American election cycles are impossibly long. Whereas only six weeks will elapse between the declaration and execution of the upcoming balloting in the United Kingdom, the U.S. presidential race is already six months old and has 12 more left to run. Politico projects that the 2020 campaign will cost about $10 billion, enough to hire more than 150,000 new teachers or maintain 350,000 miles of highway.
As my way of objecting to this interminable process, I typically don’t answer questions related to U.S. elections until the final few months before the polls open. But we are getting a host of questions about how tax policy might evolve after the election. As taxation is a critical consideration for business and private investment, I have agreed to break my silence…but only briefly.
A bit of background is in order before policy proposals can be considered. The United States is not in the best fiscal position: the most recent annual federal deficit was almost $1 trillion, or 4.6% of gross domestic product (GDP). This is partly because tax receipts as a percentage of GDP have fallen during the past four years, despite solid economic growth.
The 2017 tax reform bill is responsible for most of this decline. Sponsors of that legislation predicted that tax reductions would spur economic growth to the point of being revenue neutral. Those hopes have not yet been realized, and the contractionary effect of global trade battles has not helped.
The long-term budget outlook is of greater concern. The influence of demographics will become more pronounced in the years ahead, as the number of people receiving benefits from social security and Medicare expands. The Congressional Budget Office, a non-partisan federal agency, projects the annual deficit as a percentage of GDP will double in size over the next thirty years, bringing aggregate federal debt to a staggering level of almost $95 trillion.
As a consequence, the cost of carrying the debt will absorb an increasing fraction of annual outlays, placing pressure on other spending categories. Concern among investors over the sustainability of the debt may force the U.S. to pay a higher premium to borrow, which would make matters worse. In light of all of this, a discussion about fiscal responsibility seems warranted. And the revenue side of the ledger has to be part of that conversation.
For some, there is another reason to reconsider our system of taxation. The concentration of income and wealth in the highest deciles of society has risen sharply during the current expansion. According to figures compiled by the Federal Reserve, the top 1% of American families control about 30% of aggregate net worth; the top 10% control more than two-thirds.
Hard work, entrepreneurship and sound investing are certainly contributors to favorable outcomes. But the extremes of the wealth distribution, and the diminishing mobility seen within it, suggest to certain viewers that the system is tilted and needs to be leveled. A wealth tax is one means to this end. Polls indicate that this idea attracts support from a broad swath of the population, including some of the wealthiest Americans.