For rich folks, the two Santas delivering early
Wrong. A disaster. Obscene.
These are among the ways liberal budget wonks have described Democrats’ determination to give a windfall to the rich by repealing the cap on state and local tax (SALT) deductions.
Here’s how I’d characterize things: Both parties are now trying to be both Santa Clauses.
To understand how St. Nick figures in, you must travel back nearly half a century. In 1976, conservative commentator Jude Wanniski wrote an essay that would become the foundational ethos for nearly all Republicans who came after. In it he presented his “Two Santa Claus Theory”: “For the U.S. economy to be healthy and growing, there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus.”
Democrats, Wanniski argued, had already established themselves as the “Spending Santa Claus.” They bribed voters with attractive benefits, such as health care and Social Security. Meanwhile, too many Republicans had been Scrooge-like, with unhelpful hand-wringing about budget deficits. To rival Democratic largesse, the GOP should become the “Santa Claus of Tax Reduction,” Wanniski said.
Wanniski’s argument worked. Tax cuts soon became the monomaniacal driving force of the GOP. But his prescribed “division of labor” didn’t last.
Republicans eventually grew jealous of the gifts bestowed by Democrats’ Spending Santa. Despite promises to shrink the size of government — to starve the beast, or drown it in a bathtub — they instead added tons of new spending, even as they slashed tax revenue.
President Donald Trump, for instance, signed into law $4.7 trillion in additional debt in just the three years before the coronavirus struck; of that, about half was from tax cuts, and the other half from spending increases. Deficits be damned: Trump had successfully become both Santas. And now Democrats are attempting to do the same.
Over the years, Democrats have become more sensitive to
Republicans’ anti-tax propaganda. Rather than fight the narrative that Americans are overtaxed, Democrats conceded the point. In recent years, Democrats have assured Americans that only a small (and evershrinking) sliver of the population designated as “rich” would ever be eligible for a tax hike under Democratic rule. The rest of the population, those supposedly nonrich, would instead receive a generous tax cut from Democrats. Just as they could expect from Republicans.
Today, that nonrich population whom Democrats consider deserving of a tax cut includes people earning millions of dollars per year. Perhaps even some billionaires.
And so we see Democrats, again, working to repeal the SALT cap — reportedly for five years, including one year of retroactive repeal. Households making $1 million or more a year would receive roughly half the benefit of this policy, according to estimates from the Tax Policy Center. About 70 percent of the benefit would go to households making at least $500,000.
Advocates of the SALT cap repeal claim it helps the middle class. By and large, it does not. That’s because people in the middle class (even those in high-tax states) are much less likely to benefit from itemizing their tax deductions, especially after the 2017 Trump tax overhaul doubled the standard deduction. If you don’t itemize, the size of the allowable SALT deduction is irrelevant.
Among the households in the middle quintile of the income distribution — those making between $52,000 and $93,000 annually — only 4 percent would receive any tax cut at all from the SALT cap repeal. Those lucky 4 percent would shave about $400 off their tax bill on average. Nearly every millionaire (93 percent), by contrast, would get a tax cut, with an average size of $48,000.
Now you might think that whatever savings from SALT repeal would get wiped out by other anti-rich provisions of the Democrats’ bill. You’d be wrong.
Democrats might be embracing their newfound identity as both Santas. But it’s becoming increasingly clear which of those two jolly personalities is driving this sleigh.