Dems poised to raise taxes
Under Biden, party targets business, wealthy to offset new spending programs
Democrats have spent the last several years clamoring to raise taxes on corporations and the rich, seeing that as a necessary antidote to widening economic inequality and a rebuke of former President Donald Trump’s signature tax cuts.
Now, under President Joe Biden, they have a shot at ushering in the largest federal tax increase since 1942. It could help pay for a host of spending programs that liberal economists predict would bolster the economy’s performance and repair a tax code that Democrats say encourages wealthy people to hoard assets and big companies to ship jobs and book profits overseas.
The question is whether congressional Democrats and the White House can agree on how sharply taxes should rise and who, exactly, should pay the bill. They widely share the goal of reversing many of Trump’s tax cuts from 2017 and of making the wealthy and big businesses pay more. But they do not yet agree on the details — and because Republicans are unlikely to support their efforts, they have no room for error in a closely divided Senate.
For Biden, the need to find consensus is urgent. The president is set to travel to Pittsburgh on Wednesday to unveil the next phase of his economic agenda: a sprawling collection of programs that would invest in infrastructure, education, carbon-reduction and working mothers and cost $3 trillion to $4 trillion.
The package, which follows on the heels of Biden’s $1.9 trillion economic aid bill, is central to the president’s long-term plan to revitalize American workers and industry by funding bridges and roads, universal prekindergarten, emerging industries like advanced batteries, and efforts to invigorate the fight against climate change.
Biden plans to finance that spending, at least in part, with tax increases that could raise upward of $2.5 trillion in rev
enue if his plan hews closely to what he proposed in the 2020 presidential campaign. Aides suggest his proposals might not be entirely paid for, with some one-time spending increases offset by increased federal borrowing.
Others in his party, including his own transportation secretary, have pushed Biden to explore tax plans he did not campaign on, like taxing consumption, wealth or vehicle miles traveled. (A Transportation Department spokesperson said Saturday that there would be no vehicle-milestraveled tax in the infrastructure proposal.) Biden has stressed his broadbrush desire to increase the tax burden on wealthy Americans who largely earn their money through inheritance or investment, to fund spending programs meant to help people who earn their money primarily through wages.
“I want to change the paradigm,” Biden said Thursday during a news conference. “We start to reward work, not just wealth.”
Democratic lawmakers have promised for decades to raise taxes on companies and the wealthy, a desire that kicked into overdrive after Trump signed a tax-cut package that delivered an outsize share of its benefits to corporations and high earners. But they have struggled to muster the votes for large tax increases since President Bill Clinton signed a 1993 law that included a variety of hikes intended to help reduce the budget deficit. Business groups, conservative activists, lobbyists and donors across the ideological spectrum have largely blocked such attempts.
President Barack Obama campaigned on ending tax cuts for the rich signed into law by President George W. Bush, but after the 2008 financial crisis, he cut deals with Republicans to extend those cuts before allowing some of them to expire at the end of 2012.
Liberal economists say this year could be different, thanks to the unique political and economic circumstances surrounding the recovery from the pandemic recession. With Biden’s signing of a $1.9 trillion economic relief bill, financed entirely by federal borrowing, forecasters now expect the economy to grow this year at its fastest annual clip since the 1980s. Republicans and some economists have begun to warn of overheating growth spurring runaway inflation, which could reduce the salience of warnings that tax increases would cause growth to stall.
Public polling shows broad support, even among many Republican voters, for raising taxes on large corporations and high-income individuals. The most conservative Democrats in the Senate, who hold great sway over Biden’s legislative agenda, say they favor trillions of dollars in infrastructure spending, so long as there is a plan to pay for it.
That includes Sen. Joe Manchin, D-W.Va., who told reporters last week that Biden’s infrastructure plan was “going to be enormous” and that its costs needed to be covered. He signaled openness to making changes to the 2017 tax overhaul, adding that the benefits in that legislation were “weighted in one direction to the upper end.”
“Where do they think it’s going to come from? How are they going to fix America?” he said, when asked about Republican resistance to tax increases. “I don’t think that’s reasonable.”
Democrats widely share a desire to raise the corporate income tax rate after it was cut to 21% in 2017. And they want to raise the top marginal rate for individuals back to 39.6% from 37%.
But there are disputes in the rank and file, with some favoring Biden’s plan to set the corporate rate at 28% and others preferring a lower one, like 25%. There are also questions over which high-earning individuals should see a tax increase.
Biden has pledged not to raise taxes on people earning less than $400,000. Some of his progressive allies, including Sens. Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts, have advocated raising taxes on a broader group. Democrats like Manchin have pushed him to consider additional tax plans that do not solely target the rich, like a European-style tax on consumption, though that type of tax could fall more heavily on low-income Americans than wealthy ones.
Republicans are unlikely to support any plan to raise taxes, leaving administration officials and leading congressional Democrats to hammer out a plan on their own. But absent Republican support in the Senate, where both parties hold 50 seats and Vice President Kamala Harris can break ties, Democrats would need to secure total consensus within their caucus to pass the legislation and use a fast-track budget process known as reconciliation to bypass the 60-vote threshold for ending a filibuster.
Business groups and Republican lawmakers, who supported the 2017 tax cuts, predict that any tax increase will slow economic growth and undermine the competitiveness of U.S. companies. They contend that the economic and wage growth in the run-up to the pandemic prove that Trump’s tax cuts worked, an argument Biden’s advisers reject, citing research from the International Monetary Fund and others.
“He wants a massive tax increase, and he wants to allocate the tax responsibility in this country on the basis of class,” said Sen. John Kennedy, R-La. “That’s a hell of a way to make tax policy. Sound tax policy is made on the basis of economics.”
Many liberal economists say there are good reasons to raise taxes, starting with using those funds to invest in workers and help build economic opportunity. Spending on physical infrastructure, like roads and water pipes, or on programs like education and child care that are meant to help people earn more money could help curb persistent inequalities in income and wealth. The economists also say that tax increases that are properly set up would provide incentives for multinational companies to keep jobs in the United States and not shift profits to lower-tax foreign countries
Key Democrats are trying to bring the party to consensus. The top tax writer in the Senate, Ron Wyden, D-Ore., is drafting a series of bills to raise taxes, many of them overlapping with Biden’s campaign proposals.
“I’ll be ready to raise what the Democratic caucus decides is required to move forward,” Wyden, chair of the Senate Finance Committee, said in an interview.