The Memo: Biden tries to flip the script on taxes
President Biden’s plan to increase taxes on wealthy Americans is reigniting one of the fiercest divides in politics: How much should the government do, and who should foot the bill?
The president faces a fierce battle to get his infrastructure plan enacted, and he can’t depend on unified backing even from his own party.
Biden this week will propose a massive boost to social infrastructure spending on things such as paid leave, child care and tuition-free community college.
To pay for it, according to multiple media reports, he will nudge up the highest rate of income tax and dramatically hike the capital gains tax paid by top earners.
The plan is expected to call for an approximate doubling of the capital gains tax, from its current level of 20 percent, for Americans with incomes of over $1 million.
At the heart of the plan is a key question: whether income derived from the sale of assets should be treated basically the same as income in the form of a paycheck.
Biden and his backers answer with an emphatic yes. Wealthier Americans derive a greater proportion of their overall income from investment, they note. The beneficial treatment of capital gains, they say, has the effect of further helping those who are already in a privileged position — and therefore exacerbating wealth inequality and social incohesion.
But there are counterarguments, too. Those who favor keeping the capital gains tax low insist that it is a key driver of investment and that high rates encourage people to hold on to their assets rather than incur a high tax bill, thus diluting economic dynamism.
Then there are the politics to consider. Democrats up until recently were petrified of being labeled the “tax-and-spend” party by conservatives — a fear that was rooted in the knowledge of how effective such attacks had been in the 1980s and early ’90s.
Given the razor-thin Democratic majorities on Capitol Hill, whether Biden can even get his proposals passed will depend upon his ability to corral moderates such as Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.). Success is far from guaranteed.
Progressives are adamant that the time is right for Democrats to cast off their traditional timidity about taxation and push a more egalitarian agenda. Conservatives are equally emphatic that doing so would be a huge mistake.
“This is how you stall an economy,” said Grover Norquist, the president of Americans for Tax Reform and perhaps Washington’s best-known anti-tax campaigner.
Biden, Norquist insisted, “could just have sat back because you are going to see this surge in the second quarter. There could be this incredible growth. You could be coasting on that, but instead what you are doing is chasing investment away from the United States, telling people, ‘You don’t want to get capital gains in the U.S.’”
The Biden plan, Norquist argued, “is a boat anchor on economic growth when, going into 2022, you would want to be going gangbusters.”
Biden aides have been stressing how few people would be affected by the new top rate of capital gains tax. Jen Psaki, the White House press secretary, emphasized the $1 million income threshold for the top rate on Friday, and added, “The president’s bottom line is that people making under $400,000 a year should not, will not, have their taxes go up.”
Ron Klain, Biden’s chief of staff, tweeted that the plan was one Biden had “campaigned on extensively.” Klain added that it “changes the tax rate for less than 1% of Americans (in fact, less than 1/2 of 1% of Americans).”
Conservatives such as Norquist argue this framing is misleading. They say, for a start, that a capital gains tax hike would have a detrimental impact on the stock market, thus affecting the huge number of Americans who have individual investments, 401(k) accounts or IRAs.
The stock market reacted badly on Thursday afternoon when news of Biden’s plans first emerged but recovered on Friday.
“If a 1 percent fall in stock prices is all that you get from a really major increase in capital gains taxes, that’s not a big problem,” Paul Krugman, the Nobel Prize-winning economist and liberal New York Times columnist, told Bloomberg TV.
More broadly, progressives are scathing of the predictions of doom from what they see as a basic move toward a more equitable tax structure.
Jonathan Tasini, a Democratic strategist who backed Sen. Bernie Sanders (I-Vt.) in the 2016 presidential race, argued that any assertion about the dangers of hiking the capital gains tax rate “is greed dressed up as economic argument.”
“There is no rich person in the world who will honestly tell you that he … would not have invested money in a company because of capital gains rates. You are making a profit already! What we are saying is you have to give back,” he added.
Tasini also argued that debates about taxation in general often proceed along false lines — as if the tax revenue simply disappears into the ether rather than being used for public benefit.
“Nobody who makes money, whether you become rich or less than that, does so entirely on their own or because of their own genius. All taxes are about giving back to pay for everything that society provides that allows you to make money and invest — and that includes having the roads and bridges that take you to the office where you make a living,” he said.
Mark Zandi, the chief economist of Moody’s Analytics, argued that the overall impact of Biden’s proposals was likely to be fairly modest, especially when the benefits of infrastructure spending are factored into the equation.
Taxpayers in the million-dollar-plus bracket are “a very rarefied group,” Zandi said.
If the Biden plan were to pass, he added, then maybe in a decade “an econometrician would be able to tease out some negative effects, all else being equal. But I think it is going to be very much on the margins. This is revenue that is going to presumably pay for the American Family Plan, which is child care and family leave, and some of it is going to less wealthy households who are going to use it and spend it. It could help them go to work and so raise labor force participation.”
Overall, Zandi predicted, the plan would be “a tailwind rather than a headwind” for economic activity.
Even so, Biden faces a pitched political battler to get his plan passed. And opponents such as Norquist insist the American public is on their side.
“Every time a Democrat wins the presidency, all the same people come out and say all the same things: ‘Tax the rich. Nobody cares! This will be very popular,’” he said. “Envy is not a political program.”
The Memo is a reported column by Niall Stanage.