Could Tax Increases Speed Up the Economy? Democrats Say Yes – The New York Times

WASHINGTON — Elizabeth Warren is leading a liberal rebellion against a long-held economic view that large tax increases slow economic growth, trying to upend Democratic policymaking in the way supply-side conservatives changed Republican orthodoxy four decades ago.

Generations of economists, across much of the ideological spectrum, have long held that higher taxes reduce investment, slowing economic growth. That drag, the consensus held, would offset the benefits to growth from increased government spending in areas like education.

Ms. Warren and other leading Democrats say the opposite. The senator from Massachusetts, who is a leading candidate for the Democratic presidential nomination, contends that her plans to tax the rich and spend the revenue to lift the poor and the middle class would accelerate economic growth, not impede it. Other Democratic candidates are making similar claims about their tax-and-spend proposals. Some liberal economists go further and say that simply taxing the rich would help growth no matter what the government did with the money.

Democrats in the past, including the party’s 2016 nominee, Hillary Clinton, have argued that a more modest combination of tax increases and spending programs would expand the economy. But no Democratic nominee before Ms. Warren had ever proposed so many new taxes and spending programs, and leaned so heavily into the argument that they would be, in economist parlance, pro-growth.

That argument tries to reframe a classic debate about the economic “pie” in the United States by suggesting there is no trade-off between increasing the size of the pie and dividing the slices more equitably among all Americans.

Ms. Warren has proposed nearly $3 trillion a year in new taxes on businesses and high-earners, largely focused on billionaires but sometimes hitting Americans who earn $250,000 and above per year. The taxes would fund wide-reaching new government spending on health care, education, and family benefits like universal child care and paid parental leave.

Last month, Ms. Warren wrote on Twitter that education, child care and student loan relief programs funded by her tax on wealthy Americans would “grow the economy.” In a separate post, she said student debt relief would “supercharge” growth.

The last batch of economists to disrupt a political party’s consensus position were conservative — the so-called supply-siders who built influence in the late 1970s and gained power in the Reagan administration. Previous Republican presidents had focused on keeping the budget deficit low, which constrained their ability to cut taxes if they did not also cut government spending. Supply-siders contended that well-targeted tax cuts could generate big economic growth even without spending cuts.

Ms. Warren is making the case that the economy could benefit if money is redistributed from the rich and corporations to uses that she and other liberals say would be more productive. Their argument combines hard data showing that high levels of inequality and wealth concentration weigh down economic growth with a belief that well-targeted government spending can encourage more Americans to work, invest and build skills that would make them more productive.

Fueling their argument is the fact that the United States now has one of the lowest corporate tax burdens among developed nations — a direct result of President Trump’s 2017 tax cuts. Tax revenues at all levels of government in the United States fell to 24.3 percent of the economy last year, the Organization for Economic Cooperation and Development reported on Thursday, down from 26.8 percent in 2017. America is now has the fourth lowest tax burden in all of the O.E.C.D., just above Mexico, Chile and Ireland, a development that Democrats say has helped corporate executives and shareholders get rich but has done little to help working Americans.

In making their pitch, Democrats cite evidence that transferring money to poor and middle-class individuals would increase consumer spending because they spend a larger share of their incomes than wealthy Americans, who tend to save and invest.

“The economy has changed, our understanding of it has changed, and we understand the constricting effects of inequality” on growth, said Heather Boushey, the president of the Washington Center for Equitable Growth, a think tank focused on inequality.

Inequality has widened significantly in America over the last several decades. The Congressional Budget Office estimates that the incomes of the top 1 percent of Americans more than tripled from 1979 to 2016, before taxes and government transfer payments are taken into account. For the middle class, incomes grew 33 percent. More than a decade after the recession, wage growth for the middle class continues to run well behind previous times of economic expansion, like the late 1990s.

Research by the economist Emmanuel Saez and colleagues shows that the last time such a small sliver of Americans controlled such a large share of the nation’s income and wealth was in the late 1920s, just before a stock market crash set off the Great Depression. World Bank researchers have warned that high levels of inequality are stifling growth in South Africa, which has the globe’s worst measured inequality.

“We have an economy that isn’t delivering like it used to,” said Ms. Boushey, who advised Hillary Clinton’s 2016 Democratic presidential campaign. “That’s leading people to say let’s re-examine the evidence.”

The contention that tax and spending increases can lift economic growth is not the only challenge to traditional orthodoxy brewing in liberal economic circles. Some Democrats have also embraced modern monetary theory, which reframes classic thinking that discourages large budget deficits as a drag on growth. Its supporters, including Representative Alexandria Ocasio-Cortez of New York and the economist Stephanie Kelton, an adviser to Senator Bernie Sanders of Vermont, argue that the United States government should be spending much more on programs to fight inequality, like a federal job guarantee, without imposing new taxes.

Some of the inequality-focused economists say they are hoping to build new economic models to predict the effects of their policies, though they acknowledge few of those models exist yet. Instead, they rely on evidence about the likely effects of individual programs, added together.

Many economists who study tax policy contend that Ms. Warren’s plans — and other large tax-and-spend proposals from Democratic candidates this year — would hurt the economy, just as classic economic models suggest.

“Some elements of the large increase in government spending on health and education proposed by Senator Warren would promote economic growth” through channels like improved education, said Alan Auerbach, an economics professor at the University of California, Berkeley, who has written some of the most influential research in the profession on the relationship between tax rates and growth.

But, he said, “I am very skeptical that these growth effects would offset the negative effects on growth of the higher taxes, particularly given that the spending increases are not specifically targeted toward enhancing growth.”

Ms. Warren disagrees. In the latest Democratic debate, she said the spending programs funded by her wealth tax would be “transformative” for workers. Those plans would raise wages, make college tuition-free and relieve graduates of student debt, she said, adding, “We can invest in an entire generation’s future.”

An emerging group of liberal economists say taxes on high-earners could spur growth even if the government did nothing with the revenue because the concentration of income and wealth is dampening consumer spending.

“We are experiencing a revolution right now in macroeconomics, particularly in the policy space,” said Mark Paul, an economist who is a fellow at the liberal Roosevelt Institute in Washington. “We can think of a wealth tax as welfare-enhancing, in and of itself, simply by constraining the power of the very wealthy” to influence public policy and distort markets to their advantage.

Taken together, Ms. Warren’s proposals would transform the role of federal taxation. If every tax increase she has proposed in the campaign passed and raised as much revenue as her advisers predict — a contingency hotly debated among even liberal economists — total federal tax revenue would grow more than 50 percent.

The United States would leap from one of the lowest-taxed rich nations to one of the highest. It would collect more taxes as a share of the economy than the Netherlands and only slightly less than Italy.

Mr. Sanders’s plan envisions a similarly large increase in tax levels. Former Vice President Joseph R. Biden Jr.’s proposals are much smaller in scale: He would raise taxes on the wealthy and corporations by $3.4 trillion over a decade, in order to fund increased spending on health care, higher education, infrastructure and carbon emissions reduction.

If Ms. Warren’s tax program is enacted, said Gabriel Zucman, an economist at Berkeley who is an architect of her wealth tax proposal, “in my view, the most likely effect is a small positive effect on growth, depending on how the revenues are used.”

Another economist who has worked with the Warren campaign to analyze its proposals, Mark Zandi of Moody’s, said he would expect her plans to be “largely a wash on long-term economic growth.”

Researchers at the Levy Economics Institute of Bard College projected this summer that Ms. Warren’s wealth tax and spending policies would generate a 1.7 percent increase in the size of the economy. A preliminary study of a wealth tax like Ms. Warren’s proposal, by the Penn Wharton Budget Model, found that it would reduce the size of the economy by a similar 1.7 percent. The model uses the sort of classic methodology that liberals are now rebelling against and did not evaluate Ms. Warren’s spending proposals.

Historical experience offers few parallels for assessing the economic effects of a taxation-and-spending program on the scale of Ms. Warren’s ambitions. A 2002 study of wealth taxes in rich countries found that those taxes, most of which have since been abandoned, reduced economic growth slightly on an annual basis.

Conservative economists roundly disagree that large tax increases can spur faster growth, even those who say government spending on paid leave and child care may get more Americans into the labor force. They say a wealth tax on the scale of Ms. Warren’s proposal would greatly reduce savings and investment by the rich.

“What a wealth tax does is, it directly taxes savings,” said Aparna Mathur, an economist at the conservative American Enterprise Institute who favors a narrow paid leave program and whose research finds benefits from reducing tax rates on business and investment. “If you’re taxing savings, you’re implicitly taxing investment. So how can that possibly be pro-growth?”

The supply-side economists’ plans were similarly denounced — George Bush called them “voodoo economic policies” while running for president in 1980 — but in time dominated Republican proposals.

Some members of the new liberal revolt against tax orthodoxy welcome the comparison to the supply-side uprising.

“While I think that the supply-siders were wrong, and were always wrong, they were reacting to very real economic problems in the 1970s,” said Michael Linden, the executive director of the Groundwork Collaborative, a liberal policy and advocacy group. “There was something really wrong with the economy at the time. I think there is now.”