When the Biden administration rolled out proposals to increase taxes on corporations and wealthy stockholders, the targets of the increases laughed them off. “Corporate executives and lobbyists in Washington, New York and around the country say they are confident they can kill almost all of these tax hikes by pressuring moderate Democrats in the House and Senate,” reported Politico last month.
It seems those haughty fat cats, so confident they could easily work their will in Congress … were absolutely correct. The pushback has operated largely behind the scenes, but evidence of its effectiveness has popped up primarily in reports targeted at the inside-Washington audience. Farm-state Democrats in the House are openly protesting Biden’s measure to close a huge capital-gains-tax loophole. Biden’s plan “seems like a rather high rate to me,” said Senator Bob Menendez of New Jersey. The pushback includes Democratic moderates in both houses of Congress — and not only those fighting off strong 2022 challenges.
Given the thin margins in the House, and nonexistent 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 heavily scaled back. “They’ll take what we give them,” gloated one senior Democratic aide.
The front pages have been consumed with Biden’s struggles to keep his party together on infrastructure and democracy protection. But the quiet Congressional revolt against his tax hikes poses the most serious threat to his agenda.
The reason is that Congressional budget rules mandates that any permanent increase in the deficit be fully financed. A temporary outlay — for coronavirus relief, or building infrastructure — does not require any offset. But the most ambitious measures Biden proposes to reshape government — expanding health-care coverage, a more generous child tax credit, universal pre-kindergarten and community college — all need an ongoing source of financing.
Taxing the rich is Biden’s solution. There’s a lot of money in the bank accounts of the affluent, especially after several decades of rising inequality and a big fat Trump-era tax cut for the wealthy. But every dollar Congressional Democrats shave off Biden’s proposal for taxing the rich means one less dollar that can be spent on his social programs.
Why are Democrats so skittish about Biden’s proposal they’re willing to put his domestic legacy at risk? They — or the rich people lobbying them — cite a mix of political and policy reasons. “You are talking about tax hikes that could hit millions of small businesses across the country and taxes that could kill investment,” the U.S. Chamber of Commerce tells Politico, “From a raw political perspective, it would be a really funky decision for these moderates to say they would be willing to put this much of a wet blanket on an economy that is really poised to take off.” A “senior financial services industry lobbyist” adds that if Democrats pass anything more than a watered-down version of Biden’s plan, “Democrats are just going to get killed over it.”
While both these concerns probably sound serious over a comped steak dinner, neither is remotely supported by the data. Start with the politics. Taxing the rich in general is highly popular, and Biden’s specific proposals are, if anything, even more popular. In April, Investors’ Business Daily, a right-wing newspaper that specializes in anti-tax polemics, conducted a poll that I can only assume was expected to confirm strong opposition. Instead, it found that Biden’s plans to both raise the corporate tax rate and to increase taxes on capital gains for couples earning more than a million dollars, enjoyed overwhelming support. The support held up even among a subset of investors. (To its credit, IBD published the results anyway.)
As for the substance, the bulk of academic economic opinion has a very different view than the C-Suite. Biden’s proposals would eliminate preferences in the tax code that distort free-market signals even while benefiting the wealthy. A huge proportion of the American tax-shelter industry is predicated on finding ways to convert ordinary income into capital-gains income. Eliminating that preferential lower rate — as the tax-reform act signed by Ronald Reagan in 1986 did — would shut down that unproductive paper-shuffling and redirect investment into areas where actual market signals dictate. Likewise, Biden’s proposal to close the massive loophole that allows capital gains that are passed on after death to go completely untaxed would eliminate a huge distortion in the tax code that gives older people an incentive to hold on to their stock until they die.
The Tax Policy Center has found no meaningful correlation between capital-gains tax rates and economic growth over the last half century. The Congressional Research Service has reached a similar conclusion. A recent paper by two Princetown economists suggests the revenue-maximizing rate for capital-gains income would be in the low forties, about the level Biden proposes.
Conservatives, obviously, have a darker view. But when John Harwood surveyed conservative economists to find their view of the economic drag of Biden’s tax hikes, they suggested a miniscule effect. Republican economist Doug Holtz-Eakin, after accounting for the benefits of the spending side, came up with an economic hit of 0.2 percent of GDP over the long run — essentially a rounding error. The American Enterprise Institute calculates Biden’s tax hikes alone, without weighing any effect from the spending,would shave off just 0.16 percent from the economy’s size. “I would not say it is a job-killing disaster,” AEI’s Kyle Pomerleau conceded to Harwood.
Those effects would be undetectably tiny. The notion of Biden’s proposals strangling the economy is a scare story being spread by business lobbyists, but not even conservative economic experts actually believe it.
But suppose the experts are all wrong, and Biden’s plan depresses growth far more than any mainstream economists forecast. Would Democrats be stuck with the damage? Not hardly. There is no policy Republicans are more earnestly eager to solve than “excessively high taxes on the rich.” Congressional Republicans are available to swoop and cut taxes for the wealthy at any time. Nancy Pelosi could call them up at 3 a.m. on Christmas, and they’d be rushing to Washington to take the vote before brunch. There is no world in which Democrats have to live with excessively punitive taxes on the rich they can’t easily undo.
The chance Democrats won’t have is to build on Biden’s social benefits. They have, realistically, one shot. They will probably lose at least one chamber of Congress in the midterm elections, and then have to overcome a heavy Republican tilt in both the House and Senate elections to regain their majorities, an opportunity that may not come again for a decade or longer.
Taxing the rich is an incredibly rare sweet spot: a policy change that meets the approval of the party’s centrist technocrats and the voters and enables other popular and morally compelling reforms. The cause has been losing ground to an inside game dominated by the prejudices and self-interest of the rich and powerful. Every cent of Biden’s tax hike on the wealthy that Democrats leave on the table, because of a handful of gutless members of Congress, will be a sickening waste.