With big tax push, Democrats aim to tackle enormous gains of top 1 percent
Senior House Democrats on Monday unveiled legislation that would represent the most significant tax increases on the rich and certain corporations in decades, reflecting President Biden’s pledge to confront a dramatic surge in U.S. inequality.
House Ways and Means Committee Chairman Richard E. Neal (D-Mass.) proposed more than $2 trillion in new revenue that would overwhelmingly hit the richest 1 percent of Americans with a number of new taxes and tax changes affecting their incomes, investments, businesses, estates, retirement funds and other assets.
Neal’s plan pares back some of the ambitions in the Biden administration’s initial $3.5 trillion budget plan, rejecting a key White House proposal to tax the inheritances of the very wealthy and offering less aggressive changes for both domestic and multinational firms. And Democrats have not completely rallied behind the package, with some members studying the details as votes are expected in the coming days.
But economists and tax experts say the proposal — which has White House support — amounts to the first major effort in Congress to address the populist political fervor over the gap between America’s ultrarich and its middle-class that has widened to levels unseen in nearly a century. The fears of a tax system unduly weighted to the rich have only intensified during the pandemic. Since 2019 alone, the wealth controlled by the top 400 people in America increased by $1.4 trillion, according to Gabriel Zucman, an economist at the University of California at Berkeley.
Democrats face numerous hurdles in enacting the legislation, which is entangled with broader negotiations over the $3.5 trillion spending package. They also face amplifying GOP attacks alleging that the tax increases will hurt middle-class families, drain investment and strain economic growth. And there are signs Republicans could try to hammer Democrats over the tax proposal in midterm election campaigns.
“This reckless bill will hurt working-class Americans at a time when they need support the most,” said T.W. Arrighi, spokesman for the National Republican Senatorial Committee.
House Democrats tried to blunt some of these criticisms by designing the proposal to put the lion’s share of tax increases on wealth earned by the most rich. The White House’s vocal support for the measure and the lack of any immediate objections from party centrists are signs that Democrats could try to advance the tax plan in the coming weeks as part of Biden’s broader economic agenda. The tax component and new spending measures are essentially intertwined because of the way Democrats are attempting to move the changes through Congress.
Congress’ nonpartisan scorekeeper on Monday suggested Neal’s tax plan would raise roughly $2.2 trillion over 10 years, but Democrats say their $3.5 trillion spending package is fully offset. They argue that they recoup more savings by cutting costs on prescription drugs and from “dynamic scoring,” or assuming higher economic growth leads to more government tax revenue.
“This is a critical time. The magnitude of the inequality in America today is much larger than it’s been in years. We are in an era not seen since the Gilded Age at the end of the 19th Century, or the Roaring ’20s right before the Great Depression,” said Joseph Stiglitz, a Nobel Prize winning economist at Columbia University. “The question is: Will our political system be dictated by the vast majority of Americans, or a small minority of vested interests who want to keep their goodies for themselves?”
Among the most substantial changes from the White House plan to Neal’s proposal is how wealthy investors are taxed. Biden’s plan called for approximately doubling the capital gains rate paid by investors to roughly 39 percent, so people making money off selling assets would pay similar rates to the income rates most Americans face on their annual taxes. (Even some rich people have ridiculed this tax discrepancy, with billionaire Warren Buffett famously pointing out he pays a lower tax rate than his secretary.) Biden proposed pairing that change with new rules aimed at preventing billionaires from giving their children massive increases in their stock holdings tax-free.
Neal’s plan goes a different route on taxing wealthy investors altogether. He proposes only modestly increasing the statutory capital gains rate, from 20 percent to 25 percent. And Neal altogether rejected Biden’s plan to go after the increase of capital gains at death, amid criticism from rural Democrats that such a measure could hurt family farms. Under Neal’s plan, investors who become billionaires due to the increasing value of their stock holdings could continue to pass them onto their heirs tax-free, tax experts say, assuming they do not sell them before they die.
“If the Ways and Means plan was enacted as is, Jeff Bezos and Elon Musk would still pay an effective rate of $0 on most of their income if they pass their assets onto their heirs,” said Steve Wamhoff, director of federal tax policy at the Institute for Taxation and Economic Policy, a left-leaning think tank. (Bezos is the owner of The Washington Post.) “It’s obviously a big improvement over the tax code we have now, but there are a lot of things Biden suggested that would go a lot further.”
Neal’s plan includes two new measures designed to go after wealthy investors, including by closing a loophole previously used by the president himself. That change, closing the so-called “Gingrich-Edwards” loophole, would raise roughly $250 billion by expanding a 3.8 percent capital tax originally created to pay for President Barack Obama’s 2010 health law. (The Wall Street Journal reported that Biden made “aggressive” use of this loophole in 2019.) The plan would also levy a 3 percent “surcharge tax” on individuals earning more than $5 million annually.
Adding the proposals together, investors under Neal’s plan could pay a capital-gains tax rate of roughly 31.8 percent, said Kyle Pomerleau, a tax expert at the American Enterprise Institute, a right-leaning think tank.
“The tax increases have come down since the original Biden proposal, but these are still pretty large,” Pomerleau said. Democrats on the Senate Finance Committee are considering much more aggressive measures to force billionaires to pay annually on the increased value of their stock holdings, but the fate of those proposals is unclear.
Neal’s plan also takes on the complicated tangle of international tax reform, both filling in some blanks from the White House plan and paring back its scope. Treasury Secretary Janet Yellen is working toward an international agreement to raise the global minimum tax to 15 percent. The administration proposed enacting a U.S. minimum tax on overseas earnings by raising it from 10.5 percent to 21 percent, hoping to demonstrate to the world its seriousness about enacting higher taxes on multinational corporations.
But in a nod to the concerns of Democratic moderates, Neal proposed instead only raising that number to 16.5 percent — much closer to the new global minimum proposed by the United States. Neal’s plan was developed with input from senior Treasury officials, according to a person familiar with the matter who spoke on the condition of anonymity to describe private deliberations.
“We still have to see what actually comes out of these international rules,” said Daniel Bunn, vice president for global projects at the Tax Foundation, a right-leaning think tank. “It’s possible U.S. rules will still be tougher than those faced by foreign multinationals, which may mean U.S. companies are less competitive in international markets and lose out on market share in foreign markets.”
The concerns about the international taxes come amid broader conservative pushback against the Democratic overhaul. Pharmaceutical companies are likely to mount a ferocious campaign against the plan to save $600 billion by cutting government spending on prescription drugs. The plan will be particularly hard for owners of companies formed as “pass-throughs” that are subject to a range of new taxes under the Neal plan, said Donald Schneider, who worked for the Republicans on the House Ways and Means Committee.
But Jeffrey Sachs, a liberal economist and special adviser to the United Nations on economic issues, said Neal’s plan would take only a small part of the huge gains made by the richest Americans in recent decades. Neal’s plan would raise revenue from a variety of sources, including by increasing tax enforcement, by roughly $260 billion per year. By contrast, Sachs said, the richest 1 percent currently receive roughly $4 trillion per year — and roughly $2 trillion more per year than they would have had their share of national income remained flat since the 1980s.
“We’ve never had so much income and wealth at the very top of the distribution during the entire post-World War II period,” Sachs said. “The proposed tax changes are actually very modest numbers, and surely in the right direction. That’s why it’s so important to get this done.”