Does A Democratic Senate Clear the Pathway For Biden’s Tax Agenda?
With the two Democratic Senate victories in Georgia, Democrats now have majorities in both houses of Congress. On the surface, this is likely to give President Elect Joe Biden some breathing room in this upcoming Congress to push through his ambitious policy agenda including $3 trillion of tax increases on high net wealth individuals and corporations.
Digging a little deeper, though, the result is not so certain. There are several issues that will muddy the waters for Biden’s agenda: (i) the Democrat’s majority in the House and Senate is of the narrowest of margins, with eleven more seats in the house and an even split in the Senate giving VP-Elect Kamala Harris the tie-breaking vote; (ii) the democratic party is divided between progressive and moderate factions who are at odds over key policy issues; (iii) in order to bypass the usual 60-vote threshold required to pass legislation in the Senate, the Democrats will have to use a process known as reconciliation that instead requires only a 51-vote majority, however this process, which is only allowed once per budget resolution, imposes strict procedural restrictions that require bills to be narrower in scope than typical, forcing drafters to forgo many of their desired policy provisions; and (iv) in Mitch McConnel the GOP has a minority leader who deftly disrupted the Democrat’s agenda in the same minority role during the Obama Presidency.
As a result of these constraints, it is unlikely Biden will push through his full tax agenda in this next Congress. For one, it’s not clear that tax policy is top on the list of priorities for Biden, Senate Majority Leader to-be Chuck Schumer, and House Leader Nancy Pelosi. Their top priority is instead likely to be increased relief in response to the economic falloff caused by the Covid-19 pandemic, including increasing to $2,000 per adult the economic impact payments to American families. After that, they will have to prioritize among the items in Biden’s campaign platform that in addition to tax increases on high net wealth individuals and families, includes enacting ambitious legislation concerning infrastructure, healthcare, education, racial, LGBTQ+ and gender economic equality, immigration, gun violence, climate change and energy policy.
Priorities aside, another question is whether there will be significant pressure on Biden and Congress to raise taxes. With record low interest rates the government has more leeway to borrow to fund their fiscal agenda. For that reason, it will be important to watch what the bond market does when we get “back to normal.” If interest rates rise over the next one to two years as some have speculated, the ambitious agenda will need to be paid for with increased tax revenues. That in turn could put more pressure to enact some of the tax increases proposed by Biden.
There will accordingly be some room to push through some tax policy legislation, but it’s unclear how much of that will actually impact high net wealth individuals and families. In fact, it will likely be easier to rally his own party around tax cuts for low and middle-income families. Though some moderate tax increases may be in store for corporations and wealthy families, we could also potentially see a repeal of the SALT cap that Burned Blue States and wealthier taxpayers.
Among the more progressive wing of the Democratic party there have been calls for a wealth tax and increased taxes at death for the wealthiest American families and high net wealth individuals. This is one area where we could see some changes during this Congress to appease the progressive party members and unify the party. Though there has been little said by Biden on this, the Biden Sanders Unity Tax Force recommended raising estate taxes to the historical norm. It’s unclear what this means since the estate tax exemption has ranged from as low as $600,000 to as high as $11.7 million over the last 24 years.
Within the Democratic Party there is also talk of passing a Financial Transactions Tax on the sale of stocks and bonds. This is marketed as a tax on Wall Street who have unequally benefited from the Federal Reserve’s policies such as Quantitative Easing that were enacted in response to the Great Financial Recession and kicked into high gear in response to the Covid-19 pandemic. The CBO scored one proposal as likely to raise close to $800 billion over ten years.
Biden’s campaign platform broadly provided for six tax policy changes, which for the reasons described above are certainly not slam dunks to be pushed through this upcoming Congress:
Raising the top individual income tax rate to 39.6 percent and changing the capital gains tax and dividend tax rate for those high net wealth individuals and families earning more than $1 million to the top individual rate.
Increasing the corporate rate from 21 percent to 28 percent.
Establishing a Made in America credit, which Biden’s campaign described as a ten percent “advanceable” tax credit that would apply to specific expenditures on wages, investments, and other costs related to the expansion of U.S. manufacturing and services under certain conditions.
Enacting a ten percent surtax on income from foreign production by U.S. corporations of goods sold into the United States. This is in essence a tariff-like tax on import income.
Modifying the rules for taxing certain foreign source income that would result in increased US taxes on the foreign earnings of US companies.
Applying a minimum 15 percent tax rate on income reported on financial statements of corporations with at least $100 million of book income.
While there is bi-partisan momentum among Congressional leaders to push through some of these policy changes, including those concerning the taxation of foreign profits, the proposed tax increases for high net wealth individuals and families and corporations are likely to face an uphill battle. Moreover, Biden and Democratic Congressional leaders no doubt have their eye on the 2022 Congressional elections and will weigh any changes to tax policy against how they handicap its impact on gaining or losing seats then.
To the extent Biden is able to rally the party around any tax legislation, it’s our view we’ll see the passing of tax credits for low- and middle-income families, possibly some tax credits to subsidize other policy priorities such as climate change, Covid-19 relief, and reshoring certain business operations, and the following tax increases:
for high net wealth individuals and families, we can expect legislation that increases the individual income tax rates and capital gains and dividend tax rates for those earning in excess of $400,000 per year; and
for corporations we expect legislation that increases the corporate tax rate (possibly a phased approach) and modification of the rules concerning the taxation of certain foreign source income that would result in increased US taxes on those foreign earnings.
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