When the Biden administration presented proposals to raise taxes for corporations and wealthy shareholders, the targets of the increases made them laugh. “Business executives and lobbyists in Washington, New York and across the country say they believe they can kill almost all of these tax hikes by putting pressure on moderate Democrats in the House and Senate,” Politico reported last month.
It seems those big haughty cats, so confident they could easily do their will in Congress… are absolutely right. The pushback has worked largely behind the scenes, but evidence of its effectiveness has emerged mainly in reports intended for the Washington public. Farm-state Democrats in the House are openly protesting Biden’s move to close a huge capital gains tax loophole. Biden’s plan “seems to me to be a pretty high rate,” said Senator Bob Menendez of New Jersey. The setback includes moderate Democrats in both houses of Congress – not just those struggling with the major challenges of 2022.
Given the tight margins in the House and the non-existent margin in the Senate, almost any Democrats can kill almost any Biden legislative proposal for almost any reason they see fit. Insiders now believe Biden’s proposals will be sharply scaled back. “They will take what we give them,” said a senior Democratic official.
The front pages were consumed by Biden’s struggles to keep his party united on infrastructure and democracy protection. But Congress’ quiet revolt against his tax hikes poses the most serious threat to his program.
The reason is that congressional budget rules require that any permanent increase in the deficit be fully funded. A temporary expense – for coronavirus relief or building infrastructure – does not require compensation. But the most ambitious measures Biden is proposing to reshape government – expanding health care coverage, a more generous child tax credit, a universal preschool, and a community college – all need a source of funding continues.
Taxing the rich is Biden’s solution. There is a lot of money in the bank accounts of the rich, especially after decades of growing inequality and a big Trump-era tax cut for the rich. But every dollar congressional Democrats take out of Biden’s proposal to tax the rich means a dollar less that can be spent on his social programs.
Why are Democrats so nervous about Biden’s proposal that they are willing to put his national heritage at risk? They – or the wealthy who put pressure on them – cite a mix of political and political reasons. “You talk about tax hikes that could hit millions of small businesses across the country and taxes that could kill investment,” the United States Chamber of Commerce told Politico, “From a point From a gross political standpoint, that would be a really brilliant move for these moderates to say that they would be willing to put such a wet blanket on an economy that is really poised to take off. ”A“ senior financial services industry lobbyist ”adds that if Democrats adopt anything other than a watered-down version of Biden’s plan, “Democrats are just going to get killed because of it.”
While both of these concerns probably seem serious on a steak-cooked dinner, neither are remotely supported by the data. Start with politics. Taxing the wealthy in general is very popular, and Biden’s specific proposals are even more popular. In April, Daily Investor Business, a right-wing anti-tax controversy newspaper, conducted a poll that I can only assume should confirm strong opposition. Instead, he found that Biden’s plans to both raise the corporate tax rate and raise capital gains taxes for couples earning more than $ 1 million benefited from ‘massive support. Support continued even among a subset of investors. (To its credit, IBD released the results anyway.)
As for the substance, most of the academic economic opinion has a very different point of view than that of the C-Suite. Biden’s proposals would eliminate preferences in the tax code that distort free market signals while benefiting the rich. A huge proportion of the US tax shelter industry is founded on finding ways to convert ordinary income into capital gains income. Eliminating this lower prime rate – as Ronald Reagan’s tax reform law signed in 1986 did – would end this unproductive paper shuffling and redirect investment to areas where real market signals dictate. Likewise, Biden’s proposal to close the huge loophole that allows capital gains passed on after death to be fully exempt would remove a huge tax code distortion that prompts seniors to keep their shares until. their death.
The Tax Policy Center has found no significant correlation between capital gains tax rates and economic growth over the past half century. The Congressional Research Service came to a similar conclusion. A recent article by two Princetown economists suggests that the rate of maximization of income for capital gains would be in the 40s, roughly at the level proposed by Biden.
The Conservatives, of course, have a darker view. But when John Harwood polled conservative economists for their take on the economic drag from Biden’s tax hikes, they suggested a tiny effect. Republican economist Doug Holtz-Eakin, after factoring in the benefits on the spending side, resulted in an economic blow of 0.2% of GDP in the long run – essentially a rounding error. The American Enterprise Institute calculates that Biden’s tax hikes alone, without weighing any spending effects, would only reduce the size of the economy by 0.16%. “I wouldn’t say it’s a job-killing disaster,” AEI’s Kyle Pomerleau conceded to Harwood.
These effects would be incredibly small. The idea that Biden’s proposals are strangling the economy is an alarmist story spread by corporate lobbyists, but even conservative economics experts don’t really believe it.
But suppose the experts are all wrong and Biden’s plan depresses growth far more than mainstream economists predict. Are Democrats stuck with the damage? Not hardly. There is no policy Republicans are more keen to resolve than “excessively high taxes on the rich.” Republicans in Congress are available to speed up and reduce taxes for the rich at any time. Nancy Pelosi could call them at 3 a.m. on Christmas, and they would rush to Washington to vote before brunch. There is no world in which Democrats have to live with excessively punitive taxes on the rich that they cannot easily undo.
The chance Democrats won’t have is to rely on Biden’s benefits. They have, realistically, a hit. They will likely lose at least a house of Congress in the midterm elections, and then have to overcome a strong Republican tilt in the House and Senate elections to regain their majority, an opportunity that may not happen again for a decade or more. .
Taxing the rich is an incredibly rare sweet spot: a change in policy that meets the approval of centrist party technocrats and voters and allows other popular and morally binding reforms. The cause is losing ground in favor of an internal game dominated by the prejudices and the personal interests of the rich and powerful. Every penny of Biden’s tax hike on the rich that Democrats leave on the table, because of a handful of gutsy members of Congress, will be a sickening waste.