September 4, 2019 / 7:58 PM / 3 months ago

Breakingviews - Woke capitalism is a winner in the 2020 campaign

By Gina Chon and Tom Buerkle

South Bend Mayor Pete Buttigieg (L) and U.S. Senator Elizabeth Warren (R) watch U.S. Senator Bernie Sanders speak during the first night of the second 2020 Democratic U.S. presidential debate in Detroit, Michigan, U.S., July 30, 2019. REUTERS/Lucas Jackson

SAN FRANCISCO/NEW YORK (Reuters Breakingviews) - Woke capitalism is a winner so far in the 2020 campaign. Democratic White House hopefuls from self-styled socialist Senator Bernie Sanders to his colleague Elizabeth Warren and former Vice President Joe Biden blame the U.S. economic system for growing inequality. Their plans target private equity firms, banks, corporations and the rich. A wealth tax may not be as effective as it looks. But some ideas could start to cut the gap between the haves and have nots.

Despite unemployment at a near 50-year low and a steadily growing economy, many Americans are struggling. Almost 40% of adults say they don’t have the funds to pay an unexpected $400 expense, according to a recent Federal Reserve survey. The top 10% of household income earners hold nearly 70% of U.S. wealth while the bottom half has only just over 1%, according to a separate Fed paper.

Those dynamics create fertile ground for criticizing the system. But which of the Democratic candidates’ proposals might actually help improve it?


Senator Warren has unveiled the most detailed plans to rebalance American capitalism. For big companies, the former Harvard bankruptcy-law professor wants to impose a 7% surcharge on corporate profits above $100 million based on what they report on their financial statement, not to the tax authorities. The plan would address loopholes, like carrying past losses forward, that have helped some profitable companies pay very little tax. Amazon, which actually received a federal tax rebate of about $130 million in 2018, would have paid about $700 million to Uncle Sam under Warren’s proposal.

With the federal budget deficit on track to exceed $1 trillion next fiscal year, according to the Congressional Budget Office’s latest figures, this plan has the advantage of bringing in revenue. Warren estimates this at $1 trillion over 10 years, citing two economists at the University of California-Berkeley. Reducing the scope for clever tax minimization makes sense, and her plan would be a start. But it’s arbitrary to impose a surcharge on the most profitable companies. Ideally, loopholes would be closed across the board.

Warren and others, like Sanders who has endorsed some of her plans, are on firmer ground when it comes to discouraging excessive leverage. Her calls to further limit interest deductibility for tax purposes could find broad support. The Fed warned in May that the rapid growth of debt could leave risky borrowers vulnerable to an economic downturn. There’s also no compelling reason to attach a tax advantage to debt that doesn’t apply to equity capital.

Similarly, closing a loophole related to so-called carried interest that allows buyout barons to pay relatively low rates of tax on some of their rewards is both logical and worthy of bipartisan support. Even now-President Donald Trump campaigned against the carried-interest benefit in 2016.


When it comes to individuals, Senators Cory Booker and Kamala Harris, for example, want more tax credits for middle class families, with Harris’s plan being the more generous at up to $6,000 a year. But it’s unclear how she would pay for it. Still, it might level the playing field more effectively than, say, a wealth tax – one other proposal of Warren’s.

Biden wants to increase taxes on capital gains, a longtime target of Democrats. He would raise the top personal income tax rate to 39.6%, where it stood before the 2017 Republican tax cuts, and apply it to long-term capital gains for individuals earning more than $1 million a year. Now, assets held longer than one year are subject to a reduced rate of up to 20%. The threshold may be unscientific, but the idea of treating one person’s gains the same as another person’s income at least has simplicity.

Strengthening the estate tax, which now goes up to a 40% maximum rate but only on estates worth over $11 million, is another sensible option. Sanders has a plan that would impose a 45% tax on estates valued at $3.5 million, rising to 77% for those worth more than $1 billion. The senator says it would affect only 0.2% of the wealthiest Americans. Though people get emotional about it, it’s hard to argue that inherited wealth is anything but a windfall that’s fair game for a government looking to redistribute wealth while causing minimum disruption to citizens who remain alive.


Unsurprisingly, some proposals go too far. Take the private equity industry, in the crosshairs again thanks to failed leveraged buyouts like retailer Toys R Us, which went bankrupt in 2017. Alongside Warren’s better ideas, she also suggests making buyout firms liable for the debts of the companies they buy. The ability to walk away from failures while sweeping up the profit from successes can be frustrating to watch, but such a shift would require a rewrite of corporate capital and structure rules, which would be a stretch – and could undermine the important legal certainties underpinning the system.

Warren has also proposed a wealth tax that she says would raise nearly $2.8 trillion over 10 years. Households would pay an annual 2% tax on every dollar of net worth above $50 million, and 3% on every dollar above $1 billion. This is one of the richest seams for Democrats to mine as it’s popular with voters. It sounds like a good idea but European nations have found wealth taxes wanting in practice. Twelve developed countries had such taxes in 1990, but only four did in 2017, according to a 2018 report from the Organisation for Economic Co-operation and Development. The OECD found they are costly to administer and fall significantly short in expected revenue.

For once, Wall Street is less of a target than in previous presidential campaigns. Most of Warren’s proposals for the biggest banks are already known, like reinstating the 1933 Glass-Steagall Act that separated commercial and investment banking. Sanders has many similar ideas, and also wants to cap credit card interest rates and ATM fees. While the two latter ideas would help consumers up to a point, it’s unclear how breaking up big banks would help the average American. JPMorgan, the industry behemoth with $2.7 trillion of assets, would still rank among the country’s top five banks if broken in two.

Sanders has once again proposed a financial-transaction tax that he says would raise $2.4 trillion over a decade, which would pay for his plan to eliminate $1.6 trillion in student loan debt. Stock trades would be taxed at 0.5% and bond transactions at 0.1%. The problem is, levies like this tend to quickly spawn workarounds. The Tax Policy Center estimated that a similar Sanders proposal in 2016 would bring in far less revenue than he projected – just $52 billion in the first year.

Still, many of the Vermont senator’s once radical-seeming plans have become more mainstream, reflecting broader angst about inequality, corporate greed and the self-reinforcing benefits enjoyed by the 1%. If a Democrat wins in 2020, expect a kinder, gentler version of capitalism. Unless you’re rich, that is.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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