President Biden proposed to raise taxes on affluent Americans is reigniting one of the fiercest political divisions—how much should the government do, and who should bill?
The president faces a fierce challenge in implementing his infrastructure proposal, and even his own party can not rely on united support.
Biden would suggest a huge increase in social infrastructure spending on initiatives like paid leave, healthcare, and tuition-free community college.
According to several media outlets, he would nudge the highest income tax rate and significantly increase the capital gains tax charged by top earners.
The bill is expected to allow for an estimated doubling of the capital gains tax from its present 20 percent level for Americans with incomes over $1 million.
At the heart of the proposal is a central question: whether income from the selling of assets should be considered exactly the same as income as a paycheck.
Biden and his supporters answered an emphatic yes. Wealthier Americans generate more of their net investment profits, they note. They argue that the beneficial treatment of capital gains would further benefit those already in a privileged position—and thereby exacerbate income disparity and social inconsistency.
But there are counter-arguments, too. Many who support keeping the capital gains tax low insist that it is a key investment factor and that high rates allow people to hold onto their assets rather than pay a high tax bill, diluting economic dynamism.
There’s politics to remember then. Until recently, conservatives were petrified of being branded the “tax-and-spend” party—a fear rooted in the awareness of how successful such attacks were in the 1980s and early 90s.
Whether Biden can even get his policies passed may depend on his ability to corral moderates such as Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.). Success isn’t guaranteed.
Progressives say it’s time for Democrats to throw off their conventional timidity regarding taxes and pursue a more inclusive agenda. Conservatives are similarly emphatic about it being a big error.
“That’s how you’re stalling the economy,” said Grover Norquist, American Tax Reform President and perhaps Washington’s best-known anti-tax campaigner.
Biden, Norquist insisted, “should just have sat back because in the second quarter you’ll see this boom, there could be this tremendous rise. You may be coasting on that, but what you’re doing is chasing investment away from the U.S., telling people, ‘You don’t want capital gains in the U.S.’ “
Biden’s proposal, Norquist concluded, “is a boat-anchor to economic growth when you go into 2022, you’d like gangbusters.”
Biden aides stressed how few people will be impacted by the proposed capital gains tax. Jen Psaki, White House Press Secretary, stressed Friday’s $1 million income requirement for the highest tier, adding: “The president’s bottom line is that people under $400,000 a year shouldn’t, won’t, have their taxes raised.”
Ron Klain, Biden’s staff member, tweeted the proposal was one Biden had “campaigned extensively.” Klein added that it “changes the tax rate for less than 1% of Americans (actually less than 1/2% of Americans).”
Conservatives like Norquist say this is deceptive. For starters, they claim that a capital gains tax increase will have a negative impact on the stock market, affecting the vast majority of individual investors, 401 (k) accounts, and IRAs.
On Thursday afternoon, when news of Biden’s plans first appeared, the stock market responded badly, but recovered Friday.
“If a 1% drop in stock prices is what you get from a very big rise in capital gains taxes, that’s not a big deal,” said Paul Krugman, Nobel Prize-winning economist and columnist for the New York Times.
More broadly, progressives are predicting disaster from what they see as a basic step toward a fairer tax system.
Jonathan Tasini, a Democratic strategist who supported Sen. Bernie Sanders (I-Vt.) in the 2016 presidential election, argued that any claim about the risks of raising the capital gains tax rate “is covetous as an economic statement.”
“No wealthy person in the world can honestly tell you he… wouldn’t have invested money in a business because of capital gains rates. You’re making a profit! What we’re saying is to give back. “
Tasini also argued that tax debates in general frequently continue along false lines—as if tax revenue actually disappears into the ether rather than being used for public gain.
“Nobody who makes money, whether you become rich or less, does so on their own or because of their own genius. Both taxes are about giving back to pay for all that society offers you can make money and invest—and that includes getting the roads and bridges that carry you to the office where you live. “
Mark Zandi, Moody’s Analytics’ chief economist, argued that Biden’s proposals’ overall effect was likely to be fairly modest, particularly when the benefits of infrastructure investment are factored into the equation.
Taxpayers in the million-dollar-plus bracket are “a rare group,” Zandi said.
If the Biden plan were to pass, he said, then maybe in a decade, “an econometrician could tease out some negative results, all the rest being equivalent. But I think it’s going to be on the margins. This is money that would probably pay for the American Family Plan, which is childcare and family leave, and some will go to less fortunate families that will use it and spend it. It could help them go to work and increase labor participation. “
Overall, Zandi projected, economic activity will be “a tailwind, not a headwind.”
Biden faces a pitched political battler to get his initiative passed. And critics like Norquist insist on the American public’s side.
“Every time a Democrat wins the presidency, people come out and say the same things: ‘Tax the wealthy, nobody cares! It’ll be really famous, “he said. “Envy is not political.”
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