Democrats, there are easier ways than wealth tax to reduce financial inequality in the US – why are they being ignored?

Washington DC – American billionaires are worried about tax.

It is still a year to the next US presidential election and we have no idea who the Democratic candidate will be, but it is already clear that the Democrats’ central pitch will be to call for higher taxes.

Two leading contenders, senators Elizabeth Warren and Bernie Sanders, have both proposed a wealth tax, while, according to a Bloomberg report, the charismatic House representative Alexandria Ocasio-Cortez is planning to introduce a bill that would increase the top income tax rate to 59 per cent.

Since most US states, including the most populous, California, levy state income tax on top of the Federal tax, the top rate for many Americans would be over 70 per cent. That would be the highest of any large economy in the world.

This sort of extreme measure is not going to happen. American politics doesn’t work that way. But the mood it captures is very real, and it is not only the American rich who are worried.

On Friday Barack Obama, the former president, warned that the Democrat candidates should not lurch too far to the left in search of nomination.

“This is still a country that is less revolutionary than it is interested in improvement,” he said. “They like seeing things improved. But the average American doesn’t think that we have to completely tear down the system and remake it.”

These are wise words, demonstrating once again what an extraordinarily thoughtful person he is. But I’m not sure the Democratic left wants to listen, and a fair chunk of America is urging them on. For this is not just about taxation, or health care, or immigration, or any of the specific issues that divide the country. It is about fairness: that the system is rigged by the elite against ordinary hard-working people. That elite, to be clear, includes the East Coast Harvard professors as well as the West Coast high-tech billionaires.

So what will happen? I don’t think it makes any sense for a British journalist to try to wade through the intricacies of the US election process. No one has a clue as to what will happen. Such clues as there are, I think, lie in those words of Obama, that Americans want to see improvement.

So where will improvement come from?

Well, something has to be done about inequality. We worry about differentials in the UK, but actually income differentials have declined over the past decade, whereas in the US they have gone up. But the problem is much deeper. You don’t have to spend very long in the US to realise how anxious many people are about money.

This is partly about the uneven safety net of social security, good in some areas but poor in others. It is also about the lack of savings, for some two-thirds of Americans don’t have $1,000 of emergency cash to meet an unexpected bill. There is an annual campaign to try to get people to save more, but the savings rate at 6 per cent is the lowest since 2008 and half that of 50 years ago.

If savings are one area where there needs to be Obama’s “improvement”, health care is another. He tried when in office to bring in such change, and thanks to that, the bones of a nationwide system are there. Warren’s plans for universal care are the most radical idea, but they would do away with the present insurance system that most Americans rely on.

Tell people they will lose what for many is a very good (if far too expensive) health service for something totally untried? Not a good idea. Far better, surely, to nudge down overall costs while dealing with glitches in “Obamacare”.

As for improvement in taxation, there are a string of things that could be done without bringing in a wealth tax or jacking the income tax rate to 59 per cent. The key one would be closing loopholes, whereby the very rich can game the system to pay proportionately much less tax than people on middle and upper-middle incomes. US billionaires are worried about an attack on their wealth, but they should really be more worried about the evident unfairness of the present system. Because it is unfair, it is also inefficient. If they want to focus on its inefficiency, then they would gather more general support for reform.

One of the many problems of election campaigns is that politicians make promises they cannot fulfil – and at a certain level know they can never fulfil. (Think of the Lib Dems and those student fees.) So Democrat contenders are making promises that may burnish their reputation among their supporters but won’t work in the real world. All the evidence about taxation is that income tax rates above 50 per cent bring in less revenue, not more. The evidence is more sketchy on wealth taxes because there have been fewer of them, and in any case most have been abandoned. But they seem to cut overall revenue too.

The puzzle is this. If it is improvement, not revolution, that American voters really want, why are the Democrat challengers not proposing this? I suggest they listen to Obama.