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The Third Rail of U.S. Politics: Tax Increases


Proposals to raise taxes have historically been deeply politically unpopular. Will President Biden successfully convince a majority of Congress to approve the largest tax increases in a generation to pay for infrastructure spending?

This past February marked the 108th anniversary of our modern income tax system. (We’ll forgive you if, like us, you missed the milestone.) The 16th amendment gave Congress the “power to lay and collect taxes on incomes …”


The debate for and against that amendment largely followed the same contours our current tax debate does. As the Constitutional Rights Center explains, “The public and most newspapers seemed to favor” the 16th amendment. Supporters argued it “would force the wealthy to take on a fairer share of the federal tax burden that had in the past been largely carried by those earning relatively little.”


John D. Rockefeller, one of the country’s wealthiest men of that age, opposed it.


Despite Americans’ relative embrace of the 16th amendment, the debate about tax policy has been fraught since ratification in 1908. Politicians’ discussions are often marked by sweeping statements to the American people – recall presidential candidate Walter Mondale’s 1984 pledge to increase taxes and George H.W. Bush’s 1988 promise not to, for example. Mondale lost that election to President Ronald Reagan in a landslide, winning only one state and the District of Columbia, and President Bush’s 1992 reelection effort was unsuccessful in large part as a result of his support for raising taxes after he promised voters he wouldn’t during the 1988 campaign.


On the campaign trail, the parties cannot seem to agree.


Which makes it easy to forget that, over the last few generations, Republicans and Democrats have been able to unite on major tax policy changes pretty frequently. Bipartisan coalitions in Congress and the White House came together in 1964 to enact sweeping tax legislation. They did so again in 1981 and in 1986 in support of President Reagan’s tax agenda, and in 1997 to enact part of Republicans’ Contract with America pledges.


Is that type of bipartisanship possible again?


Doubtful. The 1964, 1981, 1986, and 1997 tax bills each lowered Americans’ tax burdens. Reducing levies is a much easier feat to achieve politically, especially in a narrowly divided Congress.


Today lawmakers are contemplating big-ticket tax increases.


President Biden’s Tax Plan

The Biden administration has now released both its corporate and individual tax plans. The increased revenue both proposals would generate would, under the White House’s direction, be used to fund trillions of dollars of investments in physical and “human” infrastructure. Let’s review what is in these tax proposals.


On the corporate side, the president has called for:

  • Raising the corporate tax rate from 21 percent to 28 percent;

  • Imposing a 10 percent tax penalty on corporations that create jobs overseas when those jobs could be filled by U.S. workers;

  • Establishing a 15 percent minimum tax on all corporations with profits of $100 million or more; and

  • Increasing the global intangible low-taxed income (GILTI) on income earned by foreign affiliates from 10.5 percent to 21 percent.


For individual taxpayers (and businesses paying through the individual tax rate system) who earn more than $400,000 a year, the White House would:

  • Raise the top tax rate from 37 percent to 39.6 percent;

  • Tax long-term capital gains and dividends at 39.6 percent (instead of 20 percent) for households earning more than $1 million annually;

  • Limit the benefits of itemized deductions;

  • Phase out qualified business income deductions; and

  • Eliminate a policy that allows families to pass capital gains tax-free to younger generations.


President Biden also has proposed to provide significantly more money for the Internal Revenue Service to go after individuals and corporations who might be cheating on their taxes.


The Biden administration also has proposed some tax reductions for individual taxpayers. For example, its plan would lower tax levies by expanding tax credits for families caring for children and elderly relatives, equalizing tax benefits of retirement plans, creating a new renter’s tax credit to reduce rent and utilities to 30 percent of total income, and providing credits for first-time homebuyers and people who purchase electric vehicles.


Corporations would be eligible for some breaks, too. The Biden plans includes a 10 percent tax credit for manufacturring companies that create jobs in the United States and who expand production or revitalize their plants.


According to The Balance, President Biden’s tax program would:

  • Increase federal revenues by $3.3 trillion over 10 years;

  • Reduce after-tax income by 7.7 percent for the top one percent of taxpayers by 2030;

  • Make the tax code more progressive by asking more affluent households to pay taxes at a higher rate than low-income taxpayers;

  • Cut economic growth by 1.62 percent over 10 years; and

  • Lower the number of full-time jobs by 542,000. (The National Association of Manufacturers thinks that estimate is too low. In a recent report, it put estimated job losses at one million over two years.)


This Iteration of Tax Reform Won’t Be Bipartisan

Very few, if any Republicans, are likely to support these proposals. In fact, as CNBC reports, Senate Minority Leader Mitch McConnell (R-Ky.) says the president’s tax policy is “a red line for congressional Republicans, effectively killing any chance of a deal on infrastructure spending.”


Specifically, Sen. McConnell says, “I don’t think there’ll be any Republican support, none, zero for the $4.1 trillion grab bag, which has infrastructure in it, but a whole lot of other stuff.”


Republicans like Rep. Kevin Brady, the ranking Republican member on the House tax-writing committee, have focused on the potential economic impact the tax increases would have. He says, “I’m not sure we should be compromising by making America dramatically less competitive than our global competitors.”


Business groups like the U.S. Chamber of Commerce and the Business Roundtable also are lobbying against the White House’s outline, focusing on moderate Democrats, whose support or opposition to the proposals will be pivotal in determining whether they become law.


Are they having any luck?


Democrats In Disarray

Yes.


It’s not just Republicans who are uncertain about President Biden’s tax plans. A growing number of Democrats are publicly questioning the proposals — more than enough to potentially sink the tax increases.


A recent Financial Times headline reads, “Democrats are among the doubters of Biden’s plan to tax the rich.”


Who are these lawmakers?


Sen. Robert Menendez (D-N.J.) is skeptical of the president’s capital gains tax plan, for example. He says, “For me, it is what you’re doing, the totality of the package, and how does it affect the ability of growth to continue to take place. … Right now it seems like a rather high rate to me.” According to The Wall Street Journal, Sen. Mark Warner (D-Va.) also is uncertain about the size of the capital gains tax hike.


Rep. Josh Gottheimer (D-N.J.) warned the White House back in March that, “We need to be careful not to do anything that’s too big or too much in the middle of a pandemic and an economic crisis.” Sen. Joe Manchin (D-W.Va.) and Rep. Scott Peters (D-Calif.) have said they want a corporate tax rate that is no higher than 25 percent. A few dozen Democrats also have said they won’t support the White House tax and infrastructure plan unless the bill that comes to the floor includes a repeal of the 2017 cap on taxpayers’ ability to deduct state and local tax payments from their federal bills.


In the Washington, D.C.-based newspaper The Hill this morning, several Democratic strategists criticized the White House’s tax and spending plans. One said, “I can see the ads now. ‘Joe Biden the $6 trillion dollar man.’ … Most Americans want the government to work but spending $6 trillion doesn’t make political sense.”


As Fox Business reminds readers, “House Speaker Nancy Pelosi can afford to lose just three Democratic votes if Republicans are unified in opposition, while Democrats need the support of all 50 members in the Senate to pass the measure …” This is why the firm AGF Investments says, “[O]ur initial impression is that there simply aren’t enough votes to pass President Biden’s mammoth proposal to raise taxes and spend trillions of dollars on U.S. infrastructure.” As things currently stand, this assessment appears correct.


But Where Do The American People Stand On President Biden’s Tax Plan?

Just like Congress, Americans are divided on whether they support President Biden’s outline for tax policy.


According to a Morning Consult survey, 54 percent of Americans say they would support tax increases on corporations and wealthy earners to pay for infrastructure investment. Thirteen percent did not know and 33 percent either don’t want infrastructure investments at all or are not willing to pay for them with tax hikes. Additionally, the latest Gallup poll to ask the question (a survey from 2019) found 69 percent of people don’t think corporations pay their fair share in taxes. Sixty-two percent say the same of the wealthy.


Americans are likely to want to keep their own taxes where they are, however. According to Gallup, 59 percent of Americans think the level of taxation they currently face is fair.


Will having a majority of Americans on its side save the White House tax plan?


We’ll know within the next few months. President Biden has encouraged Congress to send him an infrastructure and tax legislative package this summer.

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