The one percent will be feeling the Bern

I write this as I am watching Bernie Sanders’ acceptance speech after winning the New Hampshire Democratic primary.  All his typical themes are there; universal health care, pay equity and a living wage for all, rebuilding America’s infrastructure, the rich and the large corporations paying their fair share – the list goes on and on.  The common thread through all of his initiatives is money – more of it, either going out as spending or coming in as revenues.  Spending is not really the problem, governments are good at that.  But collecting money and raising taxes?  Avoidance and tax planning can deflate revenues from any new tax measure, just ask the Trudeau Liberals who discovered that their new upper income tax bracket’s revenue projections are a few billion dollars short of plan.  If Bernie wins, he has a problem.

Now Trump is on TV, having won the Republican side of this primary.  He is going to make America great again by beating China, Japan, and other competing nations in economic prowess, innovation, and international prestige. Trump also has spending plans – on national defence, building walls on the borders, well, at least Mexico’s, and making others pay.  A special mention went out to taking care of US veterans who have been treated poorly, as well as an emphasis on addressing the rampant drug problem in the US.  Trump is not a great economist, but he also knows that this will take new spending and the US deficit is still projected at $500 billion per year or more well into the future, increasing from that figure over the coming decade.  The national debt is at $19 trillion and counting.  If Trump wins, he has a problem.

I am going to go out on a limb here and say that if one of these fringe candidates wins the presidency the rich can look forward to paying more taxes.  Who are the rich in the US?  According to Jason Cawley, a contributor to the financial website SeekingAlpha.com, 15% of US filers with $100,000 or more inincome account for 54.5% of the US adjusted gross income for the 2013 taxation year.  So, no matter who wins, the meaty end of the revenue stick is the top 15% of filers who can be targeted to pay more.  Whether you are on the left or the right, no one likes to see their marginal tax rates go up.  A better alternative would be for Bernie or Trump to reform the US tax code for the first time since Ronald Reagan did it in 1986.

In the 30 years since Reagan’s achievement each subsequent budget cycle has added back complexity, exemptions, targeted tax expenditures and loopholes that have created distortions that favored certain constituencies and mostly those in the upper-income brackets.  Some policies, like mortgage-interest deductibility, will never be removed, but a general simplification of the code and the marginalization of the special-interest groups that influence the formulation of the tax code is in order.  Bernie Sanders has taken no PAC money and neither has Trump, so they are not beholden to special interests should either one win the general election.  There is no other candidate in the race who can claim to be above the special interests the way these two are.  It is ironic that the candidates positioned at the extremes of their respective political spectrums are the best positioned to effect significant, sustainable reform on the one piece of legislation that Americans complain about every day.

If special tax breaks and deductions are eliminated, then the marginal rates may fall but those rates will have greater bite.  The US has the highest corporate tax rate in the OECD at 39.1%, but the real effective tax rate is about half that.  A maximum rate set at the OECD simple average of 25% with fewer tax expenditures would make more sense and bring the US into line with more progressive economic regimes.  For 2015, the top federal marginal tax rate is 39.6% for personal income above $413,200, but how many of those lucky filers really pay that rate?  Maybe a top rate of 30% that actually sticks to their wallets makes more sense.  You get the idea – make it simpler, remove distortions, and then people can understand at what level of income they pay more and what that rate really is.  This is not going to cause the massive disincentive to work like the top marginal US tax rate of the 50’s and 60’sthat hit 91% until 1965 – and yes, I checked that figure!

Americans are taxed based on citizenship, not residency, so leaving the country will not help them escape the long reach of the US taxman.  According to the US Treasury, only 4,279 individuals renounced their US citizenship or US-issued Green cards in 2015.  This compares to 3,415 in the previous year, but this is a seriously small number compared to 145 million tax filings.  The conclusion is that no one is leaving the US in significant numbers, and the US still offers some of the lowest tax rates in the world, so where are they going to go – Canada?  Unlikely – which is why Bernie and Trump can count on the rich to stick around to fund their promises to make America great again, whatever that means to them.