Why Democrats’ tax plans are such a mess

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J0E BIDEN promised to pay for his big social spending proposals by raising taxes on the rich and no one else. Now Democrats are rushing to find a big pot of money without raising tax rates at all. They spoil it.

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As of this writing, they were predicting that they would soon come to a compromise on a social spending bill that would pass both the House of Representatives and the Senate, where they cannot afford a single vote. dissident in their ranks. Still, they struggled to strike a deal that could satisfy two centrists: Kyrsten Sinema of Arizona, who has little appetite for raising tax rates, and Joe Manchin of West Virginia, who is willing to do so. do, but opposes the alternative designed to satisfy Ms. Sinema.

The desire for higher tax revenues without higher tax rates has prompted Democrats to scramble to make sweeping changes to how some levies work. One is a new minimum tax on the accounting profits of larger companies, which can exceed those declared to the tax authorities. Another is a tax on companies that buy back their own shares, a long-standing scarecrow of the left. The most striking idea is a reform of the federal capital gains tax aimed at trapping the ultra-rich. It would tax them annually on the paper earnings of their investment portfolios, rather than when assets are sold, as in the current system. It is this proposal that Mr. Manchin rejects.

All of these ideas are fancy and none are good. A tax on corporate accounting profits would outsource the tax rules to non-accountable accounting bodies, reduce the effectiveness of desirable tax deductions for investment, and, by interfering with the ability to carry forward losses, wreak havoc on businesses. companies with volatile earnings. (Will they have to pay minimum tax in good years without reward in bad years?)

There is no valid economic reason to penalize share buybacks. Either way, companies could avoid the tax attached to them by paying dividends instead. The mark-to-market capital gains tax is a haphazard attempt to quickly extract huge amounts from a few very wealthy people – Elon Musk alone could owe $ 40 billion to $ 55 billion. Because this tax would only apply to publicly traded securities, with different rules for participation in private companies, it would deter entrepreneurs from listing their companies on the stock exchange. This would ultimately be bad for investment and the incentive to innovate, and would hamper widespread ownership of shares.

The Democrats’ predicament may appear to be a direct result of their fragile control of Congress and the idiosyncrasies of two of their senators. But it also results from a lack of vision and leadership. They have failed to introduce straightforward reforms that increase revenue by broadening the tax base, such as abolishing the blatant exemption that resets capital gains accumulated when owners die and pass on their assets.

Taxing capital gains on death, as Mr Biden first proposed, would raise more than $ 200 billion over a decade, not far from the “several hundred billion” Democrats say that the tax on investment portfolios would bring in. Yet lobbyists rejected the idea, just as they also preserved the deferred interest loophole, which allows investment managers to classify their fees as lightly taxed capital gains, not income. Democrats continue to play around with the idea of ​​lifting the cap on a federal taxable income exemption from money used to pay state and local taxes. Doing so would benefit the rich, reduce the tax base, and subsidize high-tax states.

By promising to pay for a great expansion of the welfare state by taxing only the rich, Mr. Biden ignored Europe’s example. Its social spending is financed through broad-based and efficient taxes, including the value-added tax, a consumption levy. The president’s plans, which included a sharp increase in corporate taxes, were initially hostile to economic growth. Tightening the target further – capital gains reform would only apply to billionaires and those with annual incomes exceeding $ 100 million over three years – led to an even more ill-conceived proposal to which Mr. Manchin is right to oppose. From the start, Democrats have claimed that increasing corporate taxes would have no negative effect on wages, contrary to the overwhelming consensus among economists.

The failure to agree on a tax plan echoes doomed attempts by Republicans under Donald Trump to “repeal and replace” the Obamacare health insurance system. This promise was also made without giving sufficient thought to the economic and political constraints it faced.

Perhaps one of the two dissenting senators will give in, letting Mr. Biden’s proposals pass. But sooner or later Democrats will have to face the fact that continually expanding the welfare state without hurting the economy means winning an argument for raising taxes, rather than always telling voters that a rich person will pay.

For more information on Joe Biden’s presidency, visit our dedicated hub

This article appeared in the Leaders section of the print edition under the title “Capital Pain”


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