In June 2020, presumptive Democratic presidential nominee Joe Biden addressed a gathering of his party’s wealthy donors. “I’m going to get rid of the bulk of Trump’s $2 trillion tax cut,” he told them, knowing this was not necessarily welcome news to such an audience. The 2017 tax law, Donald Trump’s signature domestic policy, gave disproportionate benefits to corporations and high-income households. Biden promised to raise an estimated $4 trillion over 10 years by boosting the same business and individual tax rates Trump and a Republican Congress had slashed.
Now it is October 2021, Biden is president — and he may be about to oversee the perpetuation of the Trump tax cuts, or most of them.
That’s the stunning implication of the latest reports on talks between his White House and the Democratic Senate, which indicate that a final Build Back Better bill might include no change to the tax rates in the 2017 law. Not the 21 percent corporate rate. Not the top 23.8 percent rate on capital gains. And not the top 37 percent rate on individual income.
Instead, what’s under consideration is a bill that relies heavily on such speculative “pay-fors” as improved tax enforcement, along with a 15 percent minimum tax on large corporations ($148 billion over 10 years) and a tax on a few billionaires’ unrealized capital gains (perhaps $250 billion, depending on details and implementation).
In the process, Biden’s promise that the bill, whatever its price tag, will not add “a dime” to the national debt is looking much iffier.
And it could be years before Democrats get another shot at a broad tax overhaul. Their current tenuous hold on the House, Senate and White House represents a near-term high-water mark of progressive power in Washington, with Republicans early favorites to regain control of the House in 2022.
In fairness to Biden, this is not the outcome he would have preferred. It may even have been inevitable once Republicans refused to engage on his Build Back Better plans, leaving Democrats with only the narrow legislative path of reconciliation in a 50-50 Senate.
That set up a two-senator squeeze on the White House: Sen. Joe Manchin III (D-W.Va.) said no to spending more than $1.5 trillion, reducing the rationale for higher revenue; and Sen. Kyrsten Sinema (D-Ariz.) objected to higher rates on individuals or businesses, ruling out Biden’s promised options for raising the money.
To be sure, total repeal of the Trump tax cuts would not have offset the $3.5 trillion in spending Democrats initially proposed, which is why their plans called for savings from negotiated drug discounts in Medicare — also about to be lobbied to death.
Still, Biden boxed himself in by promising that he would not raise taxes on households earning less than $400,000 — i.e., 98.2 percent of the population.
This was a concession to political reality: Democrats rely on support from upper-middle-class suburbanites in high-tax blue states.
It was at odds with fiscal reality, however, which is that transforming the U.S. social safety net and energy economy would probably require taxing more than just a handful of wealthy individuals and corporations.
Making matters worse, Democrats — in deference to that same blue-state suburban base — are still considering a partial repeal of the one provision in the Trump bill that did hit upper-income folks: the $10,000 cap on the deduction for state and local taxes paid. Depending on how it’s done, this regressive move could cost the Treasury tens of billions per year.
Perhaps the negotiations will produce new sources of revenue at the last minute. On Tuesday, Democrats were said to be considering a 3 percent surcharge on $5 million dollar-plus annual incomes as an alternative to the billionaire tax. This is a $127 billion item (over 10 years) borrowed from a broader bill, approved in September by the House Ways and Means Committee, that actually would have repealed much of the Trump tax cut.
Yet even that proposal retained the capital gains break known as “stepped-up basis,” a boon to those who give, and receive, inherited wealth. Biden specifically warned his donors in June 2020 that he would get rid of it, but rural Democrats’ concerns about the impact on family-owned farmland carried the day.
In economics, “revealed preference” refers to the difference between what consumers say they want and what they really do want, as shown by how they choose to spend limited resources. Biden’s oft-repeated, folksier formulation is “show me your budget, and I’ll tell you what you value.”
If present trends continue, a Democratic-controlled Washington will reveal these preferences: a permanent 21 percent corporate tax; a minor boost, at best, to tax-system equity; time-limited, scaled-back health-care and family leave support; and a grab bag of green energy subsidies. The bill may be “paid for” only in the same gimmicky sense as the pending bipartisan infrastructure bill, with its “pension smoothing” and oil stockpile sales. Who voted for that in 2020? Who would have?
