Democrats face new pressure to raise taxes

Democrats are under pressure to increase taxes on the wealthy following a blockbuster report on the taxes of prominent U.S. billionaires. 

The report by ProPublica, published last week, focuses on how many of the wealthiest Americans pay little in taxes when compared to their wealth gains. 

The Biden administration and Democratic lawmakers have floated tax changes that would target wealth and investment gains, but some Democrats have raised concerns about these ideas. Progressives think that they could get additional momentum in light of the ProPublica article. 

The article “pulls the veil back and exposes how corrupt the system really is,” said Frank Clemente, executive director of the progressive group Americans for Tax Fairness. 

The ProPublica story, based on IRS data it obtained from an anonymous source, reported that some well-known wealthy Americans, such as Jeff Bezos and Elon Musk, have paid little to no federal income taxes in certain years. The news outlet also reported that the top 25 richest Americans paid an amount in federal income taxes from 2014 to 2018 that translates to 3.4 percent of their increase in net worth during that time period. 

The article doesn’t suggest that the billionaires engaged in illegal behavior, but instead benefited from how the current U.S. tax system is structured. The federal tax system focuses on taxing income, not wealth, and households do not have to pay taxes on investment gains until the investments are sold.  

The article comes amid a debate in Washington over how to pay for President Biden’s infrastructure proposals. Much of that debate so far has focused on the portions of Biden’s proposals that would roll back aspects of Republicans’ 2017 tax law, such as his proposals to raise the corporate tax rate from 21 percent to 28 percent and the top individual income tax rate from 37 percent to 39.6 percent. However, those proposals would not make much of a dent at increasing taxes on many of the wealthiest Americans, whose wealth is tied to increases in the value of their stocks and real estate. 

Democratic lawmakers since the ProPublica story’s publication have renewed their push for tax changes that would result in the wealthy paying more in taxes. 

Sen. Elizabeth Warren (D-Mass.) has reemphasized her proposal to create an annual wealth tax, while Senate Finance Committee Chairman Ron Wyden (D-Ore.) plans to release more details soon about his proposal to tax wealthy people’s investment gains annually.  

Rep. Thomas Suozzi (D-N.Y.), a member of the tax-writing House Ways and Means Committee, told The Hill that he’s exploring the idea of a one-time tax on multimillionaires’ wealth, which he called a “patriot tax.” That idea is still in its infancy. 

These ideas are unlikely to be enacted quickly. The Biden administration has not come out in favor of wealth taxes or taxing investment gains annually, and some Democrats have questioned whether a wealth tax is constitutional. 

However, Biden has offered a more modest proposal to target a tax preference that the wealthiest families use to avoid taxes on the appreciation of their assets. He called in his American Families Plan to tax capital gains at death. 

Capital gains now are not only not taxed at death, but heirs who sell assets they inherit only have to pay taxes on the gain in value that occurred after they received the asset, rather than the gain that has occurred since the decedent purchased the asset.  

Biden is proposing to end this tax preference, known as “stepped-up basis,” and to make death an event when capital gains are realized. The proposal would apply to gains in excess of $1 million per person. The president is also proposing to tax capital gains at the same rates as wage income for households with income above $1 million. 

Kimberly Clausing, a deputy assistant secretary at the Treasury Department, said that the administration proposed to tax capital gains at death as opposed to other ideas focused on taxing investment gains because other ideas need more time to be fleshed out. 

“One of our focuses was on what can we propose that’s really kind-of ready to go, and that doesn’t necessarily need years of careful design and implementation work,” she said at a virtual event last week hosted by the Urban-Brookings Tax Policy Center. 

Democrats have been floating ending stepped-up basis and taxing capital gains at death for a number of years, making it the option for increasing taxes on wealth gains that could get the most traction. 

A group of Democratic senators led by Sen. Chris Van Hollen (D-Md.) released a proposal in March on this topic, and Rep. Bill Pascrell (D-N.J.) has offered legislation on the issue in the House. 

But some Democratic lawmakers, particularly those who represent rural areas and focus on agriculture issues, have raised concerns about Biden’s proposal. They are worried that it could hurt the ability for family farms to be passed down to subsequent generations. 

Biden’s proposal seeks to address concerns related to family-owned farms and businesses by proposing that tax payments on the appreciation of these entities not be due until after they cease to be family-owned. The administration estimates that only very few estates with farms will be impacted by the proposal.

Progressives are hoping that the ProPublica report will help get rural-district Democrats on board with Biden’s proposal to tax capital gains at death. 

“I think this is much harder to resist now,” said Chuck Marr, senior director of federal tax policy at the Center on Budget and Policy Priorities, a left-leaning think tank. 

Rep. Cindy Axne (D-Iowa), who is among the Democrats who have raised concerns about Biden’s proposal, said she’s working to prevent family farms from being hurt by any policy changes. 

“Folks like Jeff Bezos and Elon Musk should be paying their fair share of taxes for the upkeep of this planet before they go off exploring different ones,” Axne said in a statement to The Hill. “While I’m still working to ensure tax code changes won’t inadvertently affect Iowa’s family farmers, seeing reports that the ultra-rich in this country are paying single-digit effective rates shows that we need to do more in Congress to level the playing field.” 

Any tax increases on the wealthy would likely need to be done as part of legislation that moves through Congress using the budget reconciliation process so that it doesn’t need any Republican votes to pass. 

While Republicans are generally critical of Democrats’ proposals to raise taxes on the rich, Democrats argue that the ProPublica report makes it more difficult for GOP lawmakers to oppose these ideas. 

“I think it puts pressure on the Republicans because they’ve been defending this tax system,” Pascrell told The Hill last week.