US tax updates
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America’s super-wealthy have had an expansive pandemic. The ratio of America’s billionaires’ worth to gross domestic product has risen by a third to almost 20 per cent since the onset of Covid-19. The problem for Democrats is that almost none of these windfalls are liable to be taxed unless they are sold. President Joe Biden avoided endorsing a wealth tax during last year’s election campaign. The logistical difficulties of auditing high net worth Americans’ wealth annually could have proved almost as difficult as the politics.
Biden thus settled on the more practical goal of raising the US capital gains tax for the top brackets and taxing unrealised gains when they are passed on to heirs. Alas, even these more modest steps have hit a roadblock in Congress. As the revenue portion of Biden’s $3.5tn bill stands, the net position of America’s super-wealthy would remain largely unchanged. This would be a missed opportunity, which is unlikely to come around again for years. Copious studies have shown that inequality at today’s levels acts as a drag on growth, which is the opposite of what Biden’s critics have been arguing. Gilded Age-levels of inequality are also damaging to US democracy.
The good news is that the bill is not yet a done deal. Richard Neal, the chair of the House ways and means committee, which writes tax law, has offered no reason for dropping Biden’s proposed reform to the US estate tax. Biden had proposed to scrap the “step up basis”, which shields heirs from paying capital gains on the assets they inherit. This gives wealthy Americans a strong incentive to hold assets until they die which, in itself, is an economic inefficiency.
Neal has also sharply scaled back Biden’s request to equalise the US capital gains tax with the proposed 39.6 per cent top income tax rate. Neal would raise the tax from 20 per cent to 25 per cent. Again, he has offered scant justification for a move that would shield America’s wealthiest from Biden’s modestly redistributionist mandate.
There are also strong hints that Democrats plan to scrap the $10,000 cap on the state and local tax deduction, which would give a big tax cut to the rich in high-tax liberal states, such as New York and California. It is still unclear whether the bill will eliminate the “carried interest loophole”, which enables private equity partnerships to treat profits as investment income. The loophole should be scrapped.
As a whole, the bill would still be a big net plus for America. It would invest heavily in early childhood learning, poverty reduction and renewable energy. But its problem areas are growing. One such flaw originates with Biden himself. He vowed not to raise taxes on anyone earning below $400,000 a year. That threshold was both too high and too broadly interpreted to cover any kind of tax, including a potential one on carbon. As a result, Biden will have a hard time reaching the US carbon emissions reduction targets that he has set. Overall, the bill would make the US tax system slightly more progressive by raising the top rates of income tax and lifting the corporate tax rate from 21 per cent to 26.5 per cent.
But it does not go far enough. In 2018, the last year for which full records are available, Elon Musk, the world’s richest person and the chief executive of Tesla and SpaceX, paid just $8,410 in income tax. This is both politically and economically indefensible. Democrats still have time to incorporate Biden’s modest proposals to put capital gains on a less unequal footing with income. Failure to do so would smack of double standards.