Yahoo Finance 5 Biden tax hikes that are disappearing
Democrats in the House and Senate are finally beginning to craft legislation that will include their main spending priorities, and several tax hikes to pay for them. This is where empty posturing ends and hard bargaining begins.
President Biden has proposed dozens of tax hikes to pay for green-energy subsidies, social-welfare programs and other parts of his domestic agenda. Fellow Democrats in Congress have proposed many others. Some could end up being law, but others are fanciful ideas ginned up to appease political factions or signal ideological virtues. As members of Congress write actual legislation, they tend to leave out frivolous ideas with no chance of passing.
The main elements of legislation the influential House Ways and Means Committee is drafting include higher taxes on businesses and the wealthy, which nearly all Democrats favor, in principle. But they differ on how much to raise those taxes and on who, exactly, should pay more. Democrats will now spend weeks or months haggling over the details, with Republicans sure to oppose any new tax hikes to pay for Democratic priorities. There are probably better-than-even odds Democrats will be able to pass some tax hikes, in bills that become law with very narrow party-line votes.
But some tax hikes Democrats have been talking about for months are disappearing, because there were never realistic prospects Congress would pass them. The upshot is that modest tax hikes are possible; radical measures are not. Here are 5 tax hikes investors won’t have to worry about any time soon:
A capital gains tax of 40% or more. Biden would tax capital gains for the wealthiest Americans at the top income tax level, which is now 37%. But he wants to raise that to 39.6%, which would become the new top rate for capital gains. Since the current top cap-gains rate is 20%, Biden would essentially double it for the wealthiest Americans. Some higher earners also pay a 3.8% tax on investment income, so for them, the top Biden rate would effectively be 43.4%.
That’s too much for Congress. The House Ways and Means Committee has proposed raising the top capital gains rate to just 25% for top earners (not including the extra 3.8%, which would stay the same). For anybody earning less than $400,000, there would be no change. Those numbers could shift a little as Democrats negotiate, but if the starting bid for House Democrats is nearly 15 points lower than what Biden is asking for, there’s no chance the top rate will end up close to Biden’s number.
A 28% corporate tax rate. In 2017, Republicans cut the top corporate tax rate from 35% to 21%. Biden wants to raise it back to 28%, but the House plan would boost it to just 26.5%. Democratic Sen. Joe Manchin of West Virginia says he’s only willing to push the corporate rate as high as 25%, and that compromise measure is a good target for final legislation. It might seem like there’s not much difference between a 28% rate and a 26.5% rate, but financial markets rallied on Sept. 13 when the House plan came out, raising the odds of a smaller tax hike than Biden wants.
A minimum corporate tax. Biden borrowed this idea from Elizabeth Warren, the liberal Democratic senator who generally favors much higher taxes on businesses and the wealthy than he does. Biden’s version would be a 15% minimum income tax on big companies with more than $2 billion in income that pay little or nothing in income taxes. The idea is to generate some revenue from companies using tax breaks and loopholes to whittle down their tax burden. It’s a sloppy approach, however, because it would use a new tax hike to offset tax breaks already on the books, such as credits for investing or purchasing equipment. Many of those tax breaks are supposed to stimulate economic activity. If they’re not working as intended, it’s better to repeal old or outdated tax breaks than leave them on the books and lard up the tax code with other measures to cancel them out. The House plan doesn’t contain any minimum corporate tax and the idea hasn’t made headway in the Senate, either.
A capital gains tax on estates. Current law eliminates the capital gains on assets such as stock or real estate held by somebody who dies. So if an investor buys $1 million of stock that appreciates to $5 million by the time he dies, the inheritors don’t owe taxes on the $4 million in profit. Instead, the base value resets to $5 million and the new owners would only pay taxes on any profit above that if they sold.
Biden wants to end what is known as the “step-up” resetting of the base value for an asset, above a value of $1 million, with exceptions for farms and family businesses. But the House plan includes no version of this proposal, which probably means House Democrats figure it’s too hard to defend and explain. The step-up rule contributes to a kind of American aristocracy because it allows wealthy families to avoid taxes on huge amounts of capital gains as assets pass from one generation to the next. It’s a tax break that only benefits the wealthy. Yet defenders demonize any change as a “death tax” that ruins devastated widows, etc., etc., etc. Pragmatic Democrats must feel they don’t have a winning counterargument.
More tax revenue for Social Security. As a presidential candidate, Biden said he would shore up the shaky funding for Social Security by raising payroll taxes on wealthy Americans. The Social Security payroll tax only applies to the first $142,800 of income, with no SS payroll on additional earnings. Biden would reimpose the payroll tax on earnings above $400,000. So there’d be no tax hike on earnings below $400,000, but the payroll tax would kick in again at that threshold.
As president, however, Biden seems to have lost interest in his own plan, which isn’t included in either or the two big legislative packages he has outlined. It’s no surprise, then, that Congress isn’t interested either: There’s no Social Security funding fix in the House Democrats’ plan, and it hasn’t gotten traction in the Senate, either.
There’s one other big tax idea some Democrats support, although Biden doesn’t:
A wealth tax. Elizabeth Warren and her like-minded Senate colleague Bernie Sanders have pushed hard for a wealth tax, which would be a portion of multimillionaire’s wealth paid to the government every year. Biden has called the idea punitive, however, and there are several problems with it, such as questions of legality and the difficulty determining the value of illiquid assets such as real-estate and privately owned businesses every year. We won’t have to worry about these kinds of details any time soon, because there’s no wealth tax in emerging legislation, either. Washington needs to tap some of that wealth, somehow, but even Democrats are being pretty cautious about how to do it.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.
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