Democrats in Congress agree the wealthy should pay their “fair share.” They just can’t agree on what that means.

As they urgently try to finalize their Build Back Better bill, which they say would create a more equitable society, they are looking to revise the U.S. tax code to help fund those sweeping social reforms.

Why We Wrote This

President Joe Biden has vowed to create a more equitable America. Democrats say taxing the ultra-rich more would mark a big step toward that – but there’s disagreement about how to achieve that goal.

House Democrats originally planned to roll back many of the Trump tax cuts. But they ran into opposition in the Senate. So the party is grasping for alternatives.

Under one proposal, unveiled Wednesday, America’s richest citizens would no longer be able to defer taxes on their stock portfolios, but would have to pay taxes on unrealized gains.

Critics are already calling that measure unworkable and possibly unconstitutional, saying it fails to value the contribution of entrepreneurs who drive innovation and create jobs. 

West Virginia Democrat Joe Manchin floated an alternative: a 15% “patriotic” tax, ensuring that the wealthy wouldn’t get off the hook even with the best accountants and lawyers.

“Everybody in this country that has been blessed and prospered should pay a patriotic tax,” he said. “I believe we will end up where everyone must participate.”

Washington

Coming off a pandemic year in which many working-class people lost their jobs, America’s 400 richest families saw their collective wealth increase by 40%. Yet under the current U.S. tax code, these ultra-rich are likely to pay a lower tax rate than those making less than $10,000 a year – and some might pay no tax at all.

Now President Joe Biden wants to change that. 

“I hope you can be a millionaire or a billionaire,” the president said at a CNN town hall in Baltimore last week. “But at least pay your fair share. Chip in a little bit.”

Why We Wrote This

President Joe Biden has vowed to create a more equitable America. Democrats say taxing the ultra-rich more would mark a big step toward that – but there’s disagreement about how to achieve that goal.

Democrats are looking to revise the U.S. tax code to help fund the sweeping social reforms in the Build Back Better bill, which they say would create a more fair and equitable society. To pay for the bill – which includes everything from universal pre-K to expanded health care and climate measures – House Democrats planned to roll back many of the Trump tax cuts. But they ran into opposition in the Senate. So instead, the party has begun to look for ways to generate revenue from the very richest Americans.

On Wednesday Senate Finance Committee Chairman Ron Wyden unveiled a billionaires’ tax, aiming to capture gains in the stock portfolios of about 700 wealthy Americans that currently go untaxed for years or even a whole lifetime. But the plan appeared to hit a roadblock when Sen. Joe Manchin of West Virginia called it “convoluted.” He expressed support for the wealthy paying their fair share, but added that he didn’t like that it singled out people who have created many jobs and contributed a lot of money to philanthropic causes.

“Everybody in this country that has been blessed and prospered should pay a patriotic tax,” said Senator Manchin, proposing instead a 15% tax for wealthy individuals, to ensure that they wouldn’t be able to avoid taxes completely, even with the best accountants and lawyers. “I believe we will end up where everyone must participate.”

The disagreement put the Democrats in disarray on the eve of President Biden’s trip to Glasgow, Scotland, for a United Nations climate summit, by which time they’d hoped to have the budget plan finalized so he could tout America’s new climate initiatives. Instead, they wound up arguing among themselves about how best to ensure the wealthy pay their “fair share.”

David Gamage, a scholar of tax law and policy at Indiana University, argues that the ultra-rich should not only pay more in raw terms than average Americans, but should pay a proportionately higher rate. That’s in part because they and their companies are benefiting more from societal institutions like the legal system, market system, and police who uphold the rule of law. 

“Those who benefit the most from these institutions, as measured by wealth, should pay more,” he says.

Republicans and business interests counter that Democrats aren’t properly valuing the innovation, jobs, and products and services that many wealthy individuals contribute to society and the economy. Entrepreneurs, they argue, are more efficient than government at allocating money to good ideas. 

“We all benefit from police and fire and roads, we all have those,” says Utah Sen. Mitt Romney, former CEO of Bain Capital. “But you know what, Steve Jobs and Elon Musk and Bill Gates have created a lot of value for all of us and created a lot of jobs. Putting in place a tax scheme which will make it harder to begin a business would not be good for any of us.”

President Joe Biden participates in a CNN town hall at the Baltimore Center Stage Pearlstone Theater, on Oct. 21, 2021. During the Baltimore event he called on wealthy Americans to “chip in” and pay their fair share of taxes. At stake for Democrats is how to pay for a spending bill on education, health care, and climate change.

What the rich pay

Nearly 6 in 10 Americans believe corporations and wealthy people don’t pay their fair share of taxes, according to an April 2021 poll by the Pew Research Center. 

So how much do they really pay? A new White House report estimates that America’s richest 400 families paid an average 8.2% federal income tax rate over the past decade. That’s lower than the lowest of the country’s seven tax brackets.

That math involves certain assumptions that not all would agree with. But in a concrete example, investigative journalism nonprofit ProPublica analyzed a trove of leaked IRS data and found that in 2018 the 25 richest Americans were worth $1.1 trillion – the equivalent of 14.3 million American wage earners combined. Yet according to their analysis, the top 25 paid a combined $1.9 billion in personal federal taxes, compared with $143 billion for the wage earners. 

In certain years, Jeff Bezos, Elon Musk, Michael Bloomberg, Carl Icahn, and George Soros didn’t pay a penny in federal income taxes, according to an analysis of leaked IRS data obtained by ProPublica.

Much of that is due to billionaires hiring accountants and lawyers to help them utilize loopholes in the tax code, which is legal. And in recent years, the IRS’s ability to conduct audits has decreased, particularly when it comes to complex tax returns, according to Natasha Sarin, deputy assistant secretary for economic policy at the Treasury Department. Since 2010, the number of IRS agents has fallen about 20% to just over 75,000, of which fewer than 3,000 focus on investigations.

So in a separate initiative, Democrats are proposing to essentially double the IRS’s manpower. They also plan to require banks to notify the IRS when $10,000 or more of non-wage income goes into or comes out of an individual’s accounts in a given year, a tool which supporters say will help the agency better enforce wealthy individuals’ compliance. 

“As a matter of fairness and as a matter of revenue, you really focus on compliance in a meaningful space by which you can make significant progress,” said Ms. Sarin on a webinar moderated by the Committee for a Responsible Budget on Oct. 26.

“Dynastic wealth”

Senator Wyden has been working on his proposal since 2019. It aims to change a two-tiered system in which everyday Americans like nurses and firefighters pay annual taxes but wealthier individuals can defer taxation on the appreciation of their stock portfolio and other assets in a cycle that he describes as “fuel[ing] the concentration of dynastic wealth.”

Under his proposal, America’s billionaires – about 700 citizens – would have to pay taxes each year based on the market value of their portfolios at year’s end. Gains would be taxed, but if they took a loss in a given year, they could count that against gains earned in one of the prior three years.

“It’s a gigantic improvement over the tax system we have now that mostly fails to collect taxes from billionaires,” says Indiana University’s Professor Gamage, who consulted with Senator Wyden on the tax.

Critics are already calling the initiative unworkable and possibly unconstitutional. There’s also the more immediate concern that if billionaires were to lead a sudden sell-off in the stock market before the new tax took effect, that could hurt the retirement accounts of many Americans, at least temporarily.

Sen. Ron Wyden, of Oregon, speaks to reporters following a Democratic strategy meeting at the Capitol in Washington, on Oct. 26, 2021. He introduced a bill that would tax the wealthiest Americans, who currently often see large gains in investment value go untaxed.

Professor Gamage, who also worked on the tax provisions of the Affordable Care Act, says that as long as the Supreme Court upholds existing precedents and the 16th Amendment, which provided for a federal income tax, Senator Wyden’s proposed tax – including on unrealized gains – should pass muster. But others are not so sure the court would or should uphold those existing precedents, some of which are controversial.

And Senator Manchin was not the only Democratic senator who signaled caution about the billionaires tax. Mark Warner, another Democrat on the Senate Finance Committee, said it could “distort markets,” while Sen. Tim Kaine said it was “riskier” than other funding proposals. Other Democrats said they would need to see more details.

Jettisoned House plans

Meanwhile, some House Democrats are irked that their own carefully developed plans for raising revenues were being jettisoned at the 11th hour for complex alternatives that they have had little time to study or fine tune.

“I’m frankly and honestly disappointed,” House Democratic Leader Steny Hoyer told reporters Oct. 26, though he added he would support the billionaires’ tax if that’s what it took to advance the president’s Build Back Better act. “This is a bill worth paying for in a way that we can get the votes to do so. Unfortunately, it does not appear we could pass the [House] version through the Senate.”

If Democrats can’t come up with enough ways to raise revenues, through taxes or otherwise, that could jeopardize the president’s promise that his Build Back Better agenda wouldn’t add to the national deficit or cost people making under $400,000 a penny more in taxes. 

Already, Republicans are arguing that the Democrats’ big spending is driving up inflation, causing the price of everything from gas to groceries to go up – not to mention heating bills this winter. 

“There should be fair taxes for everybody, but ultimately there should be limited government here in Washington,” said GOP whip Steve Scalise of Louisiana Tuesday.

The purpose of the Democrats’ tax proposals was not so much about making the tax code more fair, he argued, but rather paying for trillions of dollars in new initiatives. The tax proposals, he said, “have nothing to do with equity.”

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