Happy Monday! We've got a big week ahead as the Senate returns and House committees look to wrap up their work on the Democratic budget reconciliation package by Friday. Here's what's happening.
House Democrats Release Details of Tax Hikes on Wealthy and Businesses
House Democrats on Monday released a package of revenue increases that would raise roughly $2.9 trillion over 10 years to help offset the cost of President Joe Biden’s $3.5 trillion economic plan.
On paper, the proposal from the tax-writing Ways and Means Committee would raise about $2.2 trillion through higher taxes, with a focus on making businesses and wealthy individuals pay more. The plan also calls for taking steps to reduce drug prices, moves that are projected to save about $700 billion in federal spending.
According to a score from the Joint Committee on Taxation Monday, the proposal would raise slightly less than Democrats project, about $2.1 trillion over 10 years. Once revenue losses associated with the many policy-driven tax breaks in the proposal are taken into account, the plan would provide $871 billion to help offset the cost of other parts of Biden’s agenda, according to the JCT.
Here’s a rundown on some of the key tax proposals in the plan from House Democrats:
The top corporate tax rate would increase to 26.5%, up from the current 21%. The corporate tax would be graduated, with the top rate applying only to businesses that earn more than $5 million a year. Corporations making less than $400,000 would see their income tax rate drop to 18%, while those between the two incomes levels would see no change in rates. The corporate tax rate provisions would raise $540 billion.
The top individual income tax rate would increase to 39.6%, up from the current 37%, with the top rate kicking in at an adjusted gross income of $450,000 for married couples. The tax increase is projected to raise $170 billion.
A new 3% surtax on incomes over $5 million per year would raise $127 billion.
The top capital gains tax rate would rise to 25%, up from the current 20%, taking effect on September 13, 2021. This increase is projected to raise $123 billion.
The net investment income surtax of 3.8% would be expanded to cover passive income, raising $252 billion.
A $500,000 cap on the pass-through deduction, which currently applies to the first 20% of qualified business income, would raise $78 billion.
Reducing the estate state tax exemption, along with other tweaks to the estate tax, would raise $77 billion.
The minimum tax rate on foreign business incomes would rise 16.6%, up from the current 10.5%. Altogether, changes to the tax rules for international corporations would raise an estimated $360 billion.
The IRS would receive $80 billion in additional funding to beef up enforcement and collections, a move that is projected to net $120 billion.
In addition to these main components, the proposal from House Democrats includes a range of other provisions that touch on a variety of areas, including cryptocurrency, tobacco consumption and oil production. Together, these provisions would raise nearly $200 billion.
Tax breaks, too: The legislative package also includes more than $1 trillion in tax breaks that would constitute a major part of Biden’s domestic agenda. An extension of the child tax credit, first passed as part of Covid relief and scheduled to expire at the end of this year, would cost $556 billion over 10 years. A permanent extension of the expanded Earned Income Tax Credit would cost $135 billion, while a permanent extension of the expanded Child and Dependent Care Tax Credit would cost $98 billion in lost revenues.
Add in a slew of other tax credits touching on infrastructure, education, housing, retirement savings and renewable energy, and the total comes to roughly $1.3 trillion. That would leave “about $943 billion of revenue for other priorities,” the Committee for a Responsible Federal Budget says.
Taking aim at the 1%: Much of the tax plan focuses on the wealthy and the businesses that provide a good chunk of their incomes. The proposal would “overwhelmingly hit the richest 1 percent of Americans with a bevy of new taxes and tax changes affecting their incomes, investments, businesses, estates, retirement funds, and other assets,” says The Washington Post’s Jeff Stein.
Still, the proposal isn’t as far-reaching as some had expected (see below for more on this). And as The Wall Street Journal’s Rich Rubin notes, the proposed taxes would affect business owners who are still involved with their companies more than passive investors. “The result is that passive investors who borrow against their assets and don’t sell would see relatively little change, while active business owners could see sharp increases in their marginal tax rates,” Rubin writes.
The less aggressive approach isn’t sitting well with some critics. “They have a once in a lifetime opportunity to address the egregious, unfair treatment that the wealthy get in the tax code, and the committee has refused to do it,” Erica Payne, president and founder of the Patriotic Millionaires, said, according to The Hill.
White House expresses support: Spokesman Andrew Bates told reporters that the proposal “makes significant progress towards ensuring our economy rewards work and not just wealth by cutting taxes for middle class families; reforming the tax code to prevent the offshoring of American jobs; and making sure the wealthiest Americans and big corporations pay their fair share.” Bates also said that the plan “meets two core goals the President laid out at the beginning of this process -- it does not raise taxes on Americans earning under $400,000 and it repeals the core elements of the Trump tax giveaways for the wealthy and corporations that have done nothing to strengthen our country’s economic health.”
What comes next: The tax hikes laid out in the proposal can be seen as what Chris Krueger of Cowen Research calls a “revenue menu” that can be adjusted if and when Democrats need more money to pay for their programs. In terms of outlays, the tax breaks function the same way. Together, they give lawmakers a set of controls or dials that can be turned up or down, depending on what’s called for.
The Ways and Means Committee will its markup of the legislation on Tuesday and Wednesday this week. The end result will be a large part of what the House is offering in the ongoing negotiation with the Senate and the White House over the president’s domestic agenda.
What Was Left Out of House Democrats’ Tax Plans
The tax proposals released by House Democrats on Monday had some notable omissions.
They left out a Biden proposal to end the “step-up in basis” for inherited assets, a change that would have taxed unrealized capital gains before those assets were passed onto a wealthy person’s heirs.
The new plans also exclude most of the administration’s proposals to close the tax gap by requiring better information reporting to the IRS and its proposed limits on tax breaks for fossil fuel companies. They don’t incorporate the taxes on stock buybacks and partnerships that key Senate Democrats have proposed. And they say nothing about the $10,000 limit on the deductibility of state and local taxes. Numerous Democrats from high-tax states like New York and New Jersey want to raise or eliminate that cap, which was imposed by the 2017 Republican tax law, with some lawmakers threatening to vote against any package that doesn’t address the issue. “I have been consistent for six months: ‘No SALT, no deal’,” Rep. Tom Suozzi (D-NY) said in a statement Monday.
Dems Say They’ll Address SALT Deduction Cap: Key House Democrats on Monday vowed that they will still include “meaningful SALT relief” in their plans. “With Speaker Pelosi, we continue to work among our colleagues and the Senate to undo the short-sighted capping of SALT by Republicans. We are committed to enacting a law that will include meaningful SALT relief that is so essential to our middle-class communities and we are working daily toward that goal,” House Ways and Means Chairman Richard Neal (D-MA), Oversight Subcommittee Chairman Bill Pascrell, Jr. (D-NJ), and Suozzi said in a joint statement.
A Tax Break for the Rich: Budget hawks and some progressive Democrats oppose changing the cap, arguing that the benefit of such a change will primarily go to high-income households — the same people Democrats are trying to tax more. The Tax Policy Center says that 96% of the benefit of repealing the $10,000 cap would flow to the top 20% of income earners. And restoring the full deduction would cost $88.7 billion in 2021, according to figures from the Joint Committee on Taxation cited by Bloomberg.
Step-Up in Basis Unlikely, but Not Dead Yet: The proposals released Monday could still change substantially as Democrats look to secure the votes they’ll need in both chambers of Congress. Senate Finance Committee Chair Ron Wyden (D-OR) indicated Monday that he may not go along with the House plan on capital gains and inherited assets. “It’s important to address the fact that billionaire heirs may never pay tax on billions in stock gains,” he said. “The nurses, firefighters, and teachers who pay their taxes with every paycheck know the system is broken when billionaire heirs never pay tax on billions in stock gains.”
And a step-up in basis, or lack of one, could change the revenue outlook for capital gains taxes more broadly. “If Democrats drop the plan to treat death as a taxable event for capital gains for individuals with real-estate and other asset appreciation over $1 million, then a capital gains rate above 28% would likely cost the federal government money,” Bloomberg’s Colin Wilhelm reported late last week.
The Big Winners in the Post-9/11 Military Spending Surge
The Pentagon has spent more than $14 trillion since the start of the war in Afghanistan, and up to half of that money went to for-profit military contractors, according to a study released Monday by Brown University’s Costs of War project and the Center for International Policy.
“Corporations large and small have been, by far, the largest beneficiaries of the post-9/11 surge in military spending,” William D. Hartung, the author of the study, writes. “Some of these corporations earned profits that are widely considered legitimate. Other profits were the consequence of questionable or corrupt business practices that amount to waste, fraud, abuse, price-gouging or profiteering.”
The paper notes that between a quarter and a third of all Pentagon contracts in recent years have gone to five major weapons contractors: Lockheed Martin, Boeing, General Dynamics, Raytheon and Northrop Grumman. “The $75 billion in Pentagon contracts received by Lockheed Martin in fiscal year 2020 is well over one and one-half times the entire budget for the State Department and Agency for International Development for that year, which totaled $44 billion,” the paper notes.
Why it matters: Hartung told the Associated Press that relying on private companies was problematic for reasons beyond just the money. “If it were only the money, that would be outrageous enough,” he said of instances where the Pentagon’s reliance on contractors backfired. “But the fact it undermined the mission and put troops at risk is even more outrageous.”
- Ways and Means Proposes $1.3 Trillion of Tax Breaks, $2.3 Trillion of Tax Hikes – Committee for a Responsible Federal Budget
- 5 Biden Tax Hikes That Are Disappearing – Rick Newman, Yahoo FInance
- Joe Manchin’s Selfishness – James Downie, Washington Post
- Democrats' Agenda Would Send Capital Gains Tax Rates to the Moon – Andrew Wilford, RealClearMarkets
- Moderates Are the Real Health-Care Progressives – Ramesh Ponnuru, Bloomberg
- Powell Should Stay on as Fed Chair. The Partisan Campaign Against Him Is Dangerous. – Washington Post Editorial Board
- Here’s What the Next Six Months of the Pandemic Will Bring – Michelle Fay Cortez, Bloomberg
- Covid Is on Its Way to Becoming Just Another Virus – David Fickling, Bloomberg
- Biden’s Coronavirus Mandate Isn’t as ‘Divisive’ as Its Critics Claim – Aaron Blake, Washington Post
- Republicans Aren’t Rational About Covid-19. So Stop Reasoning With Them. – Jennifer Rubin, Washington Post
- How Far Are the Unvaccinated Willing to Go? – Jessica Karl, Bloomberg
- Biden Is Right: Vaccine Refusal ‘Has Cost All of Us’ – New York Times Editorial Board
- Biden’s Covid Vaccine Mandates Are Unconstitutional — and Unnecessary – Henry Olsen, Washington Post
- The Hyperbolic GOP Reaction to Biden’s Vaccine Mandate Shows Why It’s Necessary – Max Boot, Washington Post
- The Sacklers Are Walking Off Into the Sunset. Reform the System. – Ryan Hampton, New York Times