Democrats could raise government revenue further by implementing a carbon tax—an approach that would also have environmental benefits.
When American voters head to the polls for Congressional midterm elections in November, their choices seem likely to be guided more by “pocketbook issues” than by foreign affairs or president Donald Trump’s scandals. If the Democrats hope to retake control of the House of Representatives, they will need a platform that addresses voters’ economic concerns—particularly the concerns of many voters who elected Trump in the first place.
The conventional wisdom still stands: underlying Trump’s election was the median household’s perception that it had been left behind by globalisation and technological change, with the gains from those developments having gone to the rich instead. Fortunately, from an economist’s perspective, it is not difficult to think of proposals in eight critical policy areas that would simultaneously expand the economic pie and share the slices more equitably.
The first key proposal relates to health care. Democrats must commit to expanding the share of Americans with health insurance, not reducing it, as Republicans have been working toward. This means, for starters, repairing the damage the Republicans have done to the Affordable Care Act (better known as Obamacare).
Second, Democrats should commit to investing in infrastructure, including the construction and repair of roads and bridges, funded by a higher gasoline tax. Such infrastructure would not only support long-term economic growth, but, in the short-run, would also create blue-collar jobs for people whose employment prospects have stagnated.
Investment is also critically important in education. Democrats should work especially to ensure a pre-school education for all, so that children can enter kindergarten on a more equal footing. They should also expand access to higher education (especially community college), but not by providing government loans that get channelled to some for-profit universities from which students emerge with high debt and little else. Only schools with adequate graduation rates and job-placement records should be eligible.
The fourth plank of an effective economic platform is financial regulation, which the Republicans are weakening at a particularly bad moment: the peak of the financial and business cycles. Democrats should step up to protect the Dodd-Frank reforms implemented after the 2008 financial crisis. That includes the supplementary leverage ratio required of the largest banks, which newly appointed regulators are working to relax. Banks’ capital requirements should, if anything, be increased. To avoid a repeat of the home mortgage crisis, loan originators should have to “keep skin in the game.”
Moreover, Democrats should resume the good work that the Consumer Financial Protection Bureau has done until now—for example, regulating payday loans, student loans, auto loans, and credit card debt. They should also reinstate president Barack Obama’s fiduciary rule, which would have required professional financial advisers to put their clients’ interests first when advising them on assets invested in retirement plans.
The fifth area that Democrats must address is taxation. In particular, to “make work pay”, they should reduce marginal income-tax rates on low-income workers—such as by expanding the Earned Income Tax Credit—rather than on high-income workers, as Republicans have done. They should also abolish the carried interest deduction (which benefits wealthy managers of private equity and hedge funds), as
Trump himself promised to do during the 2016 presidential campaign.
Similarly, Democrats should reverse the change to the estate tax contained in the Republican tax law, which raises to about $22 million the amount a married couple can pass, free of estate or gift taxes, to their heirs. When a couple leaves more than, say, $10 million, some fraction of the excess should go to the Treasury.
No economic platform would be complete without trade. Start by cancelling the tariffs on steel and other imports that Trump has threatened to impose. Sure, trade has both losers and winners. But, so do tariffs, and the losers far outnumber the winners. For example, they hurt industries that use steel, such as automobile producers, as well as consumers who face higher prices for finished products, not to mention farmers and others who then face retaliatory barriers to exporting their own products.
The seventh component of a comprehensive economic platform for Democrats focuses directly on improving the lot of those who have lost out as a result of technological change and other forces, rather than just those who have lost their jobs as a result of trade, as is the case with Trade Adjustment Assistance. One potential solution is “wage insurance.”
Finally, Democrats must ensure that any increased spending or transfers—including wage insurance—is paid for, rather than being allowed to blow the budget deficit wide open. To this end, “repeal and replace” the $1.5 billion ten-year tax cuts that the Republicans passed in December, which go overwhelmingly to the rich. While a lower corporate tax rate may have been a good idea, the revenue loss should be offset by measures that limit interest deductions and other loopholes.
Democrats could raise government revenue further by implementing a carbon tax—an approach that would also have environmental benefits. Furthermore, they could cancel plans to modernise the land-based component of the US nuclear triad, which is projected to cost at least $1.24 trillion over 30 years while failing to improve national security.
The items on this list may not be particularly groundbreaking. Indeed, Democrats have proposed most of them before, only to have been met with Republican opposition. But, that is no reason to dismiss proposals that would help bring about widely shared growth. What is needed, as the campaigning for the midterm elections begins, is a strong pitch.
Professor of capital formation and growth at Harvard University.
Copyright: Project Syndicate, 2018.