clock menu more-arrow no yes mobile

Filed under:

Here's what the tax code would look like if Bernie Sanders got everything he wanted

Sanders holds a rally in Birmingham for Martin Luther King Jr. Day.
Sanders holds a rally in Birmingham for Martin Luther King Jr. Day.
Hal Yeager/Getty Images
Dylan Matthews is a senior correspondent and head writer for Vox's Future Perfect section and has worked at Vox since 2014. He is particularly interested in global health and pandemic prevention, anti-poverty efforts, economic policy and theory, and conflicts about the right way to do philanthropy.

Bernie Sanders has a lot of plans. He's got his single-payer health care plan, his tuition-free college plan, his infrastructure plan, his youth jobs plan, his expanded Social Security plan, his (borrowed from Kirsten Gillibrand) paid family leave plan, and many others.

And for every plan, he's got an idea to pay for it. College? Slap a financial transactions tax on Wall Street. Infrastructure? Tax corporations on profits they earn abroad. Single-payer? Raise income and payroll taxes, and then a bunch of others too.

While Sanders tends to portray these as separate ideas with separate financing, I thought it'd be worth adding them up and seeing what the tax code looks like with all of them. I looked specifically at his changes to personal income, payroll, and capital gains tax rates.

That leaves out the financial transactions tax, his carbon tax plan, the elimination of many corporate tax breaks he proposes, and so forth. And, of course, it's highly unlikely that everything Sanders is proposing would be passed in its current form should he be elected president, especially with a Republican House. But the combined rates nonetheless give a sense of the scale of change he's calling for.

First off, let's look at income and payroll taxes

Note that the Y axis does not increase linearly
Income and payroll taxes, now and under Bernie.
Vox/Javier Zarracina

The above chart, by Vox's Javier Zarracina, shows my estimates of how Sanders would change marginal tax rates on wages, both from payroll taxes and from income taxes. You can see my full calculations here.

Several of Sanders's plans change income and payroll tax rates. His single-payer plan probably does the most here. It adds:

  • A 2.2 percent "income-based premium" paid by all Americans on their taxable income, including capital gains. This is meant to replace the premiums employees already pay for private health insurance today.
  • A 6.2 percent income-based premium paid by employers on wage income. This is basically a payroll tax, and most economists agree that the cost of "employer-paid" payroll taxes are passed on entirely to workers in the form of lower wages in the long run. For that reason, I'm treating all payroll taxes as paid by employees, regardless of their ostensible target.
  • New 37 percent, 43 percent, 48 percent, and 52 percent income tax brackets.

The single-payer plan also subjects capital gains above $250,000 to regular income tax rates.

Also important is Sanders's Social Security plan, which adds:

  • Social Security payroll taxes for wages above $250,000, which are currently exempt. The total rate here is 12.4 percent.
  • A 6.2 percent tax on investment income above $250,000.

Finally, there's the FAMILY Act, which adds a 0.4 percent payroll tax on all income: 0.2 percent ostensibly paid by the employer, 0.2 percent by the employee.

If you add these taxes to the existing US tax code — including the income tax, Social Security payroll taxes, Medicare payroll taxes, and additional Medicare taxes added by Obamacare — you get the rates in the chart above. Most taxpayers would see a single-digit increase in their marginal tax rate. People with taxable income below $250,000 would see an 8.8 percentage point increase.

But the very rich would see eye-popping increases in marginal rates: from 36.8 percent to 62 percent for people with taxable income between $250,000 and $413,350. The big change here is applying the Social Security payroll tax, which adds another 12.4 points.

For the very richest Americans, with more than $10 million in taxable income, Sanders's proposal would produce a 77 percent marginal rate. That's not unprecedented — under Dwight Eisenhower, the top income tax rate was 91 percent — but it's higher than the top rate at any point since 1964.

Now, marginal rates aren't everything. Most people wouldn't see an actual tax increase of 8.8 percent, even if their marginal rate goes up that much. Effective tax rates — the amount you're actually paying as a percentage of income — also depend on deductions and credits.

A chart sent to me by the Sanders campaign estimates that, excluding the premium taxes and payroll tax increases, people making less than $500,000 wouldn't see their effective tax rate change at all. But after adding in the premium taxes and payroll taxes, they'll see a real increase.

Whether that increase is worth it is a totally different question. Single-payer health care would make life easier for a lot of desperately sick people — and as the Sanders campaign notes, it's quite possible that the employee and employer "income-based premiums" in his plan will be less than premiums people are already paying.

The Social Security tax increases, likewise, finance more generous benefits for seniors at a time when defined benefit pensions are becoming less and less common.

But the normative question of whether these rates are good policy is very different from the question of what the rates Sanders is proposing actually are. And if you add them up, they're considerably higher across the board than under existing policy.

Bernie's plan to soak the hedge funds

Capital gains after Sanders's plans are enacted.
Vox/Javier Zarracina

Even more dramatic are Sanders's proposed increases to capital gains taxes. Currently, including a 3.8 percent surtax imposed by Obamacare, rates top out at 23.8 percent. Bernie would hike the top rate to 64.2 percent and the rate for many making upper six figures to 49.2 percent.

This is a result of a) applying his much-higher regular income tax rates to capital gains, and b) the new Social Security investment tax. It leads to top marginal rates that are genuinely without precedent in peacetime.

While income taxes on wages have topped 91 percent in the past, the highest capital gains taxes have ever gone (outside of a brief period during World War I) was 39.875 percent, the rate for 1977-'78.

The Sanders campaign estimates they'll earn $92 billion a year from taxing capital gains the same as wages. But there's reason to think they'll actually lose revenue.

One thing that happens when you increase the capital gains rate is that people stop selling assets — and thus realizing gains on capital that can be taxed — as frequently. That means there's a point beyond which raising the capital gains tax would reduce sales so much that revenue actually falls.

Note that this is a very different question from whether taxing capital gains at a high rate hurts economic growth. Many economists think it does, but that effect would reduce revenue by lowering the price at which assets are sold, not making them less likely to be sold in the first place. The latter is a different effect whose existence is much less controversial.

David Kamin, a professor of tax law at NYU and a former economic adviser to President Obama, notes in a recent paper, "The Joint Committee on Taxation and Treasury both assume that the revenue-maximizing rate for capital gains revenue ranges from 28 to 32 percent."

That's much, much lower than the 64.2 percent top rate Sanders would enact, and much lower than the 49.2 percent rate he'd impose on many who are currently in the top 23.8 percent bracket.

It seems quite possible, then, that Sanders's plans would spur people owning stocks and other investments to sell them less regularly, reducing tax revenue by enough to offset any gain from the increase in the rate.

One caveat here is that Sanders supports ending "step-up basis," a loophole that means inherited goods that heirs then sell are taxed on the value they gained since the point of inheritance, rather than since the point at which the deceased bought it.

For example, imagine Jane Smith buys a Basquiat painting for $100 in the early 1980s, and then dies in 2010, when the painting is worth $10 million. Her daughter Joan inherits it in 2010 and then sells it in 2016, when it's worth $12 million. Under the current law, Joan would only pay tax on the $2 million in value gained since she inherited it, not the nearly $12 million in value it gained since Jane bought it.

That's not just a big windfall for rich heirs, it's a powerful incentive for people with valuable assets to not sell them and instead give them to their heirs. Repealing this loophole would on the margins make people more willing to sell valuable assets, partially counteracting the effect of Sanders's rate hikes.