Editorial: Last-minute skirmish is no way to achieve tax reform
Under the pressure of successive self-imposed deadlines, before the eyes of a confused country, Democrats in Congress continue to grapple with a supposedly transformative spending plan and the means to pay for it. President Joe Biden announced a different version of what that might mean on Thursday. The end result is yet to be guessed.
There is a reason for the prolonged confusion. Democrats left with two top priorities. First, their spending commitments must be huge. (Exactly how and where the money would be spent was less important.) Second, the vast majority of Americans should not face any tax increase. This fundamental contradiction explains much of the confusion that followed. Somehow the gap between ends and means had to be narrowed – but without admitting diminished ambition and without asking anyone but the very rich to pay more taxes.
In recent days, efforts to resolve the dilemma have intensified. After setting aside one idea to raise taxes for the rich, in part for practical reasons, Biden and his allies turned their attention to another – more radical, more complex, and much more difficult to administer than the first. Not surprisingly, this so-called billionaire tax has also met with stiff opposition, and not just from Republicans. This too now seems to have been put aside. Biden’s plan switched to Plan C, a 5% surtax on income over $ 10 million.
What is strange is that the first tax plan, backed by Biden during his presidential campaign, did indeed make sense: Reforming the taxation of property on death. Unrealized capital gains, which constitute a large part of the wealth of the richest Americans, would no longer escape tax thanks to a so-called “increased base” provision. Still, some centrists weren’t convinced, calling for the next iteration, long advocated by Sen. Ron Wyden: tax unrealized gains not just once in a lifetime but every year, with change capped at around 700 billionaires. This smaller target group would have made the plan easier for the IRS to administer, but would have created countless additional complications, caused protracted court challenges, and possibly violated the Constitution.
The last idea – a very high income surtax – faces its own problems. By leaving unrealized capital gains tax-free while raising the rate of ordinary income, it maintains the main channel of tax evasion for the well-to-do and increases their incentive to exploit it. So it would generate much less income than simple arithmetic suggests. In other words, Biden’s outline still hasn’t bridged the gap between ends and means. It is suspected that many Democrats have no problem with this. Tax gimmicks (like claiming that a supposedly permanent spending increase will expire within the 10-year budget window) has been a recurring theme in this chaotic effort.
Biden and his allies are right, of course, that the rich should pay their fair share. They are also right to say that the tax treatment of capital gains is an anomaly that the rich have been able to exploit. The abolition of the base increase on death is a relatively simple and constitutionally compliant way of dealing with the problem. Hopefully this approach can be rekindled again – and that what’s valuable about the spending plan (not to mention the infrastructure bill that progressive Democrats have chained to it) won’t be dismissed.
Meanwhile, the country can only be dismayed at the current dismay of the Democrats. It does not inspire confidence in their ability to deliver and pay for the transformation they have promised.