Washington, D.C. – Though many of the details have yet to be worked out, the Democrats in the U.S. House of Representatives moved ahead Monday on a plan to pay for approximately $3 trillion in new spending with what amounts, in nominal dollars, to the largest tax increase in U.S. history.
The new taxes will not alone be enough to pay the tab for the additional spending Biden and the progressive Democrats who set the congressional agenda seek. Significant borrowing will also be involved, something some economists consider perilous now that total U.S. debt exceeds one year’s U.S. GDP, and the growth projections coming out of the COVID lockdown recession are slight.
Some analysts are predicting the policies Biden and the Democrats are pursuing will lead to a return to the economic realities of the 1970s, when high unemployment combined with high inflation made it seem that America was entering a permanent post-industrial decline that would strip the nation of its superpower status.
The proposed new spending will in part be financed by systemic changes to the tax code that not only make it more progressive but impose, for the first time in decades, new taxes on capital and investment. The plan the Democrats are moving through the Congress the process known as budget reconciliation – which can be enacted with as few as 51 votes and cannot be blocked by a filibuster – has been described as kicking off the largest expansion of government since LBJ’s Great Society legislation in the 1960s.
The details of the plan are still sketchy. The markup of the tax portion is due to begin Wednesday despite not being fully fleshed out.
The secrecy is deliberate, says House Ways and Means Committee Chairman Richie Neal, D-Mass., who said he wanted to keep the opposition to tax hikes from having time to mobilize, “comparing his behavior to a man trying to seduce a woman into marriage, postponing full disclosure until the wedding guests are seated, and the bride has been walked down the aisle,” the New York Sun said Monday.
Neal’s preferred strategy, he told the New York Times in an interview published Saturday, was to wait “until we are at the altar” to announce the details, leaving taxpayers seduced and abandoned by empty promises of a bright and prosperous future.
‘The plan Neal wanted to keep hidden as long as possible,” the Sun reported, “also reportedly includes an increase in the corporate income tax rate, to 26.5 percent from 21 percent.” The Tax Policy Center – a joint venture of the left-leaning Urban Institute and Brookings Institution — has noted, as have other organizations considered more friendly to business interests, that such a move would hurt workers and shareholders making less than $400,000, which candidate Joe Biden established in 2020 as the threshold at which the pain from his planned tax increase would start to be felt.
The Biden-endorsed plan to increase the federal corporate income tax from the current 21 percent to a higher rate – 26.5 percent according to the latest drafts – would see the tax hike passed down at least in part to working families “in the form of higher prices, fewer jobs, and lower wages” according to an analysis of the available plans by Americans for Tax Reform, a non-partisan, pro-taxpayer group.
The proposed Biden corporate rate would, the taxpayer groups said, lead to a combined U.S. state-federal rate of 30.9 percent --- “higher than our foreign competitors including China, which has a 25 percent corporate tax rate, and Europe which has an average rate of 21.7 percent.”
Other tax hikes being given serious consideration are an increase in the top personal income tax rate to 39.6 percent – something that would hurt small businesses in the U.S. – limitations on 20 percent small business deduction, expanding the Obamacare net investment income tax, and limiting the ability of pass-throughs to deduct excess business losses.
These measures, ATR said, would likely increase taxes on several million small businesses across the country. A U.S. Chamber of Commerce study also cited by the group identified 1.4 million small businesses organized as C-corporations that would be affected as well as “almost 900,000 small businesses could be hit with the limitation of the passthrough deduction based on 2018 IRS SOI data.”
Other economically damaging proposals included in the document drafts include an increase in the capital gains to 28.8 percent, increasing the holding period for carried interest capital gains to five years, a 16.5 percent global minimum corporate tax, and hiking the effective death tax by cutting the current exemption in half and modifying the evaluation rules.
The last change would not only increase the amount of tax owed but would make death a taxable event for families owning small businesses and farms who would once again be expected to pay the taxes due quickly. In the past, these requirements are known to have forced the sale of many farms and businesses to raise the capital necessary to pay the tax bill.
Democrats also continue to propose an increase in funding for the U.S. Internal Revenue Service to allow it to hire more agents who can do more audits.
The Biden Administration has estimated that would bring in an additional $800 billion in revenue over ten years, but many analysts say that highly likely due to continuing confusion regarding the amount of money lost to tax evasion – which is illegal and is the failure to pay taxes that are owed – and tax avoidance, which is the strategic use of the terms of the tax code to lower one’s tax bill through legal means. Nonetheless, if it is enacted, the funding of new agents to do more audits will lead to more taxpayers being harassed by the IRS in the coming years – something of an irony since it, unlike most government agencies, apparently has never had to undergo an audit.
Speaker Pelosi wants the House to be finished with its work on the reconciliation package by Sept. 27, three days before the end of the current fiscal year. Given the opposition of several Senate Democrats to the $3 trillion figure and the unease of House moderates who worry the new spending and taxes could be politically costly come election time, her timetable may be a bit ambitious. She’s in her final term as speaker, so getting the legislation through would be a living monument to her San Francisco-style liberalism, something even moderates in her caucus might find persuasive.
Peter Roff can be reached at RoffColumns AT GMAIL.com. Follow him on Twitter @PeterRoff.