Democrats set to throw billions in tax hikes overboard as spending plans shrink

Some progressives recognize that some of the more aggressive tax proposals could now be scrapped, as demand for income declines, but warn Democrats against canceling plans to target the wealthiest.

“We will make a lot of noise – we will not be very happy,” said Frank Clemente, director of Americans for Tax Fairness, a group that calls for increased taxes on the rich.

This is the flip side of the Democrats’ decision to cut spending plans. Much of the attention in Washington has been on how they are going to scale back their package, either dropping lower priority initiatives or funding more programs for shorter periods, in the hope that Congress will re-allocate them. – will increase later.

But a lower price will also mean big changes on the tax side, as Democrats are unlikely to raise taxes more than they need to cover the cost of their plans.

Lawmakers are still arguing over the overall size of their package, with President Joe Biden suggesting they will land somewhere in the neighborhood of $ 2 trillion, compared to the $ 3.5 trillion many liberals hoped to spend. On Wednesday, however, Sen. Joe Manchin (DW.Va.), the influential centrist, reiterated that he would not go beyond $ 1.5 trillion.

Raising around $ 1.5 trillion in taxes to cover these expenses shouldn’t be a burden for most Democrats – especially given the overlap between a recent Manchin proposal and a tax plan approved last month by House Ways and Means Committee.

Manchin wants to raise the corporate rate to 25 percent, which would generate about $ 400 billion (Ways and Means wants a 26.5 percent rate, which would generate about $ 540 billion).

Manchin and Ways and Means would both raise the highest capital gains rate to 25%, producing an additional $ 125 billion. Restoring the top marginal tax rate to 39.6%, where it was before Republicans’ tax cuts in 2017, would produce about $ 170 billion.

Improving tax compliance, by strengthening the IRS, could mean $ 200 billion in savings.

Democrats would likely have hundreds of billions of dollars in so-called dynamic scoring, and hundreds of billions more in healthcare savings.

They also appear likely to tighten tax rules on overseas profits of multinational companies, which the House Democrats plan to produce $ 300 billion. Extending a rule approved by Democrats earlier this year, making it harder for middle-class business owners to use losses to offset income, would save $ 167 billion.

All of this could generate more than $ 1.5 trillion – meaning there is less need for the more controversial proposals Democrats have raised in recent months, such as taxing corporate share buybacks, treatment unrealized capital gains of billionaires as taxable income and an offer by the administration to remove provisions in the tax code allowing the wealthy to pass their assets on to their heirs tax-free.

“The pressure for all tax increases is waning as the amount of income needed decreases,” consulting firm Capital Alpha Partners told clients last week. “New taxes that target wealth, unrealized capital gains, retirement savings or share buybacks now seem less likely.”

But some on the left are saying that these are precisely the kinds of tax increases that are most needed.

While they support the list of hikes offered by Ways and Means and Manchin, they also say these don’t do enough to challenge the richest of the rich.

The problem, they say, is that those at the top of the income ladder usually don’t make their money with big salaries, so increases in marginal tax rates, for example, don’t make much money. difference for them. The super-rich are more likely to make their money in capital gains – and they can avoid capital gains tax altogether by simply not selling their assets.

That’s where proposals like an administrative plan to end the so-called grossed-up base come in – it would tax people’s unrealized gains when they die, even if they don’t sell.

A different way to achieve a similar end would be a plan by Senate Finance Chairman Ron Wyden (D-Ore.) To subject the unrealized earnings of billionaires to annual taxes.

“Democrats need to think about capital gains reforms that prevent the rich from avoiding capital gains,” said Steve Wamhoff, former tax aide to Sen. Bernie Sanders (I-Vt.) Now at the Left Institute on taxation and the economy. Politics.

“You can do all kinds of things to improve the tax code, but if these people are paying an effective rate of zero percent on most of their income, well, you must be asking yourself whether you have really solved a fundamental problem of our tax code. . “

Not just that.

Things like taxing the unrealized gains of the rich would provide a new stream of government revenue that lawmakers might revisit in the future. If Democrats can now establish that unrealized gains are a fair game for the taxman, they could potentially extend that later to people who are just millionaires.

And many progressives see these kinds of tax hikes not only as a way to cover the cost of Democrats’ reconciliation plans, but as good policy in and of itself.

“It’s not just about paying for expenses,” Wamhoff said. “There are also issues of tax fairness, and these are issues that Democrats have addressed.”

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