House Democrats have put forward a worst-of-both-worlds tax proposal: punishing enough to do real damage to the U.S. economy and individual households, but not nearly enough to pay for the trillions upon trillions of dollars of new spending Joe Biden and his congressional allies have put into play.
In theory, the point of tax bills is to raise revenue to support necessary government spending. The spending has for a very long time now been far in excess of what is necessary, while our tax system, complex and burdensome though it is, fails to produce enough revenue to avoid permanent budget deficits. But revenue here seems to be an afterthought.
Democrats propose to raise personal income taxes (to 39.6 percent plus a new 3 percent surcharge on incomes more than $5 million), corporate taxes (to 26.5 percent), and taxes on investment income (to 25 percent); impose higher taxes on “pass-through” income from business partnerships; and hike estate taxes. All told, the Joint Committee on Taxation estimates that the tax increases would add up to nearly $2.1 trillion, though the final number could be higher or lower. Though the changes are all meant to target high-income taxpayers — who already pay a share of federal income tax that is far in excess of their share of income — according to the JCT, less than half of the new taxes collected would come from high-income individuals. The rest would come mainly from businesses, which invariably pass those costs on to their employees, customers, and business partners as far as they are able.
Democrats here are pulling their usual stunt of assuring lower-income people that higher taxes won’t fall on them, but only on their employers, their landlords, and their grocers, as though their finances were unconnected. In the past, that has been good politics, but it is bad economics.
You might think that raising taxes on the $400,000-and-up set would please progressives, but they are howling about this proposal. Progressivism increasingly is a tendency found in those $400,000-and-up households, and so the current demand is for a tax regime that punishes the wealthy for their wealth rather than docking the high-income for their incomes. “House Democrats’ Plan to Tax the Rich Leaves Vast Fortunes Unscathed,” reads the New York Times headline, as though the purpose of taxes were to scathe the rich. The article goes on to complain that the proposal “stopped well short of changes needed to dent the vast fortunes of tycoons like Jeff Bezos and Elon Musk” and landed “only glancing blows at the wealthiest Americans.”
In other words: Never mind the revenue, bring on the pain.
Conservatives are not alone in observing that businesses and other taxpayers respond to these incentives in ways that politicians do not intend. The so-called FACT Coalition (“Financial Accountability and Corporate Transparency”), which supports higher worldwide corporate taxes and complains about “tax havens,” argues that the Democratic plan “may actually worsen” tax-driven offshoring.
The House Democrats’ plan is not quite as rapacious as what the White House would like to see and is in some ways more modest in its ambitions than what Senate Democrats would prefer. In that sense, it is the better proposal, or, more precisely, the least-bad one. If Republicans want to put a price tag on what it really cost them to chuck away those Georgia Senate seats, it looks like the figure is going to be somewhere north of $2 trillion.