The Rebuild is a newsletter writtenby senior correspondent Eric Levitz. Read more of his work on a wide range of political and policy issues on our site.
The Rebuild is a newsletter writtenby senior correspondent Eric Levitz. Read more of his work on a wide range of political and policy issues on our site.
Jeff Kowalsky/AFP via Getty Images
Progressives are facing a quietly enormous defeat
Trump's tax cuts would shrink the welfare state — and make it permanently harder to expand.
Four years ago, America was on the cusp of the largest expansion of its welfare state since the 1960s.
Under Joe Biden in 2021, House Democrats passed legislation that would have established a monthly child allowance for most families, an expansion of Medicaid's elder care services, federal child care subsidies, universal prekindergarten, and a paid family leave program, among other new social benefits.
But that bill failed — and then, so did Biden's presidency.
Now, Republicans are on the brink of enacting the largest cut to public health insurance in American history. And the outlook for future expansions of the safety net looks dimmer than at any time in recent memory.
There are two primary reasons why progressives' prospects for growing the welfare state have darkened.
First (and most straightforwardly), the Democrats are not well-positioned to win full control of the federal government anytime soon. To win a Senate majority in 2026, the party would need to win multiple states that Trump carried by double digits last year. And the 2028 map isn't that much better. The basic problem is that Democrats have built a coalition that's heavily concentrated on the coasts and thus systematically underrepresented in the Senate. To win the robust congressional majorities typically necessary for enacting large social programs, Democrats would likely need to transform their party's brand.
Second, although Democrats developed grander ambitions for social spending over the past decade, they simultaneously grew more averse to raising taxes on anyone but the super-rich. In the 2010s, when inflation and interest rates were persistently low, the party could paper over this tension with deficit spending. But Biden-era inflation revealed the limits of this strategy.
Liberals could respond to all this by paring back their ambitions for the welfare state, while seeking to advance progressive goals through regulatory policy. It is perhaps not a coincidence that the two most prominent policy movements in Democratic circles today — the anti-monopoly and "abundance" crusades — are both principally concerned with reforms that require no new tax revenue (antitrust enforcement in the former case, zoning liberalization in the latter).
But expanding America's safety net remains a moral imperative. In the long term, Democrats must therefore strive to build the electoral power and political will necessary for raising taxes on the middle class (or at least, on its upper reaches).
Democrats like social welfare programs. But they like low taxes on the upper middle class even more.
Biden's agenda only grew more ambitious upon taking office. No president since Lyndon B. Johnson had proposed a more sweeping expansion of social welfare than the Build Back Better Act.
And yet, while Democrats' aspirations for social spending had become historically bold, the party's position on taxes had grown exceptionally timid. In 2016, Hillary Clinton had promised not to raise taxes on any American family earning less than $250,000. Four years later, Biden vowed to spare all households earning less than $400,000 – despite the fact that tax rates on upper-middle-class families had fallen during Trump's first term.
Meanwhile, the Democrats' congressional leadership was actually pushing to cut taxes on rich blue state homeowners by increasing the state and local income tax deduction.
In other words: In 2021, Democrats were promising to establish an unprecedentedly large welfare state, while keeping taxes on 98 percent of households historically low.
Officially, the party believed that it could square this circle by soaking the super-rich. After all, America's highest-earning 1 percent had commandeered more than 20 percent of the nation's annual income. The government could therefore extract a lot of revenue by merely shaking down the upper class.
In reality, though, Biden's vision was also premised on the assumption that America could deficit-finance new spending with little risk of sparking inflation or high interest rates.
The Build Back Better Act did not actually raise taxes on the rich by enough to offset its social spending. Instead, Democrats leaned on budget gimmicks to "pay for" its agenda: Although the party intended the law's new programs to be permanent, it scheduled many of them to expire after just a few years, so as to make the policies look cheaper over a decade-long budget window. Absent these arbitrary expiration dates, the bill would have added $2.8 trillion to the deficit over a decade. Even as written, the law would have increased deficits by $749 billion in its first five years.
More fundamentally, Biden's basic fiscal objective — to establish wide-ranging social benefits through taxes on the super rich alone — only made sense in a world of low inflation.
Western Europe's robust welfare states are all funded through broad-based taxation. This is partly because administering a large safety net requires managing economic demand. When the government expands its provision of elder care, social housing, child care, and pre-K, it increases overall demand for workers and resources in the economy. And if the supply of labor and materials doesn't rise in line with this new demand, then inflation can ensue.
Taxes effectively "pay for" new spending by freeing up such resources. When households see their post-tax income decline, they're often forced to make fewer discretionary purchases. Raise taxes on an upper-middle-class family, and it might need to postpone its dreams of a lake house. That in turn frees up labor for public programs: The fewer construction workers needed to build vacation homes, the more that will be available to build affordable housing.
But soaking the extremely rich does less to dampen demand than taxing the upper middle-class does. Even if you increase Elon Musk's tax rate by 50 percent, he won't actually need to reduce his consumption at all — the billionaire will still have more money than he can spend in a lifetime.
The same general principle applies to multimillionaires, albeit to a lesser extent: Raise their taxes, and they're liable to save less money, but won't necessarily consume fewer resources. And if they do not curb their consumption in response to a tax hike, then that tax hike will not actually free up resources.
In 2021, Democrats felt no obligation to sweat these details. For nearly a decade after the Great Recession, economic demand had been too low. Workers and materials had stood idle on the economy's sidelines, as there wasn't enough spending to catalyze their employment. In that context, unfunded welfare benefits can boost growth without generating inflation.
But as Democrats moved Build Back Better through Congress, the macroeconomic terrain shifted beneath their feet. Biden likely would have struggled to get his social agenda through the Senate (where Democrats held only 50 votes) even in the absence of 2022's inflation. But that surge in prices all but guaranteed the legislation's defeat: Suddenly, it became clear that the government could not increase economic demand without pushing up inflation and interest rates. America had returned to a world of fiscal constraints.
Unfortunately, those constraints could prove lasting, especially if Donald Trump's tax agenda makes it into law.