Many of the spending items in the tax bill Democrats are negotiating could be described as radical. After all, if we had reduced the cost of child care, expanded educational access, reduced poverty, and more efforts to fight climate change, our lives would be so much better.
But there’s nothing radical about how Democrats are proposing we pay for these changes. Many Republicans, and even some Democrats, however, are proposing that this bill is the start of great change in America.
It’s really not.
Here are some major features of the multiple different proposals being circulated:
- The top income tax rate would rise from 37 to 39.6 percent for various categories of earners who make $400,000 to $500,000 a year and more.
- It would raise the corporate tax rate from 21 to 26.5 percent, but only for large companies with more than $5 million in annual income. Smaller companies would either see their tax rate stay the same or, in some cases, decline.
- The top tax rate on capital gains would rise from 20 to 25 percent, which is still a lower rate than wage income. This would also continue with the preferential treatment that is lavished on wealthy investors.
- If someone were to make more than $5 million a year, they would be facing a new 3 percent surtax. (A surtax is an additional tax on something that’s already been taxed.)
- The Internal Revenue Service would be given new funds to go after the hundreds of billions of dollars of taxes that go unpaid every year.
- The new bill would allow Medicare to negotiate with drug prices. Currently, Medicare is prohibited from negotiating prices. This makes it that Americans pay the highest prices for medication in the world.
Even some Democrats believe these reforms are radical and are pushing them to the right because of it. In fact, House Democrats have drafted a version of the tax proposal that omits a provision sought by President Biden that would close a loophole allowing the wealthy to pass large estates down to heirs with much of it escaping taxation permanently.
Conservative Democrats are worried about being accused of hurting family farms. In turn, the Democrats who are afraid of this are letting the Republican lie that estate taxes targeting multi-million-dollar fortunes hurt family farms get repurpose to be applied to the so-called “stepped-up basis.”
The stepped-up basis involves assets that are held and not taxes throughout a wealthy person’s life and are then passed on to an heir. These assets are only taxed at the point of sale, based on how much value they gained. The appreciation of their value is calculated for future tax purposes only by measuring that appreciation from that point of transfer onward. This cancels the gains that occurred up to that point meaning that no one is ever taxed.
However, according to a senior Senate Democratic aide, “the current negotiations had already carved out an exemption for family-owned farms that would only tax gains valued from $25 million and up.” With this exemption, it’s hard to see how it would permit any actual harm to any family farms.
If the provision does die, however, tons of wealth could escape taxation permanently. All of this comes from the idea that there’s anything remotely radical about Biden’s tax plans.
While “trillions of dollars in new taxes” does sound very scary — especially to the average person — the tax plans are much more than that.
The package would raise and spend $3.5 million over 10 years, which would only be $350 billion a year. That’s less than 2 percent of our current gross domestic product. In fact, last year’s gross domestic product was a total of $21 trillion.
All in all, it is a substantial increase in taxes and spending, but not something that’s going to transform the American economy.
All of that, however, is on a large scale. What about the individuals? Who will be affected? How will billionaire investors be affected? Wealthy tax cheats? Corporations that drag in billions of dollars every year and ignore their taxes on top of it?
They’re all going to be okay.
Many of the changes that Democrats want to make are simply reversing parts of the Republicans’ 2017 tax cut. Paying taxes like how we did five years ago is nowhere near a radical change.
The overall, big picture is that the 2017 tax cut was the height of a period of relentless tax-cutting for the wealthy and corporations dating all the way back to the 1980s. In 1980, the top marginal income tax rate was 70 percent, which is about twice what it is now. The rich spent twice as much on taxes but half the time whining about how oppressed they were by taxes than they do today.
That period of tax-cutting was real. What Democrats are currently attempting is nothing more than a little nudge toward the right direction.