Democrats will likely drop hundreds of billions of dollars in proposed tax increases on the rich as they scramble to shrink the size of their “reconciliation” package.
That’s good news for moderates who are less enthusiastic about raising rates. But it’s potentially terrible news for progressives hoping to stick it to the rich. Many see this as their best chance in years to push through major changes in how wealthy people are taxed — such as a proposal to begin taxing, for the first time, billionaires’ unrealized capital gains.
The pressure on lawmakers to take up such controversial proposals will dwindle if Democrats suddenly don’t need them to make their budget numbers work.
Some progressives acknowledge that some of the most aggressive tax proposals could now fall by the wayside, as the demand for revenue eases, but warn Democrats against backing off plans to target the uber-rich.
“We will make a lot of noise – we will not be very happy,” said Frank Clemente, head of Americans for Tax Fairness, a group pushing for higher taxes on the wealthy.
It’s the flip side to Democrats’ decision to scale back their spending plans. Much of the focus in Washington has been on how they will slim down their package, by either dropping lower-priority initiatives or funding more programs for shorter periods of time, in hopes Congress will re-up them later.
But a smaller price tag will also mean big changes on the tax side as well because Democrats are unlikely to raise taxes by more than they need to defray the cost of their plans.
Lawmakers are still fighting over the overall size of their package, with President Joe Biden suggesting they will land somewhere in the neighborhood of $2 trillion, down from the $3.5 trillion many liberals had hoped to spend. On Wednesday, though, Sen. Joe Manchin (D-W.Va.), the influential centrist, reiterated he won’t go beyond $1.5 trillion.
Raising $1.5 trillion or so in taxes, to cover that spending, should not be a heavy lift for most Democrats — especially given the overlap between a recent proposal by Manchin and a tax plan approved last month by the House Ways and Means Committee.
Manchin wants to raise the corporate rate to 25 percent, which would generate around $400 billion (Ways and Means wants a 26.5 percent rate, which would produce about $540 billion).
Both Manchin and Ways and Means would hike the top capital gains rate to 25 percent, producing another $125 billion. Restoring the top marginal income tax rate to 39.6 percent, where it was before Republicans’ 2017 tax cuts, would produce around $170 billion.
Improving tax compliance, by beefing up the IRS, could mean $200 billion in savings.
Democrats would likely count hundreds of billions of dollars from so-called dynamic scoring, and hundreds of billions on top of that in health care-related savings.
They also appear likely to tighten tax rules on multinational companies’ overseas earnings, which, under House Democrats’ plan, would produce $300 billion. Extending a rule Democrats approved earlier this year making it harder for owners of pass-through businesses to use losses to offset income would save $167 billion.
All of that could generate more than $1.5 trillion — meaning there’s less need for more controversial proposals Democrats have raised in recent months, such as taxing stock buybacks by corporations, treating billionaires’ unrealized capital gains as taxable income and an administration bid to dump provisions in the tax code allowing the wealthy to pass assets to heirs tax free.
“The pressure for all tax increases becomes smaller as the amount of revenue needed decreases,” the advisory firm Capital Alpha Partners said in a note last week to clients. “Newer taxes that target wealth, unrealized capital gains, retirement savings or stock buybacks now seem less likely.”
But some on the left say those are precisely the sort of tax increases that are most needed.
While they back the slate of hikes proposed by Ways and Means and Manchin, they also say those don’t do enough to dun the richest of the rich.
The problem, they say, is that those at the tippy top of the income ladder typically don’t make their money from fat salaries, so hikes in marginal income tax rates, for example, don’t make much difference to them. The super- rich are more likely to make their money in capital gains — and they can avoid capital gains taxes altogether by simply not selling their assets.
That’s where proposals like an administration plan to end so-called stepped-up basis comes in — it would tax people’s unrealized gains when they die, even if they don’t sell.
A different means to a similar end would be a plan by Senate Finance Chair Ron Wyden (D-Ore.) to subject billionaires’ unrealized gains to annual taxes.
“Democrats need to think about reforms to capital gains that prevent rich people from avoiding capital gains,” said Steve Wamhoff, a former tax aide to Sen. Bernie Sanders (I-Vt.) now at the left-leaning Institute on Taxation and Economic Policy.
“You can do all kinds of things to improve the tax code but if those people are paying an effective rate of zero percent on most of their income, well, you have to ask if you’ve really solved a fundamental problem in our tax code.”
Not just that.
Things like taxing the unrealized gains of the wealthy would provide a new stream of revenue to the government that lawmakers could revisit in the future. If Democrats can establish now that unrealized gains are fair game for the tax man, they could potentially expand that later to people who are merely millionaires.
And many progressives see those sorts of tax hikes not merely as a way to defray the cost of Democrats’ reconciliation plans but as good policy by themselves.
“It’s not solely about paying for spending,” said Wamhoff. “There’s also issues of tax fairness, and those are issues Democrats ran on.”
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