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Rep. Alexandria Ocasio-Cortez (D., N.Y.) wore a fancy dress to a fancy party that read “Tax the Rich” on the back. It didn’t catch on.
As AOC’s fellow Democrats roll out their biggest legislative package in years, conspicuously missing are major tax hikes on the wealthy—supposedly a staple of Democratic politics. There are tax hikes, to be sure, that will help finance new spending on green energy programs and social benefits championed by President Biden. But they’re less onerous than Biden’s own proposals, in many cases. And since these are the Democrats’ opening bids, they could get further diluted as legislators craft them into a bill Congress can actually pass.
The House Ways and Means Committee, which originates tax legislation, released a long list of proposed tax hikes this week that will accompany the spending plan Democrats hope to pass later this year. They target business and the wealthy, as expected. But Democrats are nibbling instead of chomping. A few examples:
Business taxes. Biden would raise the top corporate tax rate from 21% to 28%. The House plan pushes it up to just 26.5%. And there’s no supplemental minimum tax on big companies, as Biden has called for, which means companies would continue using existing tax breaks to whittle their tax bills down to as little as $0.
Individual income taxes. The House plan would raise the top individual income tax rate back to 39.6%, which is where it was before the Republican-controlled Congress cut it to 37% in 2017. There’s also an extra 3% surtax on incomes above $5 million. But there’s no wealth tax, which liberal Democrats such as Senators Bernie Sanders and Elizabeth Warren—plus AOC—have pushed for.
Estate taxes. Wealthy families subject to the estate tax don’t have to pay tax on capital gains on assets held by an investor who dies. Instead, the value of the assets resets, with no tax owed unless inheritors sell them for a profit above the new starting basis. Biden wants to impose a capital gains tax on such assets when the owner dies, but that’s not included in the House plan.
Investor income. Biden wants to kill the “carried interest” provision that lets hedge funds and private-equity firms pay a tax on profits equal to the capital gains rate, instead of the higher rates for individual income. But the House plan leaves it in place. The only change is an extension in the holding period needed to qualify for the capital gains rate, from 3 years to 5. The rate would rise to the new capital gains rate of 25% if the whole House plan went into effect, but that’s still lower than the top individual rate of either 37% or 39.6%.
Tracking money. Biden wants new enforcement tools for the IRS, to help it recover hundreds of billions of dollars wealthy taxpayers owe but wriggle out of every year. One of those tools would be a new requirement on banks to report money flows in and out of taxpayer bank accounts, so the IRS can spot signs that wealthy people are hiding income. The House plan doesn’t include such a provision. It would substantially boost the IRS’s budget, but still leave room for tax cheats to hide money.
A more generous SALT cap. The 2017 Republican bill capped the amount of state and local taxes people can deduct from their federal tax bill at $10,000. That hurt wealthy taxpayers in high-income Democratic states the most. Several prominent Democrats want to restore the full deductibility of state and local taxes, or at least raise the cap. There’s no provision doing that in the House plan yet, but Democratic leaders have indicated there will be, soon.
None of these provisions is final, and there will be many changes to the Democratic legislation as it comes together. But 1 percenters have less to fear than Democratic rhetoric might suggest. The Senate will obviously draft its own tax provisions, and then meld them with House proposals to form a final bill. But radical legislation is more likely to emerge from the fractious House than the clubby Senate, which means the House Ways and Means outline could be a worst-case scenario for the wealthy. Some Senate Democrats, for instance, say they’ll only agree to raise the corporate tax rate to 25%.
This might seem like a setback for Biden—but it isn’t. If new taxes only fund $2 trillion in new spending, say, rather than $3.5 trillion, that would still represent a giant amount of money for child care subsidies, green energy transformation and other Biden priorities. There’s also a faction of centrist swing voters who are concerned about massive amounts of new government spending, and a smaller number might make them feel like Democrats listened to their protestations.
The tax hikes coming into focus also seem to be at levels markets can live with. Stocks have been choppy lately, but mostly because the surge of the Delta coronavirus variant has slowed the economic recovery. Stocks showed no adverse reaction when Ways & Means released its tax-hike punch list. There could still be surprises, but investors have glimpsed the worst Democrats can throw at them, and shrugged. AOC may need a more shocking dress.
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.