Democrats are playing with fire in trying to reclaim tax cuts from Republicans

The tax-cutting strategy endangers the prospect that the US might ever build a social contract based on a promise of shared prosperity.

Illustration: Guardian Design/Getty Images View image in fullscreen The tax-cutting strategy endangers the prospect that the US might ever build a social contract based on a promise of shared prosperity.

Illustration: Guardian Design/Getty Images Analysis Democrats are playing with fire in trying to reclaim tax cuts from Republicans Eduardo Porter Senator Chris Van Hollen and other Democratic lawmakers are embracing a policy that hardly benefits the middle class Soul-searching within the Democratic party is to be expected after its loss in the 2024 election. Donald Trump’s edge over Kamala Harris in voters’ perceptions of economic competence (perplexing though it now appears following a year of erratic policymaking) was bound to inspire a call to rethink the party platform.

Yet the second-guessing is steering the Democrats down a dangerous path to embracing a tax-cutting strategy that risks defeating the project to enable a healthier, more equitable society.

The most prominent proposal bouncing around Democratic circles comes in a bill from Chris Van Hollen, a Maryland senator. In a nutshell, it proposes cutting taxes for Americans earning up to $80,500 ($161,000 for married couples) and funding the $1.6tn dollar hole this would leave in the budget over a decade with a new surtax on Americans making more than $1m.

It is politically smart – a deft response to the tax cuts, on tips, overtime, car loans and social security, that Trump offered up last year in his One Big Beautiful Bill Act. Middle-class Americans, in the 40th to 80th percentile of the income scale, would save, on average, about $1,500 in taxes in 2026 under Van Hollen’s proposal – paid for mainly by the very rich in the top 0.1% of the distribution, who would see their taxes go up by an average of $1.2m, according to the Penn-Wharton budget model .

The proposal, which has the support of Vermont’s Bernie Sanders – icon of the party’s progressive left – is also a clever way to chip away at Republicans’ longstanding ownership of tax cuts. Trump’s One Big Beautiful Bill Act reserved much of its goodies for the richest taxpayers . A tax cut aimed at middle-income families would be nice for a change.

But Van Hollen et al are playing with fire. The strategy endangers the prospect that the United States might ever build a social contract based on a promise of shared prosperity. It furthers the case for depriving the state of the resources it needs to mitigate ballooning inequities and help build a social contract based on shared prosperity.

Among the 38 nations in the Organisation for Economic Co-operation and Development (OECD), only six countries raise less in taxes than the United States, as a share of the economy. US tax revenues amount to roughly the same share of gross domestic product (GDP) as in the 1960s. But the US is a different country: spending on social security and Medicare grew by six points of GDP from 1967 to 2025. Interest payments on the federal debt grew by two points . Resources available for everything else the government does declined from 22% to 14.5% of GDP over the period.

Improving the progressivity of the tax schedule – as Van Hollen’s idea would do – is not, in fact, particularly effective at mitigating inequality. Mitigating inequality requires government resources to fund cash transfers or services to improve the lives of ordinary families and individuals (known in the jargon as government transfers). For instance, economists from the World Bank and the Paris School of Economics evaluated the impact of redistribution via taxes and transfers since 1980. Transfers, they concluded, account for 90% of the reduction in inequality. Taxes account for merely 10%.

The US’s poor track record at mitigating depths of inequality unseen in other industrialized nations, is largely a story of a state impoverished by half-a-century worth of tax cuts. To put it in concrete terms: middle-class taxpayers would get an extra $1,500 a year or so from Van Hollen’s proposal. And they would pay roughly that much out of pocket for health services, nearly the most in the OECD . Or they would skip seeing the doctor . It’s hard to see this as a path to shared prosperity.

This is no time for Democrats to throw in the towel. Van Hollen’s tax proposal would not further defund the American state. But it would require a massive investment of political capital to get not much of anything. The political moment, with Trump’s polling on the economy underwater by 31% , offers an opportunity for something more ambitious. What’s more, there is the economic imperative: American social democracy simply needs more money.

It can be done. Consider Sweden, where tax revenue amounts to 42% of GDP, 16 percentage points more than in the US. But it gets there with a tax structure that is less progressive than the US . Its personal income tax is flatter – the gap between the highest and the lowest rate is smaller. It gets a large share of revenue from value-added taxes – which hit lower-income taxpayers harder because they consume more of what they earn.

Still, redistribution by the Swedish state does a lot more than the US’s to build an equitable society. Sweden’s poverty rate of only 8%, by the OECD’s definition, owes a great deal to taxes and transfers that boost lower-income families’ disposable income. Based on market income, before such government intervention, the poverty rate would be 24%. Government redistribution reduces poverty in the US by much less: from 27% to 18%.

Another way to look at this is through the Gini index, which measures the concentration of income on a scale from zero – which means perfect equality – to a maximum of one – in which one person hogs all the income and everybody else has nothing. Government redistribution reduces Sweden’s Gini index by a third, to 0.289. By contrast, it trims inequality in the US by less than a quarter, to 0.394.

This is by no means a call to leave the rich alone. In the United States, the very rich pay almost nothing in taxes. They make most of their money not via wages or other taxable income but through capital gains. Because they rarely sell their assets – they borrow against them to pay for yachts and stuff, continuously rolling loans over – these “unrealized” gains multiply over time tax-free. When the oligarchs die, clever loopholes allow them to bequeath the pile untouched by the Internal Revenue Service (IRS), cleansed of capital gains achieved during their lifetime. They must be taxed much more.

Tackling that monster will not be easy, though. It will require a lot of political capital to perform major surgery on a tax structure that has been pared back over the last 50 years to let the plutocracy off the hook. For the sake of a more equitable US, Democrats should not just give the money back to everyday working families – everyday working families deserve more.

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