The past four pieces in this series have looked at the new spending Democrats want to enact in the Build Back Better Act: mitigating climate change; boosting child care and elder care; helping the middle class; and improving health care. For this, the final entry, I'm focusing on how Democrats plan to pay for all of this.
The good news is if their proposed changes to the tax code and enforcement are enacted, the bill will be entirely paid for. The bad news is the White House doubts it has the support to tax the rich.
There is a massive and ever-growing wealth gap in the United States, one the pandemic only worsened. A study released Monday found that American billionaires have gained $2.1 trillion since March 2020. The one major piece of legislation passed during the Trump administration — the GOP’s 2017 tax cuts — has benefited the wealthy and corporations and cost $2 trillion in lost revenue. Adding insult to injury, in 2020, 55 of the country’s biggest corporations paid $0 in income taxes.
President Joe Biden and Democrats spent most of their 2020 campaign promising to make wealthy people and corporations pay their fair share, and Biden pledged that the $4 trillion in new spending he proposed earlier this year would be paid for with taxes on the upper class. The middle class and working classes would be spared.
Of all the policies I’ve written about this week, the potential changes in tax law are the most in flux. With that in mind, here are some of the other options currently being discussed.
Tax rate changes for the wealthy and corporations
The House Ways and Means Committee in September passed its budget reconciliation recommendations, which featured a series of tax increases to help pay for the package. That included increasing the top marginal tax rate for earners over $400,000 to 39.6 percent; raising the corporate tax rate from 21 to 26.5 percent; and boosting taxes on capital gains from 20 percent to 25 percent. The corporate tax hike alone would bring in $540 billion in revenue over the next 10 years. The income and capital gains tax changes would add another $300 billion or so.
Minimum corporate tax
Because of some last-minute opposition (which I’ll get into later), the tax hikes that passed ways and means might not be available in the final bill. An alternative option under consideration sets a 15 percent minimum tax that corporations have to pay. “Because this minimum tax would be tied to the amount of revenue reported, corporations could not use tax deductions to zero out their obligations to the IRS,” The Washington Post reported.
Global minimum tax
Relatedly, multinational corporations can currently dodge many U.S. taxes through holding on to its profits in countries with lower taxes. But more than 130 nations recently agreed to set a minimum tax rate of 15 percent on all corporations’ profits. That includes the United States, which has already included the provision in the Build Back Better Act. The new minimum will both stop the “race to the bottom” between countries slashing corporate rates and disincentivize American corporations from seeking out tax havens.
Increase IRS enforcement
Wealthy Americans tend to have more complicated taxes — which makes it easier for them to avoid paying them. In the House Ways and Means Committee’s legislation, the IRS would get $78.9 billion over the next 10 years for “strengthening tax enforcement activities and increasing voluntary compliance, expanding audits and other enforcement activities.” The bill’s language makes clear who’s being targeted here: “No use of these funds is intended to increase taxes on any taxpayer with taxable income below $400,000.”
The 'Billionaire Income Tax'
The newest option in play in the Senate is a less intense version of the wealth tax that Sen. Elizabeth Warren, D-Mass., has long championed. Per The Washington Post:
Under the “Billionaire Income Tax” proposal, a summary of which was obtained by The Washington Post, the federal government would require billionaires to pay taxes on the increased value of their assets such as stocks on an annual basis, regardless of whether they sell those assets. Billionaires would also be able to take deductions for the annual loss in value of those assets.
The plan would also set up a system for taxing assets that are not easily tradable, such as real estate. The tax would apply to billionaires and people earning more than $100 million in income three years in a row.
As I mentioned earlier, the original set of tax hikes envisioned as paying for the Build Back Better Act might no longer make it into law. That’s mostly due to the opposition of Sen. Kyrsten Sinema, D-Ariz., who The Wall Street Journal reported told lobbyists she’s against “any increase in marginal rates for businesses, high-income individuals or capital gains.” And with all 50 Democrats needed to pass the budget reconciliation bill, Sinema’s stance will probably prevail.
While Sinema and other centrists may let the proposed billionaire tax pass through the Senate, it’s not entirely clear whether the House would do the same.
“When you do rates, they’re efficient and they’re easily implemented,” House Ways and Means Committee Chair Richard Neal, D-Mass., told The Washington Post. “Unlike the more esoteric ideas of taxing this or taxing that, rates are simple by nature. People understand them.”
Also complicating tax matters: The Trump tax cuts added a cap on state and local tax, or SALT, deductions. The cap is set to expire in 2025, but Democrats in high-tax states want to repeal it sooner — or at least hit pause on it. As the overall bill’s spending shrinks, though, and the need for revenue grows, the idea of adding a policy that mostly benefits millionaires seems unwise. And yet some Democrats reportedly panicked recently at the thought that SALT relief may be left out of the final bill.
There’s a symbiosis between the blockade against raising taxes and the desire to cut spending from the Build Back Better Act. The fewer programs to help Americans, the less revenue that needs to be raised; the less revenue that’s able to be raised, the fewer programs that centrist Democrats will tolerate. That’s how Sinema and others can ignore the cries of “tax the wealthy” from their constituents right now. That’s why there’s hesitation to raise corporate taxes when they’d still paying less than at any point in the last 75 years. And that’s why too many of the policies I’ve written about this week that would transform America’s social contract will remain nothing but ideas.