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October 22, 2015
Bernie Sanders and His Socialist Taxes -- A 1930s Throwback
Joseph J. Thorndike

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When Bernie Sanders talks about tax reform, he isn't channeling Stanley Surrey. The Vermont independent senator, a self-proclaimed "democratic socialist," isn't interested in the kind of reform that couples base broadening with rate reduction (although he is enthusiastic about closing loopholes). Sanders has been known to cite Eugene Debs as a personal hero, but when it comes to tax reform, his muse is someone more mainstream: Franklin Roosevelt.

Sanders's tax program is not a perfect analogue for Roosevelt's, but it's close enough for government work. Like FDR, Sanders supports heavier estate taxes, higher rates in the upper brackets of the income tax, and a new -- and controversial -- tax that business leaders loathe.

If the list stopped there, Sanders and Roosevelt would have a lot in common. But the connection goes further, with Sanders embracing a different, less celebrated element of the New Deal tax program: the use of regressive taxes to fund progressive spending.

Sanders the Socialist

Sanders is the best thing to happen to socialism since Debs placed third in the 1912 presidential election. The world -- or at least U.S. politics -- seems safe for socialism again. As David Weigel and David Fahrenthold recently observed in The Washington Post, the time is ripe for rebranding:

    Twenty-four years after the end of the Cold War, many Americans no longer associate socialism with fear or missiles -- or with failure, food lines, or empty Soviet supermarkets. A word that their elders saw as a slur had become a blank, open for Sanders to define.

But to be clear, Sanders qualifies his socialism with the democratic label, which domesticates the S word. By uniting it with a bedrock American value, Sanders has wrapped socialism in the flag. "To me, democratic socialism means democracy," he explained recently. "It means creating a government that represents all of us, not just the wealthiest people in this country."

There's some class warfare evident in that statement, but there's also plenty of mainstream precedent and American heritage.

Strictly speaking, the socialist part of Sanders's democratic socialism is watered down. He hasn't suggested, after all, that the government seize control of the means of production. Rather, Sanders champions a "tax, spend, and regulate" version of socialism, with a heavy emphasis on the middle element of that trio. "What he wants is to take existing federal programs -- many established by Democrats such as Franklin D. Roosevelt or Lyndon B. Johnson -- and super-size them," Weigel and Fahrenthold said. Specifically, Sanders is enthusiastic about a single-payer healthcare system, usually described as "Medicare for all." Such a program is thought to carry a 10-year price tag of roughly $15 trillion.

Sanders's Tax Ideas

As Peter J. Reilly observed in Forbes, Sanders has yet to release a comprehensive tax plan. But his campaign circulates a summary of his various proposals, revealingly titled "Real Tax Reform Means Making the Wealthy and Large Corporations Pay Their Fair Share."

That sounds a lot like tax reform as it was defined in the late 19th and early 20th centuries. Roosevelt famously endorsed this meaning of reform when he outlined his own tax plans in 1935:

    With the enactment of the Income Tax Law of 1913, the Federal Government began to apply effectively the widely accepted principle that taxes should be levied in proportion to ability to pay and in proportion to the benefits received. Income was wisely chosen as the measure of benefits and of ability to pay. This was, and still is, a wholesome guide for national policy. It should be retained as the governing principle of Federal taxation.

Sanders is fond of using similar language, especially the emphasis on taxpaying ability. "At a time of massive wealth and income inequality, we need a progressive tax system in this country which is based on ability to pay," he wrote in his policy manifesto, "Agenda for America."

Sanders also shares FDR's worry about the linkage between money and power. "The reality is that for the past 40 years, Wall Street and the billionaire class has rigged the rules to redistribute wealth and income to the wealthiest and most powerful people of this country," he said.

Roosevelt said much the same thing: "Our revenue laws have operated in many ways to the unfair advantage of the few, and they have done little to prevent an unjust concentration of wealth and economic power."

Both FDR and Sanders were outraged at the tax preferences available to those in the upper-income brackets. Both railed against loopholes and low effective tax rates, and Sanders's complaint could have been penned by FDR (with some deflated numbers judiciously inserted):

    It is not acceptable that major profitable corporations have paid nothing in federal income taxes, and that corporate CEOs in this country often enjoy an effective tax rate which is lower than [those of] their secretaries. It is absurd that we lose over $100 billion a year in revenue because corporations and the wealthy stash their cash in offshore tax havens around the world. The time is long overdue for real tax reform.

Specific Proposals

In addition to the rhetoric, Sanders has unveiled a variety of tax proposals, some more fully developed than others.

Estate tax. Sanders wants to raise rates and lower exemptions. "Our nation cannot survive morally or economically when so few have so much while so many have so little," he declared when introducing his plan. "We need a tax system that asks the billionaire class to pay its fair share of taxes and which reduces the obscene degree of wealth inequality in America."

Specifically, Sanders has endorsed (1) lowering the exemptions from $5.4 million to $3.5 million for individuals and from roughly $11 million to $7 million for couples; (2) raising the marginal rate to 45 percent on estates worth between $3.5 million and $10 million, to 50 percent for estates worth between $10 million and $50 million, and to 55 percent on estates worth over $50 million; (3) adding a "billionaire surtax" of 10 percent; and (4) closing various loopholes.

Financial transactions tax. Sanders would use a new tax on trading to help fund his "college for all" proposal. Trades of stock would be taxed at 0.5 percent, bonds at 0.1 percent, and derivatives at 0.005 percent. "It has been estimated that this provision could raise hundreds of billions a year, which could be used not only to make tuition free at public colleges and universities in this country; it could also be used to create millions of jobs and rebuild the middle class of this country," Sanders said in his explanation of the proposal.

Social Security payroll tax. Sanders would raise the cap on income subject to the payroll tax. "The legislation would subject all income over $250,000 to the payroll tax," the senator explained. Curiously, as Reilly has noted, that seems to leave a bubble of untaxed income between the current cap of $118,500 and the new $250,000 threshold.

Preferences for capital gains and dividends. Sanders promises to "tax capital gains and dividends the same as [income from] work." Eliminating the preferences would raise more than $500 billion over the next decade, he estimated back in 2013.

Unspecified but substantial rate hikes. Sanders has been coy about his plans for revamping the rate structure of the individual income tax, but he has signaled that he has big numbers in mind. While not endorsing a return to Eisenhower-era rates north of 90 percent, he isn't ruling them out. Even his moderate statements suggest significant increases. "We are working right now on a comprehensive tax package, which I suspect will, for the top marginal rates, go over 50 percent," he told Charlie Rose on Charlie Rose The Week in June.

Many elements of that protean program bear a family resemblance to FDR's tax policies. Certainly, Sanders's plan for taxing estates sounds a lot like Roosevelt's plan for a new federal inheritance tax in 1935. Both proposals were framed in fiery terms of social equity and distributive justice.

The financial transactions tax was not part of the New Deal agenda, but the rhetoric used to defend it resembles FDR's plan for an undistributed profits tax. Both were touted as a way to raise money while modulating business entities' behavior. If democratic socialism is a regulatory program, both of those taxes are cut from the same cloth.

Most obviously, Sanders's fondness for high marginal rates is derived from FDR's soak-the-rich policies of the 1930s and 1940s. Indeed, Sanders points to history when defending his plan, insisting that high rates have ample precedent, even under GOP presidents. "When radical socialist Dwight D. Eisenhower was president, I think the highest marginal tax rate was something like 90 percent," he noted.

In other respects, Sanders and Roosevelt part company. Their differences are clearest around capital gains taxation; while Roosevelt was known to complain about the effect of the preference on effective tax rates for the rich, he avoided tackling the issue through most of his presidency. Moreover, Sanders's plan to raise the cap on payroll taxes runs counter to FDR's penchant for describing Social Security as a form of insurance; by further eroding the link between benefits and "contributions," the elimination of the cap would probably strike Roosevelt as a threat to the program's long-term political viability.

Regressive Socialism?

Still, there is much linking Sanders's tax policy to Roosevelt's. The most revealing commonality, moreover, is not found in all the talk about soaking the rich and redistributing wealth. Rather, it resides in Sanders's most regressive tax proposal: a modest increase in the payroll tax designed to fund his plan for guaranteed family and medical leave.

Sanders has acknowledged that this financing mechanism would affect all workers. "The payroll tax would hit everyone -- yeah, it would," he told George Stephanopoulos on ABC This Week recently. But Sanders defended the plan by pointing to the associated benefits. "It would mean we would join the rest of the industrialized world and make sure that when a mom has a baby, she can in fact stay home with that baby for three months, rather than going back to work at the end of one week," Sanders said. The United States is the "only major country on earth that doesn't guarantee paid family and medical leave," he added.

This argument would have appealed to Roosevelt, piggybacking as it does on his own argument for creating the regressive payroll tax in the first place. It's also, as Sanders made clear, the basis for most social democratic programs in use around the world (where VATs play the role that the payroll tax plays here).

Sanders's idea for a payroll tax increase demonstrates the importance of spending in his plan for remaking America. Sanders is interested in making the rich less rich through heavy taxation of income and estates, but he seems just as committed to making the poor less poor by spending money on social welfare programs, even if that money comes from regressive taxes.

The New Yorker, in a recent profile of Sanders, quoted one of his longtime associates, political scientist Garrison Nelson, as saying that Sanders was "more from the 1930s left than the 1960s one." Nelson was probably alluding to Sanders's fixation on working-class issues (and his relatively less enthusiastic embrace of racial and cultural liberalism). But the observation also holds true for Sanders's position on tax policy.

The liberals of the 1960s were committed to progressive taxation, but they lacked the enthusiasm for high-end tax progressivity that Roosevelt made a central element of his political appeal. The Kennedy/Johnson version of tax liberalism was deeply influenced by the Surrey sort of tax reform; it was, after all, Kennedy who engineered the first dramatic rate cuts of the postwar era (although he notably soft-pedaled the base-broadening element of classic tax reform).

To find a real fire-breathing, soak-the-rich liberal, you have to go back to the days of Roosevelt and, to a lesser extent, Harry Truman. That's exactly where Sanders is headed.