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Opinion Despite AOC’s infamous dress, Democrats are getting cold feet on actually taxing the rich

Rep. Alexandria Ocasio-Cortez (D-N.Y.), left, and fashion designer Aurora James at the 2021 Met Gala in New York City on Sept. 13. (Justin Lane/EPA-EFE/REX/Shutterstock)

Despite the slogans, the polling and even the infamous white ballgown, Democrats appear to be getting cold feet on “taxing the rich.”

The Democratic Party has repeatedly pledged to make the rich pony up. Their pledge is partly about fairness: Massive income and wealth gains have accrued to the tippy-top over recent decades, while effective tax rates for this same population have fallen. It’s also partly about fiscal responsibility: The party wants to pay for safety net and climate investments, so, like Willie Sutton, they’re going where the money is.

Finally, it’s about politics: Polling suggests broad public support for raising taxes on the rich.

But even if most Americans say they support taxing “the rich,” the people whom Democrats consider “rich” these days are a teeny — and vanishing — group.

Then-President Barack Obama said households making $250,000 or more were sufficiently well-heeled to tolerate a tax hike. President Biden has raised the threshold to at least $400,000. According to Rep. Alexandria Ocasio-Cortez (D-N.Y.), she of the “Tax the Rich” gown, rich people worthy of higher taxation are instead only those with “hundreds of millions of dollars if not billions of dollars,” not “a doctor or a lawyer.”

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For context: The average U.S. doctor has annual wages of $221,000, per the Bureau of Labor Statistics; that’s roughly quadruple the average wage across all occupations. Physicians are among the professions most likely to fall in the top 1 percent.

So why has Democrats’ definition of “rich” narrowed over time?

Americans, including those of means, have long preferred to think of themselves as “middle class”; plus, in recent years the Democratic base has changed, becoming increasingly college-educated and well-off. It’s uncomfortable for Democratic politicians to tell these higher-income constituents that they are, objectively, higher-income, particularly when astronomically richer people such as Bill Gates exist.

All this has caused problems for Democrats as they craft their bill on social spending and the climate, which they say they want to pay for. Already, Biden’s $400,000 cutoff (which rules out tax hikes on more than 95 percent of Americans) had limited funding options. But Democrats have been reluctant to levy some of the tax hikes that Biden did ask for.

For instance, Biden proposed raising the capital gains rate, so that income derived from wealth is treated the same as income from work. House Democrats’ bill is considerably weaker, instead raising the top capital-gains rate only a few percentage points.

Biden also proposed closing one of the most valuable tax breaks for the ultrawealthy, a provision called the “stepped-up basis.” Most of the time, people must pay capital gains taxes when they sell an appreciated asset, such as Microsoft stock. But there’s a death loophole: A person can bequeath that stock to his heirs without either the original owner or the heirs ever having to pay taxes on how much the stock rose during the original owner’s life.

This is a huge boon to anyone with dynastic-level wealth, since it means their fortunes can escape capital gains taxes. It also distorts investment decisions, since it encourages people to hold on to assets until they die. Biden proposed dealing with the loophole by taxing unrealized capital gains at death (with the first $1 million of unrealized gains exempted, plus some other exceptions). But in the face of aggressive lobbying, House Democrats scrapped his proposal.

Congressional Democrats have agreed to increase funding for the Internal Revenue Service, as Biden asked — but not to require more third-party reporting critical for helping the agency catch rich tax cheats, as Biden also requested.

Democrats are mulling even more tax breaks for the wealthy, including repealing the limits on state and local tax (SALT) deductions. Proponents claim this would help the “middle class.” In reality, because of the way this provision interacts with other parts of the tax code, households making $1 million or more a year would receive half the benefit, according to the Tax Policy Center; 70 percent of the benefit would go to households making $500,000 or more. Of course, those high-income households are disproportionately in Democratic states.

Sometimes this “soaking” of the rich could be mistaken for a warm bath.

Meanwhile some socially valuable pay-fors, such as carbon or gas taxes, are off the table because they would affect households making less than $400,000. Perplexingly, Democrats have simultaneously argued tobacco and nicotine taxes wouldn’t violate this rule, even though such taxes are disproportionately paid by lower-income people. Apparently, the only people Democrats reliably count as “rich” these days are billionaires, hundred millionaires and smokers.

Yes, Democrats plan to raise top rates on personal and corporate income taxes. That’s not nothing. But it’s not nearly sufficient to pay for the generous welfare state Democrats want to build. Paying for that would ultimately require levying higher taxes on the middle class, too, as other countries with more expansive safety nets do.

White House officials sometimes acknowledge this but quibble that any effort to raise taxes should “start” with the rich. Unfortunately, their congressional comrades are stopping even before they start.