US debt-ceiling deal dooms Biden’s revolutionary tax plans
U.S. President Joe Biden’s 2020 campaign promise to make wealthy Americans and corporations pay more in taxes to finance a range of social priorities breathed its last gasp, at least for this presidential term, with the debt ceiling deal he struck with Republicans on Saturday.
The deal to cap discretionary spending and suspend the debt ceiling contains no tax rate changes to raise revenue; it also slashes new funding Biden had allocated to the hollowed-out Internal Revenue Service. The agreement caps Republicans’ successful defense of the debt-boosting 2017 Trump tax cuts against withering criticism from Biden and several attempts by his Democrats to reverse them for wealthy Americans.
Barring an unlikely Democratic sweep of the White House and both chambers of Congress in 2024, major changes to the U.S. tax code are now seen as largely off the table until the end of 2025, when the 2017 individual tax cuts expire. Then, tax experts predict lawmakers will be forced to agree on a major tax revamp.
“Things are getting set up for a big fiscal cliff in 2025. That’s the next opportunity for major changes,” said William McBride, vice president of federal tax policy for the Tax Foundation, a conservative think tank in Washington.
Polls show the idea of fighting glaring income inequality with tax increases on the wealthy and corporations is hugely popular with Democratic and Republican voters.
TAX CHANGES ARE TOUGH
Biden’s unrealized campaign tax pledges illustrate the political difficulty of changing the U.S. tax code, barring a commanding majority in Congress.
His $4 trillion, two-part “Build Back Better” plan included infrastructure, clean energy incentives, workforce development, child care, paid family leave, free community college, expanded child tax credits and other initiatives.
He proposed over $3.5 trillion in new taxes, including raising the corporate rate to 28% from 21% and returning the top individual rate to 39.6% from 37% and taxing capital gains at those rates for Americans earning over $1 million. He promised no increases for those earning under $400,000 a year.
But opposition from Republicans and Democratic senators Joe Manchin and Kyrsten Sinema, now an Independent, forced Biden to scale back his revenue plans. He did manage to win new cryptocurrency tax reporting rules in the infrastructure bill and a new 15% corporate alternative minimum tax in the climate-focused Inflation Reduction Act, to achieve $238 billion in deficit cuts over 10 years.
Biden presented his tax hikes and social agenda one last time, largely for campaign purposes, in his fiscal 2024 budget request in March, proposing to raise $5.5 trillion in new revenue and cutting deficits by $3 trillion over a decade.
But in the debt-ceiling negotiations, the president did not insist on tax revenue-raisers, and sacrificed part of his revenue crown jewel – $80 billion in new funding over a decade to modernize the IRS to beef up enforcement against tax cheats. The IRS will cede $20 billion over two years to other spending priorities.
“House Republicans have successfully blocked every penny of President Biden’s tax hikes on families, farmers, and small businesses in the debt ceiling deal and protected the 2017 Tax Cuts and Jobs Act from repeal,” said U.S. House Ways and Means Chairman Jason Smith.
The Missouri Republican added that Americans want Congress to build on the Trump tax cuts “with more tax relief.”
2024 CAMPAIGN ISSUE
The 2024 presidential election is already becoming a new battle ground over taxes as both parties posture over the expiration of 2017 individual tax cuts and the overall level of taxation in the economy.
U.S. taxes are low compared with other wealthy countries, ranking 32nd out of 38 Organisation for Economic Co-operation and Development countries as a percentage of GDP, with a 2021 ratio of 26.8% – well below the group’s 34.1% average.
White House spokesperson Michael Kikukawa said Biden would continue pushing Congress to make the “super-wealthy and biggest corporations” pay their fair share in taxes.
“This agenda is overwhelmingly popular with bipartisan majorities of the American people, and would reduce the deficit by trillions of dollars without raising taxes a penny on those making less than $400,000,” Kikukawa said.
Republicans will argue for making the 2017 individual tax cuts permanent, said John Gimigliano, KPMG’s head of federal tax legislative and regulatory services.
The Congressional Budget Office estimates this would add $2.8 trillion to its baseline deficit forecast just through 2033 compared with letting them expire under current law.
Democrats will advocate “a return to Build Back Better and see a push on the corporate rate, on the capital gains rate and individual rates and all the things they had hoped to do,” Gimigliano said.
Steve Rosenthal, a senior fellow at the left-leaning Urban-Brookings Tax Policy Center in Washington, said it may be difficult for Biden to reprise his “very powerful” 2020 tax agenda.
“Very little of it was accomplished in the Inflation Reduction Act, and nothing was advanced as part of these debt ceiling negotiations,” Rosenthal said. “So how credible will Biden be running on a platform of closing loopholes and raising taxes on the rich and corporations?”