The Washington PostDemocracy Dies in Darkness

Opinion The Democrats’ latest tax plan is slightly better. But it would still greatly hurt the economy.

House Ways and Means Committee Chairman Richard E. Neal (D-Mass.) begins a markup session for tax hikes on big corporations and the wealthy to fund President Biden's $3.5 trillion domestic rebuilding plan on Sept. 14. (J. Scott Applewhite/AP)

The tax plan that Democrats on the House Ways and Means Committee released on Monday did one good thing by removing President Biden’s proposal to tax unrealized capital gains upon death, saving many owners of farms and small businesses. But the plan would still hurt the U.S. economy by making large corporations and the rich pay among the highest marginal tax rates in the world.

Democrats have long argued that the rich and big business don’t pay their fair share of taxes. The House Democratic plan implements this insight by increasing the top marginal individual income tax rate from 37 percent to 39.6 percent and levying an additional 3 percent surcharge for individuals earning more than $5 million annually. It also increases the capital gains tax rate from 20 percent to 25 percent and subjects it to the surcharge. Finally, tax rates paid by large corporations would rise to 26.5 percent, up from the 21 percent rate established by the 2017 Trump tax cut. The Joint Committee on Taxation estimates these and other changes would make business and the well-to-do pay about $2 trillion more in taxes over a 10-year period.

Many people would surely find this acceptable. Billionaires can afford to hand over a few million dollars more a year to the government, the reasoning goes, while behemoths such as Apple and Amazon could also spend less on stock buybacks and dividends to pay for the increased tax hike. At a superficial level, taking more from people and entities that can afford it and giving it to people who need it sounds like an obvious win-win.

But this ignores the role state and local taxes play in our system, as data from the Organization of Economic Cooperation and Development, a group comprising the world’s richest nations, shows. Combined state and federal corporate tax rates already put the average U.S. tax burden on businesses in the middle among OECD nations, at 25.75 percent. The House Democratic tax hike would raise that to more than 30 percent. That combined rate would give the United States the third-highest combined corporate rate in the OECD, behind only Portugal and Colombia. On the margin, this pushes companies deciding whether to locate in the United States or in other countries to take their investment and jobs elsewhere.

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Rich individuals would also face some of the globe’s highest marginal tax rates. When state, local and Medicare taxes are factored in, U.S. taxpayers already face an average top marginal rate of 46 percent. The House Democratic plan would add 5.6 percentage points to that total, raising the average top marginal rate to 51.6 percent. That’s almost as much as famously high-tax Sweden and would give the United States the 14th-highest top marginal individual rate among OECD nations.

Even this understates the rate many would face in high-tax states such as New York and California. Californians earning more than $5 million would face a 58.25 percent marginal rate, while New York City residents earning more than $25 million would pay about 60 percent. Only Slovenia, Belgium and Finland levy higher or comparable rates. If these people get their money from interest and dividends, the 3.8 percent net investment tax pushes their combined marginal rate to more than 62 percent, making them the most heavily taxed wealthy people in the world.

The capital gains tax hikes would also give the United States the highest marginal capital gains rate in the OECD. At 48.4 percent, U.S. rates would be six points higher than those in Denmark, the country Sen. Bernie Sanders (I-Vt.) often says he wants to emulate.

If passed, the Democrats’ tax hikes would likely accelerate migration from high-tax states to low-tax states. A Californian could move from San Francisco to Boston, where Massachusetts levies only a 5 percent flat tax, and easily come out ahead. States totally free of state income taxes, such as Wyoming and Alaska, offer beautiful environments while others, such as Texas and Florida, offer year-round warmth. The ultra-rich and operators of hedge funds or investment capital firms would be fools not to move to these places, costing their former residences potentially billions in lost tax revenue.

These tax hikes would also likely lead to tax increases for average Americans in coming years. The administration plans to use this money for new spending, not to help close the $1 trillion annual deficits that stretch as far as the eye can see. The Social Security and Medicare trust funds will also need shoring up in the next decade. If the rich and big business are already the most heavily taxed in the world, they probably can’t be taxed more to save our entitlements or reduce the deficit. That means the money will come from where the rest of the world already gets it: the pockets of average taxpayers.

Democrats are about to make America’s rich among the most heavily taxed in the world. The rest of us will pay for the choice, one way or another, for years to come.