Congressional Democrats need a KISS—as in keep it simple, stupid. Because the tax plan they’re producing after 8 months of interparty bickering is beginning to look like an overcomplicated, indefensible mess.
When he took office, President Biden proposed some straightforward tax hikes to raise revenue for an ambitious green-energy and social-welfare agenda. He wanted to raise the corporate tax rate from 21% to 28%, raise the top individual income tax rate by 2.6 percentage points, boost capital gains taxes on the wealthy and make other changes that would mostly affect high-income Americans. You could argue the merits of Biden’s plan, but the tax changes were easy to understand and explain.
But now the Biden tax hikes seem to be dead, with the main Democratic idea being a new tax on certain assets held by billionaires. Congress has never imposed a billionaire asset tax. Other countries have, but usually with poor results. The billionaire tax may be unconstitutional and will likely face legal challenges, if enacted. If it stands, it won’t even raise that much money. This hasty pivot from sensible tax hikes to unproven ones gives a sham vibe to the Democrats’ entire legislative agenda.
Democrats are recalculating-recalculating-recalculating because one Senate Democrat, Kyrsten Sinema of Arizona, won’t vote for any tax hike on corporate or personal income. Party liberals accuse her of heresy, as if every Democrat should automatically support higher taxes. But Sinema and a few other moderate Dems, including Sen. Joe Manchin of West Virginia, aren’t the Democrats’ real problem. What ails them most is their 1-vote majority in the Senate, which gives every Democrat in the chamber a de facto veto. If voters sent more Dems to Congress and they held, say, a 5-seat Senate majority, Sinema and Manchin wouldn’t matter, since Dems could pass bills without their votes.
Sinema and Manchin seem to be fine with the billionaire tax—maybe because they know it might not amount to much of a tax hike at all. In theory, Americans with more than $1 billion in assets or $100 million in income for three years in a row would have to pay tax every year on the increased value of their assets. So if the value of Elon Musk’s Tesla stock rose by $1 billion, he’d have to pay capital gains tax on that—amounting to $238 million—even if he didn’t sell the stock.
Americans have no problem with higher taxes on billionaires. Yet even if it worked, the tax would apply to only around 700 people and raise maybe $20 billion a year, or $200 billion over a decade. That’s only one-tenth of the money Biden wants from his other tax changes. The Biden plan, for instance, would raise nearly $200 billion per year from higher income taxes, $180 billion per year from higher business taxes and $52 billion per year from higher estate taxes. Tax cuts for lower- and middle-income Americans would leave the government with about $210 billion more in revenue per year, on net, or $2.1 trillion over a decade, according to the Tax Policy Center.
But the billionaire tax might not work. Steve Rosenthal of the Tax Policy Center highlights several possible problems, including difficulty valuing non-tradeable assets such as real estate, IRS auditing challenges and some billionaires who don’t have millions in ready cash to pay tax bills on assets they haven’t sold. There’s also the likelihood some billionaires would get refunds from the government in years when they suffered losses, or at a minimum the ability to use losses one year to offset gains in another. The outrage headlines practically write themselves.
A simpler plan would be taxing unsold assets at death, when they pass on to heirs. Current law resets the value of such unsold assets when the holder dies, with no tax due on capital gains, no matter how great. This is an enormous tax break for the wealthy that helps establish and sustain a kind of American aristocracy. Taxing capital gains at death above some exemption level, with exceptions for farms and certain businesses, could generate at least as much revenue as a billionaire tax, and more if the rate were set higher than the current capital gains tax. There would be new complexities administering estates of the wealthy, but the capital-gains tax itself isn’t novel and presents no new administrative challenges.
The billionaire tax may not make it into final legislation, and other elements of the Biden plan that seem like they’re out, for now, could make it back in. Yet Democrats are clearly flailing, given deep divisions within the party and the lack of a “working majority” that can get legislation to the finish line. Biden says he wants Congress to “pay for” most or all of the new programs it would pass in a Biden bill, which means new tax revenue would fully or nearly offset new spending. But phantom revenue may be the best Democrats can come up with, if they can pass any bill at all.