wealth tax

If You Can’t Have Wealth Taxes, You Don’t Have a Country

Progressive taxes make good neighbors. Photo: Elijah Nouvelage/Getty Images

A cosmopolitan elite is eroding the integrity of America’s borders and the sovereignty of its citizens. This numerically small but economically powerful band of globe-trotters use their outsize political influence to preempt popular policies that they don’t like — or else, sabotage the enforcement of those they can’t block. The resulting lawlessness and illicit cross-border flows beggar middle-class taxpayers and strain the finances of our welfare state. And everyone who dares to object to this state of affairs — or to demand a crackdown on those who flout our nation’s laws and make a mockery of its claims to self-governance — are derided as naïve, know-nothing demagogues or worse.

You’ve heard this story before. Donald Trump and his allies have deployed variations on it to demonize undocumented immigrants, and cast their xenophobic movement as a populist, majoritarian cause whose only real opposition is a cabal of unpatriotic elites. And yet, virtually all of the right’s (non-explicitly white nationalist) complaints about our government’s failure to enact and enforce restrictions on internationally mobile labor ring far truer when applied to internationally mobile capital.

This reality is reflected in the current debate over wealth taxes. Critics of Elizabeth Warren and Bernie Sanders’s schemes for soaking the superrich have martialed a variety of arguments against them. But the most prominent is an appeal to fatalism: Even if annual levies on great fortunes or confiscatory top income-tax rates were desirable, the U.S. government would remain incapable of effectively enforcing them. A wide variety of economists and billionaires have offered versions of this warning. “You finally have some politicians who are so extreme that I’d say, ‘No, that’s even beyond,’” Bill Gates recently said, qualifying his support for stiffer taxes on his class. “You do start to create tax-dodging and disincentives, and an incentive to have the income show up in other countries and things.”

This argument asks Americans to accept a stark limitation on their nation’s sovereignty. It stipulates that in a world of globally mobile capital, the effective limit on top tax rates is set by our superrich, not our democratic polity. Why this diminution of the nation-state’s authority should be acceptable — even as a minuscule amount of undocumented immigration is regarded as a crisis of the rule of law — is difficult to explain.

There have been times in American history when immigration restriction was a popular cause. But we’re not living in one. According to Gallup’s most recent polling, only 27 percent of Americans believe that immigration levels should be reduced. By contrast, Elizabeth Warren’s plan to levy a 2 percent wealth tax on households worth over $50 million commands 61 percent approval in Politico-Morning Consult’s polling, with a large plurality of Republicans endorsing the idea. Public support for Alexandria Ocasio-Cortez’s 70-percent top marginal tax rate is similarly robust. And yet, such steeply progressive tax policies are widely considered politically untenable and logistically unenforceable — largely because of the outsize political influence (and innovative unlawfulness) of the cosmopolitan elites who bankroll the Republican Party.

The costs of our government’s inability to police every inch of our 1,933-mile border with Mexico — and thus, perfectly enforce our legal restrictions on labor mobility — are miniscule if not nonexistent. Far from burdening middle-class taxpayers and straining the welfare state’s capacity, undocumented immigrants contribute an estimated $13 billion to Social Security and $3 billion to Medicare each year, despite their ineligibility for those programs’ benefits. Meanwhile, America’s undocumented population also increases our nation’s productive capacity, and thus, the size of the economic pie that can be diverted to publicly beneficial ends. These facts, combined with the undocumenteds’ greater propensity for abiding by our nation’s laws, means that the imperfections in our immigration enforcement system have gifted our country a lower crime rate, higher economic growth, and a smaller federal deficit.

By contrast, the costs of Uncle Sam’s failure to enforce existing taxes on the rich (let alone, to enact rates commensurate with popular preferences) have been exorbitant. By the IRS’s estimates, tax evasion costs the federal government roughly $450 billion in lost revenue every year. Much of this is achieved through underreporting, but a good chunk is attributable to the illicit movement of wealth across borders. Globally, upwards of $6 trillion in untaxed earnings are stowed away in tax havens, according to the estimates of economist Gabriel Zucman, a leading authority on the subject.

The one percent’s refusal to abide by our nation’s tax laws is all the more remarkable given how much influence they’ve exercised over their content. For decades, a large majority of the American public has said that taxes on the rich are too low. And yet, policymakers have bucked that consensus, with Republican administrations reducing the tax burdens of the rich by far more than their Democratic successors have increased them. In 1980, America’s wealthiest 400 families paid an average effective tax rate of 47 percent; today, that figure is 23 percent, which is slightly lower than the average rate paid by those in the bottom half of America’s income ladder.

The dollar’s privileged status as the global reserve currency, combined with persistently low interest rates, has mitigated the consequences of our inability to subject the superrich to progressive taxation: Instead of fully offsetting the costs of tax breaks for billionaires with cuts to social spending, Uncle Sam has been free to run higher and higher deficits. But demagogy about the national debt has still forced bouts of austerity and persistent underinvestment in social programs and infrastructure that would benefit ordinary Americans. Meanwhile, in the absence of robust federal funding for various state-level programs, many states have steadily increased taxes on their poor.

In sum: Just about everything conservatives say about immigration policy and enforcement in the U.S. applies with much greater force to tax policy and enforcement. Our inability to hold internationally mobile capitalists accountable to our lenient tax laws undermines one of the most basic aspects of national sovereignty — the freedom to democratically determine our polity’s distribution of economic rights and responsibilities — and does so in a manner that materially harms ordinary Americans.

Happily, a few on the right are beginning to understand this. The latest issue of American Affairs — a policy journal founded by a Trump supporter who wished to add some intellectual sinew to the skeletal frame of the mogul’s nationalist ideology — features an excellent meditation on “Tax Sovereignty in the Age of Global Capital.” In the essay, Michael Cuenco, a graduate student at the Munk School of Global Affairs and Public Policy, articulates some of the arguments I’ve outlined above, while endorsing a far more sophisticated conception of national sovereignty than one is used to encountering in a conservative publication. Drawing on the work of the political philosopher and economist Peter Dietsch, Cuenco argues that the “Westphalian concept of national sovereignty” — defined by the illegitimacy of one state interfering in another’s internal affairs — has become outmoded in an age of footloose capital:

In an economically interdependent world, the extremes of tax competition and the absence or relative weakness of tax cooperation mean that, as countries “struggle to preserve their Westphalian sovereignty” through strategic attempts at attracting and retaining globally mobile capital, “arbitrage becomes possible and the erosion of [fiscal self-determination through low fiscal flexibility and regressive pressures on public finance] results.” Dietsch proposes that, as things are, “Westphalian sovereignty is no longer adequate, or even logically possible. If the policies of [one state] affect other states in ways that, although not directly exercising authority over their policies, nevertheless indirectly undermine the effectiveness of these policies, then Westphalian sovereignty is compromised.” Furthermore, the continuing rise in capital mobility might necessitate new forms of institutional cooperation between states that could further conflict with the ideal of Westphalian sovereignty.

Dietsch makes a comparison with individual liberty and appeals to “the idea that sovereignty, just as much as liberty, entails not only rights but obligations” … Dietsch is thus able to formulate “tax sovereignty” as having a “twofold conditional nature,” consisting of a state’s right to fiscal self-determination bundled with a “responsibility to respect” the fiscal self‑determination of other states.

In other words: Safeguarding America’s national sovereignty and building effective institutions of global governance are not conflicting objectives; the second is a precondition for the first. In the absence of an international system for monitoring and policing cross-border capital flows, no nation can exercise genuine sovereignty over its own fiscal policy.

Fortunately, constructing such a system is well within our collective capacity. In fact, we’ve already broken ground on the project. As Cuenco notes:

One need look no further than the United States, which is already far ahead in getting other nations to respect its fiscal self-determination. In 2010, the United States unilaterally imposed the Foreign Accounts Tax Compliance Act (fatca) that requires foreign financial institutions (FFIs) to submit the financial accounts information of American citizens and resident taxpayers to the Internal Revenue Service, with the threat of a 30 percent withholding tax on U.S. source income to be imposed on FFIs that fail to comply. This historic piece of legislation and its global consequences serve as a concrete example of a state demanding that other states recognize its sovereign right to collect revenue from its tax base, albeit in a rather heavy-handed way, by compelling foreign actors to provide assistance to its revenue agency. More could be done to improve fatca, but it’s a start … One can envision a near future where sovereign states are endowed with newfound fiscal capacities and powers of enforcement that would allow them to effectively track and tax the globally mobile segments of their tax base.

America’s power on the world stage may be in decline. But between our coveted consumer and financial markets, and military supremacy, we retain a lot of leverage over how global commerce is conducted. If a Sanders or Warren administration chose to make the restoration of fiscal sovereignty a top-tier priority of its foreign policy, the superrich’s taxable assets would have nowhere to hide (or, at least, fewer places to hide). Some of the logistical challenges of wealth taxation might persist. But the ceiling on how much revenue our government could realistically extract from the tiny fraction of its citizens who’ve been hoarding the gains of economic growth would rise meteorically.

To this point, progressives have largely framed their tax plans as measures for combating inequality and advancing economic justice. And these are surely potent themes. But truly comprehensive tax reform — and the revamped enforcement apparatus it would entail — would also represent a reassertion of the rule of law, and the sovereignty of our nation-state. Trump’s Republican Party, meanwhile, exists to subordinate such sovereignty to the whims of its globe-trotting benefactors. Sanders and Warren might be wise to point that out.

If You Can’t Have Wealth Taxes, You Don’t Have a Country