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Spend and upend

29 April 2021 By John Foley, Gina Chon

Joe Biden’s $4 trillion plan to boost the American economy is an experiment in taxing the rich. The two spending programs the U.S. president has announced this year – one focused on infrastructure, and the other on education and childcare – will, he says, be paid for by the wealthy and companies. Whether he’s right depends on how plutocrats behave.

Biden on Wednesday fleshed out the details of a $1.8 trillion plan to upgrade the workforce and help families. It complements his $2.3 billion infrastructure wish list of improving roads, bridges, and water systems, and similarly aims to deliver long-term growth benefits. For example, a $200 billion plan to provide pre-school regardless of household income should increase the share of women who work, increasing the country’s productive capacity. While women make up 47% of the labor force, they accounted for 55% of jobs lost in 2020, according to the National Women’s Law Center.

The wealthy are supposed to foot the bill. The American Families Plan is backed by a $1.5 trillion package of tax hikes and closed loopholes to make the super-rich pay more. Chief among them is a plan to raise the capital gains tax rate to 39.6% for top earners. Add an existing 3.8% healthcare-related surcharge and the levy would be the highest it has been in over a century. Meanwhile, the infrastructure splurge is to be funded by increasing corporate tax rates, and higher levies on overseas profit and activities.

There are many reasons to ensure the plans are mostly self-funding, which Biden says will be the case over a 15-year timeframe. The political one is that he can then take the fast-track “budget reconciliation” path to making them law, which requires just a simple majority of the Senate.

But taxing the rich comes with an obvious problem: they have the resources to find ways not to pay. Biden anticipates that to a certain degree. His plan includes some assumptions about avoidance – for example, owners of homes or assets may decide not to sell if the capital gains tax rate rises. And $700 billion of the tax haul is to come from giving $80 billion of funding for tax authorities, who will then be better equipped to conduct effective audits. That’s smart, because it sends a warning message to would-be evaders. It’s also necessary, because the underfunded Internal Revenue Service is too easily outgunned: 38% of audits of big corporations don’t change their tax bills, according to the Tax Policy Center.

But Biden’s estimates are just that: estimates. In its simplest form, a plan to raise an extra $1 trillion in taxes from the wealthy would give them a $1 trillion incentive to find new loopholes. And beefing up the IRS may not be as fruitful as the president hopes. The Congressional Budget Office estimated last year that investing $40 billion into the agency would deliver a tax revenue increase of just $103 billion over 10 years. Hiring and training new auditors takes time, as well as money. Capital gains tax, too, is an uncertain art. This levy was increased by nearly 10 percentage points in 1969 but the total capital gains taxes paid actually fell from 1968 levels and didn’t recover until 1976, when the rate was increased again, according to the Tax Foundation.

The amount of revenue Biden raises will depend not just on what the rich do once taxes are raised but also on what they do beforehand. Previous attempts to raise the capital gains tax rate have spurred a rush to “realize” those gains, notably in the mid-1980s. And lobbying matters, because Biden needs half of the Senate to approve his scheme. For example, if capital gains taxes come due when a person dies, a hike in the rate could raise $400 billion, based on several think-tank estimates. In a watered-down version where tax is only paid when the asset is sold, it might raise just $133 billion, according to the Wharton School of the University of Pennsylvania. The difference is greater than the cost of Biden’s universal pre-school proposal.

Biden’s team will lay out its assumptions in detail. If Congressional bean counters agree that the plans are budget-neutral over the usual 10-year budget window, his $4 trillion spending packages have a fighting chance. Even then, the actual proceeds of hosing the rich are anyone’s guess. Former President Donald Trump pushed tax cuts through by convincing Congress they would pay for themselves. Instead, Biden told Congress on Wednesday, they added $2 trillion to the national deficit. By the same token, any part of his own noble plan that isn’t matched by taxes will also add to the deficit. If the rich win the cat and mouse tax game, it won’t be billionaires that foot the bill for Biden’s economic upgrade. It will be everyone.

 

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