Economic fairness and America’s presidential election

Voters in the United States have shown their anger this year by turning out for anti-establishment candidates, both Democratic and Republican, in large numbers. One factor fuelling voter unrest is evident: many ordinary Americans think that the deck is stacked against them. Indeed, when asked the question, “Do you think the US economic system generally favours the wealthy or is fair to most Americans?” a whopping 71% – including a majority of Republicans – said that the system favours the wealthy. The tax system is a major source of this perception. When Americans are asked specifically about taxes, the same message emerges; a majority of voters (62%) believe that the US tax system favours the wealthy. In response to this growing resentment, both parties’ presidential candidates have promised to re-establish economic fairness and reform the tax system. The three most prominent anti-establishment candidates have proposed starkly different tax plans. Bernie Sanders, a political independent running as a Democrat, is proposing a US$15.3 trillion tax increase over the next decade. Under his plan, the wealthy would experience the biggest hikes, with the marginal tax rate on the richest Americans reaching 54.2%. The Republicans’ presumptive nominee, Donald Trump, has also presented a radical tax plan, as did his latest rival, Ted Cruz. But Trump’s proposed change runs in exactly the opposite direction, seeking to reduce total revenues over the next decade by US$9.5 trillion (Cruz’s plan targeted an US$8.6 trillion reduction and called for a flat income tax set at a rate of 10%). This raises an obvious question. Why are voters who believe that the tax system is unfair supporting candidates offering such radically different solutions? While some might claim that the poor and middle-class voters supporting the Republican tax plans have simply been duped, the full picture is much more complicated – and much more interesting. Our research examining US tax debates over the last 200 years suggests another reason: People can agree that taxation should be fair, but disagree fundamentally about the definition of “fair.” For some American voters, fairness is based on the principle of “the ability to pay”; the rich should be taxed at higher rates because they can afford it more easily. Others, no less adamant about the importance of fairness, define it in terms of “equal treatment.” For the latter voters, fairness means that everyone should be taxed at the same rate – just like everyone in a democracy has one vote in an election. It should not be surprising that many Americans hold this view; polls show that even in an era of rising inequality, a significant share of voters continue to favour a flat tax. These two views of fairness may simply be another symptom of political polarization in US. But there is one area on which both sides agree: No one believes that the rich should be subject to lower rates than low- and middle-income taxpayers. And yet, according to the most recent IRS data available, for individuals lucky enough to be in the top 1% of income earners, that is exactly what the existing tax system dictates; within this group, the richer the individual, the lower his or her effective tax rate. It is likely no coincidence that the one thing all of the presidential candidates’ proposals have in common is the elimination of privileges for the richest taxpayers. Both Democratic and Republican candidates have pledged to repeal the carried-interest provision that allows hedge-fund and private equity managers to pay a lower rate than other earners. Similarly, Sanders and his Democratic rival, Hillary Clinton, favour effectively doing away with differential treatment of capital gains – a major reason why the richest Americans often enjoy lower rates. Clinton – the most “establishment” of the contenders – has proposed introducing what is known as the “Buffett Rule” (named for the billionaire Warren Buffett, who coined the term), establishing a minimum effective tax rate for high earners. Despite the huge philosophical differences between the two parties over the appropriate size of government, there is one uncontroversial way in which the candidate who is elected in November can address voter resentment. He or she can make sure that the rich no longer pay lower rates than everyone else. This would be a first step toward re-establishing basic economic fairness.