Not since 1993 has the US enacted a sweeping round of federal tax rises. In that time, it has widened public healthcare, built a new kind of security state and stimulated a stricken economy through two global crises. It now plans a boom in “infrastructure” so broadly defined as to include human capital as well as the inanimate kind.
America’s openness to big government is not in doubt, then. The nation’s willingness to pay for it very much is. It does Joe Biden credit that he aims to close the gap between demands on the state and contributions to it. The eternal recourse of borrowing is neither prudent nor all that progressive.
The trouble is that candour about the need for tax rises is just the first phase of the job. Raising the right ones by the right amount will be the test of the president. Biden’s proposed reversal of Donald Trump’s unpopular tax cuts, for individuals and corporations, has at least the virtue of gradualism.
It is his vision for capital gains tax, as it stands, that is harder to justify. The present rate of 23.8 per cent, including a surtax on investment income, would go up to 43.4 per cent. Even if this is not what one hedge fund manager calls “insanity”, it is a startling increase to enact in one go. Not even in the pre-Reagan 1970s, a high point for marginal rates, did CGT touch 40 per cent. Many of those in Biden’s crosshairs will be already paying his new corporate tax rate.
The White House says that only a sliver of the public will be affected, but the larger risk is that it discourages investment. Nor can Biden be sure how much money it would raise (across nations, CGT is a minor source of revenue) or, given the incentive to defer capital gains until the tax falls again, when. Given all the education and child care the tax is intended to fund, this problem is more than academic.
There is logic behind the steepness of the increase. Democrats want to equalise the treatment of wages and, say, portfolio gains. It is of a piece with the party’s tilt towards labour over capital, demonstrated elsewhere by pro-union policies. But the discrimination exists for a reason. It compensates for the fact that capital losses are only deductible up to a certain point. It is telling that the difference between income tax rates and CGT rates is hardly unique to the US. Taxing capital is legitimate, but the current proposal has more of symbolism than efficiency about it. Transaction taxes can make markets less liquid.
Biden has better revenue-raising options. The regressive cap on income subject to social security tax could be removed. A national value added tax, whose absence makes America unusual in the rich world, would raise lots of money in a simple way. The erosion of the estate tax has been opposed by such socialists as Warren Buffett and Bill Gates. The president could reverse it.
Biden has governed more dynamically than his prior half-century in public life ever predicted. At the same time, it is possible to overstate his boldness. His reputation as the new Franklin Roosevelt rests mainly on deficit-funded fiscal relief that asked next to nothing of taxpayers. Putting America’s expanding welfare state on a proper fiscal basis will be much more fraught political work. He faces tight margins in both houses of Congress.
In the end, then, a near-doubling of CGT is likely to be just a first offer. Those pressing for moderation include liberal Democrats from such high-tax places as New York and California. The party has long had grand ambitions for the state. It has less agreement as to the funding. On both those counts, it could not be more like the nation it serves.