Let the games begin. The House Ways and Means Committee has unveiled its version of which pockets to pick, and which projects to finance to convert America into a nation more agreeable to the long-held vision of Bernie Sanders. But how to get there from here will depend on the outcome of the bitter intraparty battle being waged by Democrats.
Committees in the House are battling over what to include in a 10-year, $4.5 trillion spending package, more than the $3.5 trillion Biden is asking and more than the estimated $2.1-$2.9 trillion in new taxes Ways and Means has conjured. Meanwhile, in the senate, Democrat Joe Manchin is saying he will not vote for more than $1.0-1.5 trillion in spending. Without his vote, the evenly divided senate cannot pass whatever comes over from the House, and all the toing and froing going on is just that.
There are two fundamental differences between the warring factions of the Democratic Party. So-called moderates want to concentrate tax increases on high earners and corporations, while the Bernie-led, self-styled progressives want to obtain most of the new revenue by taxing wealth, especially held by the billionaires they despise. That makes a difference. Jeff Bezos receives $81,840 in salary and has a fortune estimated at $202 billion.
Second, House moderates are prepared to vote for the smaller, $1 trillion bipartisan infrastructure bill already approved by the senate, with Republican support. Biden promised those Republicans the bill would not be joined at the hip with the larger, $3.5 trillion package. But to appease her progressive faction, House speaker Nancy Pelosi has linked the bills, making a couple of gaggles of Republicans who cooperated with the President look political naifs.
Both factions say they regard as sacrosanct the President’s interdiction against tax increases that hit individuals earning less than $400,000 and families earning less than $450,000 annually. Both are being economical with the truth. Nannies on both sides of the Democrats’ fratricidal war agree that tobacco taxes should rise, even though cigarette smoking is one of the already highly taxed, often lethal pleasures of middle- and lower-income groups. As the Wall Street Journal notes, higher tobacco taxes are unlikely to inconvenience the residents of Martha’s Vineyard.
Also, corporations do not pay taxes, consumers and workers do. Many earning less than $400,000 will find corporations’ higher costs passed on to them in higher prices and in a reduced pot from which to pay wages.
Nevertheless, America is burdened by a huge debt pile, almost $29 trillion and rising, and an unacceptable level of inequality, making paying down debt and building some fairness into the tax structure worth considering. Republicans disagree both with the need for new taxes and how the Democrats plan to use the proceeds. They say the economy is growing nicely, the Fed says inflation is under control, and an enormous pile of consumer and corporate cash sits on the side lines waiting for Delta to wane.
Unfortunately, the tax increase America will be getting, the largest as a share of GDP since 1968, is tied to a spending bill so large that the debt will actually rise. As for “fairness”, hedge-fund guys will emerge unscathed, winners of the sperm lottery will not be taxed on the capital gains chalked up by their ancestors, and high earners in Democratic cities will be allowed to deduct more of their state taxes from their federal tax burdens. The latter a sort of welfare for millionaires and billionaires, and a notice to high-tax Democratic states to continue to raising taxes, in some cases for bonuses to teachers who have not worked in over a year.
Given the state of flux, current details are only suggestive of the final outcomes. The top capital gains rate goes from 20 to 25 per cent, about half of what Biden asked for. The top corporate tax rate, 35 per cent before the Trump cuts, would go from 21 to 26.5 per cent for corporations earning more than $5 million, but drop to 18 per cent for the smallest companies. The Wall Street Journal calculates that, with state and local taxes added to the proposed federal burden, American corporations will be paying the highest rate in the developed world.
The top individual tax rate increases from 37 per cent to the 39.6 per cent that prevailed before Trump, and applies at a far lower income level. A 3 per cent surcharge is imposed on individuals earning more than $5 million. Add the existing 1.45 per cent Medicare payroll tax, the 3.8 per cent Obamacare surcharge on investment income for individuals earning more than $200,000, and you are close to 50 per cent, to which add state taxes in, say, New York and California, and the final rate is about 60 per cent. Accountants: on your marks, get set, go.
The details matter less than the fact that when the smoke clears the tax burden will have been shifted from the lower half of the income distribution to the upper half, largely because of the $300 per child tax credits now going to nearly 61 million households. Offsetting the checks now landing in those households’ bank accounts is an inflation rate that has have wiped out the wage gains of the lowest earners.
Whether having government provide care from conception to grave would markedly reduce individual incentives to work and risk-taking, leaving a shrunken pie that would provide smaller but more equal slices for everyone, is a question for another day and another column.