We Brits think of America as the Right Nation – an inherently pro-capitalist society. Yet a new generation of socialist politicians in America is making its mark. They just might take power in 2020 in a backlash against Trumpery, says Victor Hill.
Meet AOC – the new American political superstar
I have just arrived in Los Angeles and there are but two topics of conversation here – and one of them is not Brexit! The first is Mr Trump (will he be impeached?) and the second is America’s new political superstar.
America can’t stop talking about Alexandria Ocasio-Cortez, whom both admirers and detractors refer to as “AOC”. AOC, if you haven’t heard of her, is a 29-year-old socialist politician of Puerto Rican heritage who worked as a waitress before going into national politics.
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Back in November, she became the youngest woman ever elected to Congress, winning the 14th congressional district in New York City. Since taking up her seat in Congress earlier this month, she has articulated a programme of radical socialism. She wants free Medicare and free college education. She wants to cancel all student debts. (Sound familiar?) She wants to hike the minimum wage to $15 an hour. And if she is red she is also green: she wants to replace oil and gas completely with renewable energy by 2030.
None of this could be achieved without cost. It would require massive tax hikes and possibly more national debt. AOC advocates increasing income taxes to 60-70 percent on incomes of over $10 million. For that alone, almost overnight, she has become one of the most popular and talked-about politicians in the USA.
Some commentators already see her as the future of the Democratic Party. She is attractive, articulate, outspoken, and has a plan to Make America Great Again – though in a rather different way from what Mr Trump means by MAGA. She is a shrewd campaigner who realised she could win by ringing doorbells in her district, where voter turnout was previously very low, and about 70 percent are non-white. There was less motivation for voters to turn out for her white, male and elderly Republican opponent.
Death and taxes…
Doug Casey, the billionaire guru thinks that if the US economy tanks during 2019 – which he thinks is quite likely – everybody will blame capitalism, because President Trump somehow symbolises capitalism in a way that few other presidents have done. The country – especially the young, the poor, and the non-white – will look to the government to do something. Many will see a form of American socialism as the solution – funded, of course by much higher taxes.
We should remember that as recently as the Eisenhower administration (1953-61) the top marginal tax rate in the USA was 91 percent. In practice, very few if any people actually paid that because there were numerous tax shelters – many of which no longer exist – and the rich were easily able to hide money offshore. And yet US economic growth in the 1950s was robust. Of course, AOC is by no means alone in this crusade: Nobel Prize-winning economist Peter Diamond has also recommended a 70 percent plus marginal income tax rate on high earners.
Work by the American Institute for Economic Research shows that in 1963 the marginal tax rate exceeded 50 percent for those earning the equivalent of $130,000 per annum in today’s money. But the effective rate paid, after allowable deductions, was much lower. Today’s proponents of higher taxes believe that most allowable deductions should be whittled down.
This year Americans can deduct interest on student loans from taxable income up to a maximum of $2,500. They can deduct contributions to their retirement accounts up to $5,500. They can deduct qualifying unreimbursed medical expenses (i.e. those not covered by medical insurance) up to a maximum of 7.5 percent of their gross income. Further, they can deduct most of their donations to charity.
In addition, Americans will receive a Child tax Credit of $2,000 per child this year – up from $1,000 last year. There is also a brand new Family Tax Credit which allows parents and carers to claim $500 against tax for any dependents over the age of 17.
States of tax
Of course the idea that entrepreneurs should be rewarded and not discouraged runs very deep in America. America, in any case, is not the low-tax nirvana that many British conservatives think it is. American workers have to pay Federal income tax, state income taxes – which vary widely, being highest in California and New York – and city taxes. On top of this they are subject to not inconsiderable property taxes. And after they have paid these they must stump up for medical insurance – which for a family of two adults and two kids might easily come in at $2,000 a month. (And, by the way, many people have cheaper policies which do not cover many common ailments – as in everything, you get what you pay for…)
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State taxes in America have given rise to a new breed of tax exile. Many baby boomers have fled California, fed up with its tax-and-spend-on-welfare programmes. They have decamped to states like Colorado, where housing costs are also much lower. Though, interestingly, since the election of the Democrat Jared Polis as Governor of Colorado last November on a tax-and-spend ticket, I know of at least two not-poor Coloradans who are thinking of heading north to Wyoming where low income taxes are written into the state’s constitution.
For all the talk of Mr Trump’s tax package that passed through Congress one year ago, the top marginal tax rate on high earners “only” fell from 39.6 percent to 37 percent. Mr Trump’s adviser in the early days of the administration, Steve Bannon, the populist founder of Breitbart, has proposed to increase the marginal income tax rate to 44 percent. So this is not necessarily a left-right cleavage. There seems to be little appetite in Washington to reduce tax rates any further.
But what really spooks American conservatives is talk of wealth taxes which AOC has conjured but not yet defined. That would really set the cat amongst the pigeons.
Sales tax or VAT?
Then there is the little matter of consumption taxes. Unlike much of the rest of the developed world America has eschewed Value Added Tax (VAT) in favour of a sales tax levied on goods at the final point of sale, determined at state level. When you buy a large Americano (or whatever) in Starbuck’s (NASDAQ:SBUX) anywhere within the USA, your receipt will specify exactly how much sales tax you paid the state in which you find yourself. Some states even have local sales tax as well as state sales tax. The five states with the highest average combined state and local sales tax rates are: Louisiana (10.02 percent), Tennessee (9.46 percent), Arkansas (9.41 percent), Washington (9.18 percent), and Alabama (9.10 percent). Alaska has one of the lowest combined levels of sales tax at 1.76 percent last year[i].
So America’s rate of sales tax is considerably lower than rates of VAT across the European Union, where the minimum permitted rate is 15 percent and several states such as Denmark impose a standard VAT rate of 25 percent. AOC favours the introduction of VAT across the USA. One suspects that this is partly because anything associated with the EU is regarded as progressive by American liberals; but also because she figures it would raise a lot more tax revenue.
Soak the rich!
You don’t really hear a debate in America about “austerity” as you do in the UK and elsewhere in Europe. Britain’s hollowed out police forces and coast guards must look enviously at their American counterparts. (That is partly because the American government can afford to invest in these services because it does not have to fund the healthcare system or universal welfare.)
The idea is alive, however, that the tribe of billionaires who own much of America has had things its own way for too long. Thus the Labour-Momentum narrative about glaring wealth inequality at a time of burgeoning food banks has a direct analogue here. On the left there are increasing calls to soak the rich. But even on the political right, on both sides of the pond, there is awareness that at a time of increasing inequality, when government finances are under pressure, cutting state spending impacts the poor much more than the rich.
It is curious that the 45 percent marginal rate in the UK has become such a shibboleth while Americans are begging to talk about something much more punitive. I suspect that both higher taxes on “the rich” and higher social spending will return in the 2020s on both sides of the Atlantic.
The other topic
Oh, and the other topic screaming from the headlines is…immigration, of course. The headline in USA Today (18 January) is: Border security forces fraying…there is a photo of a protestor bearing a placard which reads: A wall, a wall, our country for a wall. (Americans also are Shakespeare’s children).
And the wall has become a straight left-right issue – just as immigration is becoming in the UK. I’ll have more to say about the economics of immigration shortly.
[i]See graphic of “How High are Sales Taxes in Your State” at: https://taxfoundation.org/state-and-local-sales-tax-rates-2018/