Michigan’s income gap is widening. Time for Democrats to soak the rich?

LANSING — Progressives like Bernie Sanders and Elizabeth Warren want a new tax on “extreme wealth.” Moderates like Joe Biden and Mike Bloomberg want to raise taxes on top earners and corporations. 

Democrats running for president offer sharp contrasts in their vision for the country and the party, but they have at least one thing in common: They all want to tax the rich to pay for ambitious plans to expand health care access, fight climate change, increase college affordability and more.

In a period of sustained economic growth, Democrats competing in Michigan’s March 10 primary are appealing to voters with broadsides against income and wealth inequality, arguing the rich have disproportionately benefited from tax cuts under Republican President Donald Trump.

The message may resonate because the income gap is growing in Michigan: The number of millionaires spiked nearly 60 percent from 2013 to 2017, while the state had the nation’s 15th highest rate of income inequality as of 2015, according to the labor-aligned Economic Policy Institute.

“Billionaires and even millionaires are an easy target, because the vast majority of people in the United States -- certainly here in Michigan -- are not in that income bracket,” said Dave Dulio, a political science professor at Oakland University. 

The push for higher taxes on the rich appears to tap into the same populist energy that fueled Trump’s winning campaign four years ago, said Adrian Hemond, a Democratic strategist with Grassroots Midwest in Lansing. 

“We are at a very populist moment in American politics right now,” he said. “Both Democrats and Republicans in the U.S. feel like the economy is rigged against them.”

Trump, who is up for re-election, won Michigan by 10,704 votes in 2016 after courting working-class voters with proposals to curb illegal immigration and renegotiate international trade policies he claimed were stacked against them.  

“He made the case to a lot of white, working-class voters that, ‘You’re getting screwed.’” Hemond said. “There’s an audience for that on both sides of the aisle.” 

Experts are skeptical that taxing the rich alone will generate enough money to fund the kind of expensive plans proposed by Sanders and Warren, while Republicans contend the schemes amount to a dangerous form of wealth redistribution.

Michigan income gap is up

Income inequality is “a big fact — and a bigger fact than it used to be,” said Charles Ballard, an economics professor at Michigan State University. He noted research linking it to a number of societal ills, including poor physical health, discontent and even government distrust. 

“The top has pulled away from the middle, but the middle has not pulled away from the bottom,” said Ballard, who has analyzed income growth between 1976-78 and 2011-13 for an academic journal. 

“The hollowing out of the middle class is more severe in Michigan.” 

Michigan Treasury data back up his assertions.

In 2017, the most recent year available, the top 1 percent of Michigan filers — a combination of individuals and couples — reported average adjusted gross income of more than $2.3 million. The other 99 percent of filers averaged about $53,000.

That year, more than 17,700 state filers reported more than $1 million in taxable income, a collective $95.9 billion. Less than 0.4 percent of all state taxpayers, they accounted for 26 percent of all income. 

The number of millionaires is up 59 percent from 2013, when there were 11,106 filers. They made $54.4 billion total, 19 percent of all income.

Historic state data show that household incomes were essentially stagnant for the bottom four-fifths of Michigan residents from 1989 to 2018. 

But incomes rose by 22.7 percent for the top fifth and 38.2 percent for the top 5 percent of households over that span. 

In 2015, the top 1 percent of Michigan households made an average of $917,701, while the other 99 percent made an average of $42,825, according to the Economic Policy Institute.

“We basically have an economy that is by traditional measures hitting on all cylinders,” said Lou Glazer, president and co-founder of the Michigan Future nonprofit. “And yet the fundamental problem with the economy right now is it’s not producing enough good-paying jobs.”

While Michigan has continued to add jobs since the Great Recession, not enough of them have had high enough wages to bend the income inequality curve, he said. 

Inequality is harder to assess because wealth is a measure of all assets owned by an individual or family, including stocks, real estate and vehicles. That’s one reason experts predict the kind of wealth taxes proposed by Warren and Sanders would be difficult to administer.

Michigan is home to at least 10 billionaires, according to a 2019 report by Forbes Magazine. The list included Grand Rapids grocers Hank and Doug Meijer, Detroit businessman Dan Gilbert and Ronda Stryker of Portage, director of the Stryker Corp. medical equipment supplier. 

“Wealth is much, much, much more unequally distributed than income,” Ballard said. “The bottom half have no wealth. For upper-middle class people, most of their wealth is equity in their home. And then the wealthy, what they have is stocks and bonds.”

Add it up

Trump cut tax rates for corporations and for individuals, but “most of the benefit went to high-income people because high-income people pay most of the taxes,” said James Hines, an economist and research director at the University of Michigan’s Office of Tax Policy Research.

Rather than slash spending enough to match reduced revenue, the federal government has taken on additional debt. The annual deficit is expected to top $1 trillion this year, according to the Congressional Budget Office. The national debt is projected to climb from $17.9 trillion at the end of 2020 to $31.4 trillion at the end of 2030.

The wealthy can and perhaps should pay higher taxes to help fund government services, Hines said, but Democratic proposals are generally “incomplete” because they are unlikely to generate enough money to fully pay for proposed spending initiatives. 

“It’s just not realistic to think you’re going to get it all from the rich,” Hines said. “There’s only a certain amount of revenue potential there.”

Sanders, the Vermont senator who won Michigan’s 2016 primary, last month released a tax plan that would fund some — but not all — of the $50 trillion to $60 trillion in new spending he proposes over the next decade.  

The self-avowed democratic socialist has admitted middle-class families would pay more taxes under his Medicare for All program. But he insists they’d ultimately save money because they’d no longer have to pay health insurance premiums. 

Sanders has floated the possibility of a new 4 percent income-based premium that would be paid by workers. The plan would exempt the first $29,000 in income for a family of four.  

In Michigan, about 55 percent of total filers — nearly 2.7 million  — reported reported earnings of $30,001 or more in 2017. 

Like most of his peers, Sanders has spent far more time discussing ways to tax the rich.

Democratic hopefuls combined to reference billionaires 16 times in their recent Nevada debate and 11 times during the South Carolina debate. They mentioned the middle class six times across both debates. 

Tax the wealth

Warren proposes a 2 percent “ultramillionaire” wealth tax on anyone with at least $50 million in assets and an additional 4 percent “billionaire surtax” on household net worth above $1 billion.  

Sanders’ proposed wealth tax would apply to anyone with a net worth of $32 million or more.  His campaign claims it could generate $4.35 trillion over the next decade and halve the collective wealth of U.S. billionaires over that span.

Experts have questioned the revenue assumptions of both plans, and some have even questioned their constitutionality.

Former Treasury Secretary Lawrence Summers and University of Pennsylvania Law School finance professor Natasha Sarin project Warren’s proposal would generate, at the most, $75 billion per year, less than half the $187 billion predicted by economists who developed it. 

Wealth taxes are not a great way to raise revenue because they “cause people to spend or give away their wealth,” said Hines, the University of Michigan economist.

The United States has had a kind of wealth tax since the 18th century: the estate tax, a tax on inherited wealth that is paid just once a lifetime. Trump and the Republican-led Legislature temporarily cut that tax in 2017 by doubling allowable exemptions through 2025.

Accountants and attorneys have devised complicated strategies to help wealthy clients avoid the estate tax. The rich are “not going to just shrivel up and go away if there’s an annual wealth tax,” Ballard predicted. “This is going to be really good for the Cayman Islands.” 

Warren is proposing a unique way to discourage residents from fleeing the country to avoid the wealth tax: a 40 percent “exit tax” on net worth above $50 million for those who renounce their U.S. citizenship. She also wants additional spending on IRS enforcement and additional audits for wealth tax payers. 

“People don’t have to renounce their citizenship to hide their money,” Ballard said. “There are Americans now, U.S. citizens, who have their money in Swiss bank accounts.”

Some European countries have abandoned wealth taxes after they produced less money — and more administrative headaches — than expected. Experts say it can be difficult to assess wealth, especially for those who own businesses that aren’t publicly traded. 

Sanders and Warren both argue their proposals would break up wealth and generate new revenue to fund government programs, but “if you break up the wealth, you don’t get the revenue,” Hines said. 

“They’re talking about both, and that’s why presidential campaigns are kind of silly.”

Tax the earnings

Biden and other top Democrats want to reverse Trump’s income tax cut for the wealthy by increasing the rate from 37 percent to 39.6 percent for the top bracket, which last year included single filers who earned at least $510,310 and joint filers who made at $612,351. 

That could impact many of the roughly 44,700 Michigan filers who reported at least $500,000 in income during tax year 2017. 

Bloomberg, himself a billionaire, proposes an additional 5 percent surtax on annual incomes of more than $5 million, which would create a new top income tax rate of 44.6 percent that his campaign says would apply to less than 0.1 percent of filers.

Several candidates also want higher earners to pay the same tax rate on capital gains investment earnings as they do on other forms of income. 

That’s sound policy, according to Hines, who has advocated for higher capital gains taxes on the wealthy in his own academic research. 

“It’s a good idea to collect taxes from people with the greatest ability to pay, and you’re not doing that if you’ve got very high-income people with a lot of capital gains,” he said.

Biden’s plan would increase the capital gains tax rate from 20 percent to 39.6 percent for million dollar earners, which could have impacted more than 17,000 Michigan filers in 2017. He also wants to scrap a “step-up basis” provision shielding inherited capital gains from taxation. 

The former vice president is among the Democrats proposing to raise corporate income tax rates that were slashed under Trump. And he’s proposed a minimum corporate tax of 15 percent to ensure firms like Amazon cannot use deductions and credits to avoid any tax.

Sanders proposes an “income inequality tax” on large corporations who pay their chief operating officers 50 times more than their average workers. That could impact Michigan firms including General Motors, Ford, DTE Energy, Consumers Energy, Whirlpool and Stryker. 

Promising to tax the rich could be a winning primary strategy, but the volume of tax-and-spend proposals could hurt the eventual Democratic nominee, said Dulio, the Oakland University professor, noting the estimated price tags for Sanders’ plans. 

“For some folks the math isn’t going to add up, and I think Republicans will message on that,” he said. “They’ll say this may sound great, but there’s no way you can tax this small a number of people and get that kind of money. So where else is it going to come from?”