Inflation Reduction Act drops most of Biden’s proposals to tax the rich
The deal struck last week by Sens. Charles Schumer (D-N.Y.) and Joe Manchin (D-W.Va.), a slimmed-down version of the Build Back Better Act, leaves out most of President Biden’s proposals to pull in greater government revenues from rich taxpayers.
Increases in individual income tax rates for high earners, increases in the estate tax, increased taxes on capital gains like stock and property holdings, a tax on billionaires, a plan to build out the net investment income tax and a surtax on high-income households are plans that have been scrapped from the Inflation Reduction Act.
“The administration proposed many, many tax increases that aren’t reflected in this legislation,” UCLA tax economist and former tax analyst for the Treasury Department Kimberly Clausing said Wednesday on a call with reporters.
“This past November, [there was] a version of this legislation that was broader and that would have included a lot more tax increases, including the net investment income tax provision, [which is] a very important loophole that hopefully Congress will close someday,” she added.
Among the many proposals nixed from the current legislative package is a plan to restore the top income tax rate of 39.6 percent, brought down to 37 percent by the Trump administration’s Tax Cuts and Jobs Act of 2017, as well as a 3 percent surtax on taxpayers with income of $5 million or more put forward by the House Ways and Means Committee in 2021.
Also missing is a plan to increase taxes on investment earnings, known as capital gains, to 25 percent, as well as an expansion of the net investment income tax, more than half of which would have been paid for by the top 0.1 percent of taxpayers, according to an analysis by the Tax Policy Center, a Washington think tank.
“President Biden, in his campaign, in his budgets, proposed a substantial amount of tax increases on high-income people,” analyst Howard Gleckman of the Tax Policy Center said in an interview. “It included this idea of expanding the net investment income tax, which was a provision in the 2010 Affordable Care Act that would have extended a 3.8 percent tax to certain kinds of businesses that were not subject to the original one.”
“The finance committee people were moving along on the net investment income tax,” he added. “I mean, that required some background work to do, and they were doing that. They were under the impression that this was going to happen. And then suddenly it didn’t.”
Economist Kimberly Clausing said that the makeup of the Senate, which is split evenly along party lines, is the reason that more measures to tax the rich weren’t included in the Inflation Reduction Act. Republicans are pretty much intolerant of progressive taxation policies, but Democrats, too, have encountered resistance in their ranks to such tax hikes, notably from centrists like Sen. Kyrsten Sinema (Ariz.) and Manchin.
“Any observer of this process will note that the Senate is 50-50,” Clausing said. “And when the Senate is 50-50, that means that there’s absolutely no room to be any more ambitious than that 50th senator is willing to be.”
White House economist Jared Bernstein traced the resistance to tax hikes on the rich beyond Congress, to the economic forces that act upon lawmakers through their constituencies.
Bernstein told CNBC last year regarding the Biden administration’s budget proposals that plans to tax the wealthy are often thwarted by lobbying groups in Washington who solicit members of Congress on behalf of particular industry trade groups.
“As you well know,” Bernstein said, “when you go up to Capitol Hill and you start negotiating on taxes, there are more lobbyists in this town on taxes than there are members of Congress.”
Democrats are holding their breath over a decision from Sinema on the bill. Her dissent could stymie the latest attempt to get Biden’s domestic priorities through Congress.
And while it omits most of the earlier legislative proposals aimed at taxing rich people, it may still be able to increase government revenues from the wealthy through additional enforcement measures.
The bill aims to raise revenues from increased tax enforcement by the IRS by $124 billion, according to a one-page summary of the bill from Senate Democrats.
The legislation would fund the IRS over the next 10 years to the tune of $45.6 billion for enforcement efforts, $25 billion for operations support, $4 billion for technology modernization and $3 billion for taxpayer services.
“Nearly three-quarters of Americans believe the IRS should conduct more tax audits of large corporations and millionaires,” Senate Democrats said in a July 27 write-up of the bill released along with the reconciliation bill’s text.
But economist Joseph Stiglitz cautioned during a Wednesday call that wealthy taxpayers can protect themselves against audits by using expensive lawyers.
“Very wealthy people are, quite frankly, using very expensive lawyers to avoid paying taxes,” he said. “Having a system that enforces the tax system and that makes everybody pay their fair share means that just because you have a good lawyer, you can’t escape taxation. That’s really important.”
“So it’s not only that these small investments will yield large returns. They create a fairer tax system and a fair tax system is really important for a fairer society,” Stiglitz added.