Joe Biden entered the White House with a pledge to hit the wealthiest Americans with higher taxes in order to fund trillions of dollars of social spending while tilting the benefits of US fiscal policy away from Wall Street.
But as negotiations in Congress on Biden’s tax proposals enter the final stretch, influential Democrats from the president’s own party are trying to water them down, heralding a potential reprieve for America’s financial sector and some of the richest households.
The manoeuvring on Capitol Hill over Biden’s tax rises comes as Democratic lawmakers are diving into the trickiest phase of their effort to pass the president’s signature economic package — a $3.5tn expansion of investment in education, childcare healthcare and green energy.
It is the stage when senior lawmakers and their staff have to translate lofty aspirations into concrete text, under heavy pressure from lobbyists and with high political stakes for both the White House and members of the Democratic party.
This week, Richard Neal, a Massachusetts Democrat and the leading tax writer in the House of Representatives, released his plan for $2.9tn in tax increases to fund Biden’s $3.5tn package, finally shedding light on his intentions and the specific details of a potential intraparty compromise.
Neal’s proposal includes an increase in the top individual income tax rate from 37 per cent to 39.6 per cent, yet shies away from more aggressively targeting taxes on capital gains, the source of a huge share of wealth for millionaires and billionaires.
Biden wants to increase the capital gains tax from 20 per cent to 39.6 per cent, ending the preferential treatment of windfalls compared with earned income. But Neal’s plan would raise it to only 25 per cent.
Nor does Neal call for the taxation of unrealised capital gains over $1m at death, which the White House supports. And while his plan toughens the preferential tax treatment of “carried interest” — a big source of income for private equity executives — it does not eliminate it entirely.
“Frankly this is a humiliating climbdown from the administration’s posture,” said James Lucier, an analyst at Capital Alpha Partners in Washington. “This avoids most of the stuff that Wall Street is worried about.”
White House officials have praised Neal’s plan as a step forward in the complex political process of passing Biden’s spending plan without any Republican support and only the slimmest of Democratic majorities in both chambers of Congress.
They say that while Biden had proposed a different structure, Democratic tax legislators in the House were still fulfilling the basic goal of increasing the amount of tax paid by corporations and Americans earning more than $400,000 per year.
Furthermore, many rounds of negotiations still lie ahead, both with the White House and Democrats in the Senate, where Ron Wyden of Oregon, the top tax writer in the upper chamber, is more progressive than Neal.
Nevertheless, the changes to Biden’s tax plan proposed in the House highlight the extent of the backlash among Democratic donors, lobbyists and constituents who have balked at the president’s efforts to tax wealth — especially capital gains.
Many Democratic lawmakers in urban and suburban districts in New York, New Jersey and California have been wary of the punchiest tax increases on the wealthy. They were already pushing the White House to repeal a cap imposed by Donald Trump on a break for state and local taxes that mainly benefits the rich.
But vulnerable Democrats in important swing districts across the country also have misgivings about Biden’s tax plans for fear they will hit family businesses — including farms — and make it easier for Republicans to label the party as radical.
“Neal and most mainstream Democrats are willing to do some real tax increases, but going after unrealised wealth is not their primary goal. It’s not a fight that they think is worth having when they have to defend seats [in the 2022 midterm elections],” said Ben Koltun, head of policy research at Beacon Policy Advisors in Washington.
“They don’t want to take more medicine than is needed to get the goodies,” he added.
Neal did propose a 3 per cent surtax on incomes above $5m, an alternative way to hit the super-rich and a nod to the progressive wing of the party, but that is still seen as insufficient on the left.
“The Neal plan really fails to properly tax wealth and the transmission of wealth,” said Niko Lusiani, director of corporate power at the Roosevelt Institute.
Lusiani said failing to tax capital gains at death was “tantamount to building back unequal, building back bifurcated”, adding: “It keeps the same dynastic wealth that is so divisive in our economy.”
Many liberal lawmakers have called for a full-blown wealth tax, although Biden has never wanted to go that far.
On the corporate side, Neal failed to embrace a plan announced by Wyden on Friday, which would impose a surtax on share buybacks by the largest companies. House Democrats have also proposed raising the corporate income tax rate to 26.5 per cent from 21 per cent, short of the 28 per cent level hoped for by the White House.
But despite its difference from Biden’s plan on several fronts, Democrats are not expecting Neal’s plan to gain much traction with Republicans or business groups.
Many slammed it after it was published this week, with Neil Bradley of the US Chamber of Commerce calling it an “an existential threat to America’s fragile economic recovery and future prosperity”.
Some observers in Washington predict that the tax provisions could be trimmed further as the talks proceed.
“The fact that Democrats have tried to move the tax plan into a more moderate direction is a tacit acknowledgment that the politics are much more tricky than they would let on,” said Ken Spain, a Republican strategist.
“Increasing taxes always sounds great to some on paper, but it’s a much more complicated exercise when it comes to actually doing so. Once people begin to realise how it’s going to affect them it becomes much more of a live-fire exercise.”
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