Taxing The Rich Is Popular, But It Makes Democratic Lawmakers Uncomfortable

Seventy-one percent of voters, including a slim majority of Republicans , favor higher taxes on people who earn more than $1 million a year from capital gains, according to a Navigator Research survey released this week . 

Taxing the rich, in general, has long appealed to most voters. But Democrats are struggling to coalesce around several such tax hikes that President Joe Biden has proposed to pay for his “Build Back Better” agenda.  

Without new revenue, Democrats can’t fulfill their promise of offsetting the $3.5 trillion bill’s spending on monthly parent benefits, child care and education a once-in-a-generation expansion of the federal safety net that many elected Democrats envision as their legacy. 

The House Ways and Means Committee on Thursday started the process of formally approving portions of the legislation, including provisions for paid family leave and expanded access to child care. 

But Democrats haven’t released the tax provisions, and several declined to say whether the tax titles would match Biden’s proposals when they’re released in the next few days. 

“We’re still working on it,”  Rep. John Larson (D-Conn.) said when asked about capital gains. 

Rep. Earl Blumenauer (D-Ore.) said it wouldn’t help the legislation to talk taxes outside of the committee room. 

“We’ve got too much of a sideshow,” he said. 

The original Biden proposal would tax capital gains, which are profits from selling assets such as stocks and real estate, at the same rate as labor income. And it would eliminate the “step up in basis” that allows heirs to avoid capital gains taxes entirely when they inherit assets whose value has risen. The Biden plan also called for higher taxes on corporations and a higher top tax rate for individuals. (The top marginal rate in 2021 is 37% for couples earning $628,300 or more. The top capital gains rate is 20%.) 

The special lower tax rates on capital gains income are a key reason some wealthy households pay lower tax rates than people who earn all their money from working payroll jobs. 

Eighty percent of Americans and 36% of Republicans say it bothers them that some wealthy households “don’t pay their fair share,” according to a Pew Research Center survey from April . It’s not a new survey finding majorities of Americans have told Gallup pollsters since 1992 that upper-income people and corporations pay too little in taxes.

Rep. Bill Pascrell (D-N.J.) put the odds of repealing the step up in basis for capital gains at just 50% or 60%. 

“It’s a very difficult issue,” Pascrell said, citing complaints that the tax would hurt farmers. 

Biden proposed letting farmers indefinitely defer the capital gains tax when a farm passes from one generation to the next, so long as the family continues farm operations, but the lobbyists trying to kill the tax hike dubiously insist it will still kill farms .

Concerns that taxes on inherited wealth will hurt farms are so ingrained in American politics that Rep. Jimmy Panetta (D-Calif.) said Thursday his priority is making sure family farms don’t have to pay the higher tax, even though that’s what Biden has already proposed.  

“We are ensuring that our small farmers and our family-owned farms are taken into account,” Panetta said. 

Senate Democrats are considering adding a $25 million farm exemption to the Senate’s version of the capital gains proposal on top of the indefinite deferral.   

Meanwhile, another part of the budget bill would actually cut taxes for high-income households. Democrats from New Jersey, New York, California and Oregon have demanded the bill repeal a $10,000 limit on deductions for state and local taxes imposed by Republicans in their 2017 Tax Cuts and Jobs Act. 

A full repeal of the so-called SALT limit would overwhelmingly benefit the top 1% of households, and its cost would drain dollars away from the social programs Democrats want to create or expand. But Democrats don’t want to hear it, insisting the cap on deductions unfairly hurt their constituents, even though it goes against the rest of their tax agenda. 

“It’s double taxation regardless of how you look at it,” Pascrell said.