tax code to scraping progressively more off the highest earners’ earnings like in the post-war period as well as taxing capital assets at higher rates would ease the tax burden of relatively lower-income earners. On top of this, it would give the government the revenue reserves to recreate the distributive welfare state that led to the middle-class’s historically unprecedented rise in the early-mid latter half of the 20th century. Increasing taxes on top earners and top-earning assets could be invested back in communities for public housing projects, investments in healthcare and education, including free early education and much more that will be a net good for society as it was in a previous era.
The popular rhetoric on taxes constructs them as a monolithic imposition of equal measure on all individuals. Lowering taxes from this view, then, is always an unequivocal good. Combatting this rhetoric for its theoretical flaws as visible in the empirical record as well as its clear serving of the interests of the super-wealthy, a class that has exponentially expanded their wealth since the eroding of the post-war welfare state, requires historicizing the discourse: it’s a neoliberal discourse that wouldn’t have made sense to most citizens and policymakers 60 years ago.
Nuancing popular political rhetoric around taxes by drawing out the important distinction between labour and capital taxation and the success of high taxation on the wealthiest in the past is an important step towards building a more widely supportive fiscal and monetary system rather than one that favours a privileged few.