House Democrats unveiled a proposed slate of tax hikes this week that would raise rates on high earners, corporations, and even small businesses in what they said was an effort to pay for parts of the spending package they hope to pass this year.
With opposition to the package’s proposed $3.5 trillion price tag from centrist Democrats in the Senate, it’s unclear whether the bill will survive the legislative process as-is, even with the newly unveiled pay-fors.
House Democrats did not specify whether the tax increases would generate enough revenue to offset their aggressive spending plans.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said a rough estimate of the new proposals leaves Democrats with a “pretty big hole” between projected revenues and the amount they intend to spend.
“The reason there’s a big hole is that a lot of these policies are much smaller than what the White House had been proposing before,” MacGuineas said.
Even so, the suggested tax increases are likely to draw fierce resistance from Republicans, who have railed against every aspect of the Democrats’ efforts to craft the spending package.
Here's a breakdown of what’s in the Democratic tax proposal.
CORPORATE TAX RATE
Democrats proposed raising the corporate tax rate for the biggest companies to 26.5%, up from the current flat rate of 21%.
Instead of leaving the corporate tax rate flat, Democrats floated a return to a graduated structure that taxes companies with lower profits at a lower rate. Companies that report less than $400,000 of profits would face a tax rate of 18%, while companies with more than $400,000 but less than $5 million would face 21%.
All other companies would find their profits taxed at the higher 26.5% rate.
Dr. William McBride, vice president of federal tax and economic policy, said the graduated structure for corporate taxes was scrapped during the Trump-era tax reforms because it was “generally seen as antiquated and no longer useful.”
“In the business world, you can have small profits and be a huge company,” McBride told the Washington Examiner.
“Amazon was a huge company that for years had no profits, recorded losses while they were building the company up,” McBride said. “Until relatively recently, they reported no profits, and yet they’re essentially one of the largest companies in the world.”
Like other economic experts, McBride expressed concern the larger corporate tax rate could encourage larger companies to move operations overseas, reducing the U.S. tax base and lowering revenues.
Manchin said earlier this year he would support raising the corporate tax rate to 25%. At the time, the White House had floated a corporate tax rate of 28% — higher than what House Democrats put forward this week.
It remains unclear whether Manchin would accept the middle ground of a 26.5% top rate on big companies.
CAPITAL GAINS TAX RATE
In a set of proposals aimed at wealthy Americans, House Democrats suggested hiking capital gains taxes and adding a 3% tax to any income above $5 million. Capital gains are revenues people earn from selling investments, such as stocks.
The top capital gains tax rate would climb to 25% from 20%, but the rate paid by the highest-earning investors would effectively be 28.8% when accounting for the 3.8% net investment income tax investors already pay.
However, with the extra 3% tax — McBride called this “completely new" — taxpayers who owe levies on capital gains income could end up paying even more than that.
“The proposal is to raise that rate on capital gains by five points directly, so going to 28.8%, and then now there’s this additional 3% on top of that, so that brings the total to 31.8%,” McBride said. “So, that would be the highest capital gains tax at the federal level since the 1970s.”
McBride said savers could be hit the hardest — especially those whose savings take the form of corporate equity.
Higher capital gains taxes could discourage investments by companies looking to hire more workers and raise their wages, McBride noted, lowering economic growth.
INDIVIDUAL TAX RATE
In keeping with President Joe Biden’s campaign promise not to raise taxes on Americans making less than $400,000 per year, the House Democratic proposal would raise the top individual income rate to 39.6%.
It currently stands at 37% for individuals making more than $518,000, according to the Tax Foundation.
Small business owners who file their business income on their personal returns, an arrangement known as pass-through business, could be hit especially hard by the proposed higher individual rate. Some business owners may bring home far less than the $400,000 in personal income Biden has said he would target with the higher rates.
But MacGuineas said pass-through businesses gained advantages from the 2017 tax reforms because the proposed hikes could equalize the treatment of such businesses and C-corporations, or businesses whose revenue is taxed separately from their owners.
“Pass-throughs have a huge advantage, particularly after the tax reforms of 2017, so a lot of these tax reforms would actually scale back that advantage,” MacGuineas said.
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McBride said his organization has not yet analyzed the impact of the House Democratic proposals, but the Tax Foundation did so with the slate of tax and spending proposals floated by the White House in the spring. That analysis predicted the economy would actually shrink over roughly the next decade under the proposals.
“We think that in general, this approach from the House Ways and Means Committee relative to that is going to be less harmful to the economy, but still substantially harmful,” McBride said. “That does mean that there’s going to be a loss of revenue associated with a smaller economy, so it’s going to be less than what the sort of static revenue estimates.”
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Original Author: Sarah Westwood
Original Location: Breaking down the House Democratic tax hike proposals