Oren Cass’s “Populist” Tax Plan Comes With a Steep Economic Price

American Compass founder and “Chief Economist” Oren Cass has proposed a series of tax increases that would move federal tax policy sharply away from the low-rate, pro-investment approach conservatives have traditionally supported.

Cass has called for raising the top individual income tax rates, increasing the corporate income tax rate to 25 percent, imposing a financial transaction tax, and raising or eliminating the Social Security payroll tax cap. Americans for Tax Reform estimates that the proposals would amount to trillions of dollars in new federal taxes.

New modeling from the Tax Foundation provides a useful look at the economic consequences of moving in this direction. Its Options for Reforming America’s Tax Code 3.0 examines 86 potential changes to the federal tax code, including several that closely resemble the policies Cass has proposed.

The Tax Foundation options are not identical to Cass’s proposals, and their effects cannot simply be added together because tax policies interact with one another. But across the four areas, the modeling points in a consistent direction: higher federal revenue accompanied by weaker economic growth, fewer jobs, and less investment.

Higher Individual Tax Rates Reduce Growth

Cass has proposed returning the “top couple of rates” to their levels before the 2017 tax cuts. Americans for Tax Reform cites an estimate from the Penn Wharton Budget Model that increasing the top individual rate alone would raise roughly $400 billion over a decade.

The Tax Foundation does not model Cass’s proposal precisely. One of its options instead raises individual income tax rates by 10 percent across the board, providing a broader illustration of the economic effects of higher marginal rates.

Tax Foundation estimates that the change would reduce long-run GDP by 1.3 percent and the capital stock by 1.6 percent. The economy would lose the equivalent of 1.4 million full-time jobs, while wages would fall 0.3 percent.

The trade-off is considerably more federal revenue. The proposal would reduce the conventional primary deficit by approximately $3.2 trillion over 10 years.

A Higher Corporate Tax Rate Means Less Investment

Cass has called for increasing the federal corporate income tax rate from 21 percent to 25 percent. American Compass has estimated that such an increase would raise approximately $500 billion.

Tax Foundation models a larger increase to 28 percent. Although that goes beyond Cass’s proposed rate, the model illustrates the economic effects associated with raising the corporate tax burden.

A 28 percent corporate rate would reduce long-run GDP by 0.5 percent and the capital stock by 1.1 percent, according to Tax Foundation. Wages would decline 0.4 percent, and the economy would lose the equivalent of 134,000 full-time jobs. The proposal would reduce the conventional primary deficit by $1.41 trillion over 10 years.

Corporate income taxes ultimately affect more than corporate profits. Higher rates reduce the return on new investment, which can translate into less capital formation and lower wages for workers.

A Financial Transaction Tax Would Add a New Tax on Investment

Cass has endorsed a 0.1 percent tax on secondary-market transactions involving stocks, bonds, and derivatives. Americans for Tax Reform notes that the proposal resembles a financial transaction tax championed by Sen. Elizabeth Warren and cites a Congressional Budget Office estimate that such a tax could raise approximately $797 billion over a decade.

Financial transaction taxes are designed to collect revenue each time covered financial assets change hands. While a 0.1 percent levy may appear small on an individual transaction, the tax can apply repeatedly as assets are bought and sold.

Tax Foundation research has found that financial transaction taxes increase trading costs, reduce trading volume and liquidity, and can lower asset values. The amount of revenue ultimately collected can depend heavily on how investors and markets respond to the new tax.

The policy would add another federal tax to investment activity, including markets that support retirement savings and capital formation.

Raising the Payroll Tax Cap Would Hit Jobs and Growth

Cass has called for raising the Social Security payroll tax cap and has praised legislation from Sens. Bernie Moreno and Elizabeth Warren that would eliminate the cap entirely.

The Tax Foundation’s new guide models a somewhat different policy: applying the 12.4 percent Social Security payroll tax to earnings above $400,000.

Tax Foundation estimates that the change would reduce long-run GDP by 0.7 percent and shrink the capital stock by 0.7 percent. The economy would lose the equivalent of 843,000 full-time jobs. On a conventional basis, the proposal would reduce the primary deficit by nearly $1.5 trillion over 10 years.

An earlier Tax Foundation analysis cited by Americans for Tax Reform found even larger economic effects from eliminating the payroll tax cap. That proposal was estimated to raise approximately $3.2 trillion while reducing long-run GDP by 1.5 percent and eliminating the equivalent of 1.8 million full-time jobs.

The Models Point in the Same Direction

These estimates should not be treated as a combined score of Cass’s agenda. The Tax Foundation models different versions of some policies, and implementing several tax increases simultaneously would create interactive effects that prevent their economic impacts from being added together mechanically.

What the models do provide is a consistent picture of the trade-offs involved.

Higher individual income tax rates reduce incentives to work and invest. A higher corporate rate reduces capital formation. Expanding the payroll tax increases the tax burden on earned income. A financial transaction tax raises the cost of investing and trading.

Each policy is structured differently, but Cass’s four-part agenda shares a common feature: it would substantially increase the amount of revenue collected by the federal government while increasing taxes on work, businesses, and investment.

CFE Takeaway

Oren Cass has presented higher taxes as part of a new “populist” economic agenda, but the policies themselves represent a significant departure from traditional conservative tax policy. The Tax Foundation’s latest modeling shows the economic risks that accompany this approach. Washington may collect substantially more revenue, but higher taxes on income, businesses, payrolls, and investment come with costs for economic growth, jobs, wages, and capital formation.