Barack Obama's success was built in no small part on his ability to connect with the large and growing share of American voters who are college-educated, affluent, and have a fondness for arugula. Though Obama campaigned on raising taxes for families making more than $250,000 and cutting taxes for everyone else, he won a majority of voters in households earning $200,000 or more a year. To tax-loathing Republicans, this was a bit like plump chickens enthusiastically voting for Frank Perdue. So when House Democrats called for a stiff surtax on wealthy households, one thing you couldn't say is that the proposal came without warning.
Don't be shocked if tax avoidance starts reaching Russian levels. Worse still, the superrich are footloose.
Not surprisingly, Republicans have declared war on the surtax, claiming it will be an epic job-killing disaster, and more than a few Democrats have raised the same objection, albeit in slightly less apocalyptic tones. Nancy Pelosi is already backing away from the proposal, no doubt after being cornered in an alleyway by a gang of knife-wielding limousine liberals. The fear is that a surtax will turn America into a nightmare version of Europe, where tax rates are punishingly high and many of the young and ambitious plot to escape them. Are they right? Actually, no. Despite obscenely high tax rates, a number of northern European economies have managed to survive and even thrive. They've pulled this off by tightly linking taxes to benefits. You want free health care? In Europe, you pay for it through a heavy consumption tax called the VAT, or value-added tax. Whenever you buy a haircut or a pair of jeans or a flat-screen television, you're paying for the welfare state. What we've done for the past twenty years, and what a surtax will only sharpen, is move in the opposite direction: we've separated taxes from benefits.
The appeal of the surtax to Democrats should be obvious. Paying for expanding health-care coverage to the 42 million uninsured will be extremely expensive. Over 10 years, it will cost at least a trillion dollars, even if we make absurdly generous assumptions about cost savings. Rather than have struggling single moms foot the bill, the Democratic left figures it makes moral and practical sense to charge highfliers who will have to sacrifice, say, a summer home in Provence rather than fresh fruits and vegetables for their young. Like it or not, though, the superrich really are different from you and me. Republicans rightly emphasize that successful entrepreneurs drive growth and create jobs, etc. But they're also pretty good at dodging taxes through the clever use of mile-wide loopholes. Unscrupulous lawyers and accountants are salivating at the prospect of marginal tax rates approaching 50 percent. Don't be shocked if tax avoidance starts reaching Russian levels. Worse still, the superrich are footloose. While Palm Beach probably won't secede from the Union to become part of the Cayman Islands, we'll almost certainly see a spike in the number of tax exiles.
Then there is the fact that relying on a small slice of the population to pay the bills means revenues will always be unstable. New York City and California became dangerously dependent on a small class of ultrasuccessful citizens, and the end of the boom has led to a painful contraction of revenues.
The proposed surtax would raise roughly $544 billion, which is impressively huge. But it won't come close to paying for universal health care. One of the best revenue-raising ideas, taxing employer-provided health benefits, is a political non-starter: the unions are bitterly opposed and Barack Obama savaged John McCain for proposing the same thing during the campaign. And even that wouldn't get you all the way there. Then there is a whole slew of gimmicks, like a tax on sugary beverages, that would raise modest amounts in comparison. If we were serious about solving the revenue problem, we'd look to, well, Europe. By moving towards European-style consumption taxes, we'd create a more stable revenue base—even in a recession, you still need to buy stuff—and we'd be less vulnerable to the skullduggery of rich tax cheats. As for the noble entrepreneurs who are the foundation of our prosperity, their investments would be treated more favorably than under the current tax code. Everybody wins! Or almost everybody wins.
The Senate has actually considered using a VAT to pay for coverage expansion. A 5 percent VAT would raise more than enough revenue to pay for the health care plans currently on the table. The problem is that under these proposals, everyone would pay the VAT, but only some—namely the currently uninsured—would directly benefit. The way to solve this problem is to move to a system in which employers get out of the health care business entirely and a VAT finances a system of sliding subsidies for all workers to buy private insurance. Chances are this approach will never see the light of day. It is, alas, the only approach that will actually work.
Reihan Salam is a fellow at the New America Foundation and the co-author of Grand New Party.