PAID VACATION DAYS AND HOLIDAYS
In other rich democratic countries, the law requires that employers give their employees between 10 and 38 paid vacation days and holidays. The average in these nations is 27 days.1 In the United States, the number is zero. Most public employees get some paid days off, and 77% of private-sector employers offer some to their workers. Yet some employees get none, and the average number of paid days off for those who get any is just 18.2
We should make the provision of paid vacation days and holidays mandatory. And it would make sense to increase the number to 10 paid holidays and 15 days (three weeks) of paid vacation, for a total of 25.
HOW MUCH WILL IT COST?
The additional expenditures needed to fund these various programs would total around 10% of GDP. Here is a breakdown.
|2.25%||Earned Income Tax Credit|
|0.5||Paid parental leave|
|0.5||Infrastructure and public spaces|
|0.2||Unemployment insurance and wage insurance|
|0||Criminal justice reform|
|0||Paid vacation days and holidays|
Increasing public spending by 10% of GDP would be a significant change for the United States, but it wouldn’t be unprecedented. During the course of the twentieth century, government expenditures’ share of America’s GDP rose by more than twice that. And an increase of 10 percentage points would put the US merely in the middle of the pack, not at the top, among the world’s rich democratic countries.3
HOW TO PAY FOR IT
What would be the best way to get the money? Broadly speaking, there are two options: “soak the rich” or “spread the burden.”
The world’s rich democracies tend to do the latter. They have a relatively proportional tax system, with everyone paying roughly the same share of their pretax income in taxes.4 They do this instead of soaking the rich — taxing the rich at much higher rates than everyone else — for two reasons. One is to minimize tax resistance by the rich. The other is the need to go where the money is; even if the rich have very high incomes, there aren’t that many of them, so in order to generate a lot of revenue it’s usually necessary to spread the tax burden up and down the income ladder.
America too has a relatively flat tax system. Figure 1 shows average effective tax rates in the United States at various points along the pretax income distribution (hollow circles). An “effective tax rate” is calculated as taxes paid divided by pretax income. These calculations include all types of taxes at all levels of government. The effective tax rates paid by Americans are fairly similar for those with low incomes, middle incomes, and high incomes.
However, the distribution of pretax income is quite unequal. Households at the top get a much larger portion of the income than those in the middle or bottom.5 As a result, the distribution of tax payments (dark circles in figure 1) also is very unequal. Households in the top quintile pay about 65% of all tax dollars, those in the middle fifth pay about 10%, and those in the bottom fifth pay 2%. Each is paying a similar percentage of their income in taxes, but the affluent end up paying a lot of the tax dollars because they have so much of the income.
Suppose we were to increase taxes for all Americans, keeping the distribution of tax payments exactly the same as it is now while increasing revenues by 10% of GDP. What would that change look like for households at various points along the income distribution? Households in lowest fifth of incomes would account for about 2% of these added revenues, households in the middle around 10%, and households in the top quintile 65%. In dollar terms, households in the bottom fifth of incomes would pay, on average, about $1,400 more per year, those in the lower-middle fifth $3,600, those in the middle fifth $7,000, those in the upper-middle fifth $13,100, and those in the top fifth $46,200 more.6
As a presidential candidate in 2008, Barack Obama pledged to not increase taxes for households in the bottom 95% of incomes. The Democratic nominee in 2016, Hillary Clinton, made the same pledge. In the contemporary US context, there is some sense in focusing on the top in the search for more revenue. The chief rationale for progressive taxation is that those with more income can afford to pay a larger share of that income than those with less.7 While the incomes of Americans in the middle and below have risen slowly over the past few decades, for those at the top incomes have soared, so it’s reasonable to ask them to contribute a larger share of their income.
However, there’s a limit to how much additional tax revenue we can get from those at the top. Figure 2 shows the effective tax rate on the top 5% of American households going back to 1960. We have three estimates of this tax rate (two of the three include only federal taxes, not state and local). The dot for the year 2016 indicates what the effective tax rate on this group would need to have been in that year in order to increase tax revenues by 10% of GDP.8 It’s an extremely high rate, and one far above the actual rate at any point in the past half century. This seems neither desirable nor likely to find favor among policy makers.
What, then, should we do to increase government revenues by 10% of GDP? A multipronged approach might work. Here is one possibility. The numbers here are percentages of GDP. All are estimates.
|5.0%||Add a national consumption tax (value-added tax, or VAT) at a rate of 12%, with limited deductions or a small flat rebate|
|1.4||Improve collection of unpaid taxes and reduce use of tax havens|
|1.0||Return to the 2000 (pre-Bush) federal income tax rates for taxpayers with incomes below $450,000|
|0.7||Increase the effective tax rate for the top 1% of taxpayers by 6 percentage points (from 34% to 40%)|
|0.3||Return the estate tax exemption threshold and rates to their 1965-75 levels|
|0.7||Add a carbon tax|
|0.5||Add a financial transactions tax of 0.5% on trades|
|0.3||Increase the payroll tax by 1 percentage point|
|0.2||Increase the cap on the Social Security payroll tax so the tax covers 90% of total earnings, as it did in the early 1980s|
|0.2||End the real estate tax credit|
Begin with a national consumption tax. The United States raises the least revenue from consumption taxes of any rich nation, as figure 3 shows. Currently we collect only about 5% of GDP in consumption taxes, almost entirely at the state and local levels. Most other affluent countries collect 10% or more. A value-added tax (VAT) at a rate of 12%, with limited deductions, would likely bring in about 5% of GDP in revenue.9
Because of its regressivity, the idea of a large consumption tax has yet to be embraced by America’s left.10 The degree of regressivity can be lessened by exempting more items from the tax11; but the greater the exemptions, the less revenue the tax will bring in. A better strategy might be to offset the regressivity of a new consumption tax with other changes to the tax system.
Those on the political right tend to object to a VAT for fear it will become a “money machine” — a tax that can be steadily increased over time. But this fear is based on a misreading of the experience of other rich nations. Some countries have decreased their VAT rate, some have held it constant, and most of those that have increased it did so mainly in the 1970s and early 1980s, when high inflation made such increases less noticeable.12 Some argue that tax increases in rich countries since the 1960s have come mainly via VAT increases, but actually they’ve come as much or more via increases in income and payroll taxes.13
Where would the rest of the new revenues come from? By improving collection of unpaid taxes and reducing the use of tax havens, we could raise, as a conservative estimate, 1.4% of GDP.14
We could return to the pre-George W. Bush income tax rates for taxpayers with incomes below $450,000. (We did so in 2013 for incomes above that amount.) This would increase revenues by about 1% of GDP.15
We could raise income tax rates for those in the top 1% a bit more.16 This might entail increasing the tax rate on personal income or capital income, or both. The effective tax rate on the top 1% currently is around 34%.17 An increase of 6 percentage points, to a 40% effective rate, would hardly be confiscatory. Increasing the effective tax rate for this group by 6 percentage points would generate about 0.7% of GDP.18 A common worry is that raising taxes on the rich will cause them to flee, or at least to park their money elsewhere. The best available evidence suggests that while high earners are indeed responsive to changes in tax rates, the magnitude of this effect is small.19
Since the 1970s, the estate tax has been steadily decreased. The exemption threshold — the amount of the estate beyond which the tax kicks in — has been reduced to the point where the tax applies to just two out of every thousand estates. And the tax rate has been lowered. Since 2010 estate and gift tax revenues have totaled just 0.13% of GDP, compared to 0.45% between 1965 and 1975.20 Returning the estate tax rate and exemption threshold to the earlier levels would be appropriate given the rise in wealth inequality in recent decades.21 It could boost government revenues by around 0.3% of GDP.
A carbon tax could generate about 0.7% of GDP in revenues.22 The United States arguably should have a carbon tax anyway, in order to shift resources away from activities that contribute to climate change.23
Every rich democratic nation other than the United States has a tax on financial transactions, such as purchases of stock shares. On average those taxes yield about 0.5% of GDP in revenue.24
Increasing the payroll tax by 1 percentage point (half a percentage point on employees and half a point on employers) would add about 0.3% to revenues.25 This would leave the payroll tax rate well below that in many European countries, and almost certainly below the level at which it would be a significant deterrent to employment.
We could increase the cap on earnings that are subject to the Social Security payroll tax. A person’s earnings above $128,400 (as of 2018) aren’t subject to this tax. Because a growing share of total earnings in the US economy has gone to those at the top, a growing share has been exempt from the Social Security payroll tax. In the early 1980s, about 90% of earnings was subject to the tax; this has dropped to below 85%. Raising the cap to get back to 90% would increase tax revenues by about 0.2% of GDP.26
Finally, we could do away with the real estate tax credit, which allows homeowners to deduct their state and local property tax payments from the income on which they pay federal income tax. The evidence suggests this credit does nothing to increase homeownership, and it mainly goes affluent taxpayers. This would increase revenues by about 0.2% of GDP.27
This set of proposed changes is just one of many possible ways to increase tax revenues.28 The point is that the technical details of getting an additional 10% of GDP are not difficult.
A PARTIAL BUT VALUABLE FIX
The recommendations I’ve offered won’t solve every problem America faces. We also need to deal with climate change, foreign policy challenges, prevention of future financial crises, and much more. But the new programs and expansions of existing ones outlined here would improve the lives of lots of Americans. We know from our own experience and those of other rich democratic nations that public insurance programs and employment-promoting services help, and that they do so without curtailing individual freedom, impeding the economy, or breaking the bank.
- Wikipedia, “List of Minimum Annual Leave by Country”; Rebecca Ray, Milla Sanes, and John Schmitt, “No-Vacation Nation Revisited, Center for Economic and Policy Research, 2013. ↩
- Robert W. Van Giezen, “Paid Leave in Private Industry Over the Past 20 Years,” Bureau of Labor Statistics, 2013; Society for Human Resource Management, “2017 Holiday Schedules.” ↩
- Esteban Ortiz-Ospina and Max Roser, “Government Spending,” Our World in Data. ↩
- Lane Kenworthy, “Taxes,” The Good Society. ↩
- Lane Kenworthy, “Income Distribution,” The Good Society. ↩
- The amount paid by households in the bottom fifth is calculated as $1.8 trillion (the total tax revenue needed) multiplied by .02 (this group will account for 2% of the revenues) divided by 25.2 million (the number of households in this group) = $1,428. The calculation is analogous for the other four groups. With the top fifth, we can go further and break it down into subgroups. Those between the 80th and 90th percentiles would pay $21,100 more per year, those between the 90th and 95th percentiles $30,600, those between the 95th and 99th percentiles (average income $320,000) $54,600, and those in the top 1% (average income $1.8 million) $340,000. ↩
- Lane Kenworthy, “Are Progressive Income Taxes Fair?,” Consider the Evidence, 2011. As Adam Smith put it in The Wealth of Nations (book 5, ch. 2, part 2), “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” ↩
- This assumes high-income households don’t alter their behavior in response to the increase in the effective tax rate. ↩
- This estimate is based on information in Alan B. Krueger, “A Future Consumption Tax to Fix Today’s Economy,” New York Times: Economix, 2009; Eric Toder and Joseph Rosenberg, “Effects of Imposing a Value-Added Tax to Replace Payroll Taxes or Corporate Taxes,” Tax Policy Center, 2010; Robert J. Barro, “How to Really Save the Economy,” New York Times, 2011; Andrea Louise Campbell, “The 10 Percent Solution,” Democracy, 2011; Sawhill, The Forgotten Americans: An Economic Agenda for a Divided Nation. ↩
- See, for instance, Robert Kuttner, “Progressive Revenue as the Alternative to Caps, Commissions, and Cuts,” Prepared for the Scholars Strategy Network, 2010. ↩
- In fact, a consumption tax can be made progressive. See Robert H. Frank, “Progressive Consumption Tax,” Democracy, 2008. ↩
- Bruce Bartlett, The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take, Simon and Schuster, 2012. ↩
- Lane Kenworthy, Progress for the Poor, Oxford University Press, 2011, ch. 8. ↩
- Gabriel Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens, University of Chicago Press, 2015; Reuven S. Avi-Yonah, “International Tax Evasion and Avoidance: What Can Be Done?,” The American Prospect, 2016; Jared Bernstein, “We’re Going to Need More Tax Revenue. Here’s How to Raise It,” The American Prospect, 2016. ↩
- Lane Kenworthy, “Were the Bush Tax Cuts Worse for Progressivity or for Revenues?,” Consider the Evidence, 2011. ↩
- James Surowiecki, “Soak the Very, Very Rich,” The New Yorker, 2010. ↩
- Institute on Taxation and Economic Policy, “Who Pays Taxes in America,” various years. ↩
- In 2016, average pretax income of households in the top 1% was $1.827 million, according to the Institute for Taxation and Economic Policy. There were about 1.26 million households in this group. 6% of their total income is about 0.7% of the country’s $1.8 trillion GDP. ↩
- Cristobal Young, The Myth of Millionaire Tax Flight, Stanford University Press, 2017. ↩
- OECD, Revenue Statistics Database. ↩
- Lane Kenworthy, “Wealth Distribution,” The Good Society. ↩
- Catrina Rorke, Andrew Moylan, and Daniel Semelsberger, “Swapping the Corporate Income Tax for a Price on Carbon,” Policy Study 79, R Street, 2016; Carbon Tax Center, “FAQs,” 2018. ↩
- Lane Kenworthy, “Climate Stability,” The Good Society. ↩
- Data source: OECD, Revenue Statistics Database. ↩
- The total payroll (Social Security and Medicare) tax rate is about 15%, and since the mid-1980s it has consistently collected 6.6% to 7.0% of GDP. ↩
- US Congressional Budget Office, “Increase the Maximum Taxable Earnings for the Social Security Payroll Tax,” 2016; Kathleen Romig, “Increasing Payroll Taxes Would Strengthen Social Security,” Center on Budget and Policy Priorities, 2016. ↩
- Nisha Chikhale, “U.S. Homeownership Tax Policies Are Expensive and Inequitable,” Washington Center for Equitable Growth, 2017. ↩
- See, for instance, Bernstein, “We’re Going to Need More Tax Revenue. Here’s How to Raise It.” ↩