But even after Democrats seized control of the White House and Congress, they haven’t been able to fully coalesce around a tax and spending plan, with Sen. Kyrsten Sinema (D-Ariz.) expressing opposition to higher tax rates.
Now, an unexpected compromise appears to be emerging on the billionaire tax proposal. Senate Finance Committee Chairman Ron Wyden (D-Ore.) is drafting the plan, and senior Biden officials and other senior Democrats are cautiously optimistic that Sinema and other centrist lawmakers will support the effort, according to interviews with three congressional aides and two administration officials, who spoke on the condition of anonymity to discuss sensitive negotiations.
It is uncertain whether the plan will be backed by every Senate Democrat and almost every House Democrat, the necessary threshold for its passage.
The shifting nature of the tax legislation reflects the challenge Democrats face in trying to rebalance an American economy that most economists believe has grown increasingly unequal over the last several decades.
Democrats had largely united behind increasing taxes on those earning more than roughly $500,000 per year, while also raising the corporate tax rate paid by large firms. That approach was consistent with President Biden’s insistence that Americans earning less than $400,000 per year be spared any tax hikes, a pledge the administration considers necessary to protect the political popularity of any new taxes.
The new path under consideration represents an even starker attempt to narrowly tailor tax increases to avoid political blowback. It would shield not only the lower and middle classes but also exempt the bulk of the top 1 percent — concentrating the higher rates instead on the wealthiest 0.0002 percent.
The plan would also begin to address the populist tumult that roiled the Democratic Party during the last presidential race. Sinema spoke in recent days about tax policy with Sen. Elizabeth Warren (D-Mass.), an advocate for the Wyden plan who helped popularize the idea of a wealth tax on billionaires during her campaign, according to spokespeople for both senators.
At the outset of negotiations, Biden pitched a plan to tax fortunes when they are passed down to heirs, aiming to close a loophole that allows rich Americans to receive large inheritances tax-free. That proposal collapsed, however, amid a revolt from Democrats in Iowa and Montana who warned that it could hurt family farms, even though Biden was open to exempting farms worth less than $25 million.
“Even before the pandemic, there had been decades of dramatically rising inequality, especially at the very, very top of the distribution. But the pandemic really crystallized the pathologies of that divergence,” said Austan Goolsbee, who served as a senior economist in the Obama administration. “Now that we need money to pay for these investments, you can see why Democrats would immediately turn to say: ‘Who has had the greatest time during this trying period? It’s the billionaires.’”
Some economists point out that rising inequality represents a much broader phenomenon than just increases in billionaire wealth, and argue that taxes capturing a much wider swath of the population are probably necessary to fund the transformative spending plans Democrats are pursuing.
Tax experts are also generally wary of creating a tax for such a small group of people that it may be easy to avoid, as well as inventing new tax programs out of whole cloth.
“Countries with a more robust welfare state tax everybody a bit more, rather than just the rich,” said Joshua McCabe, senior fellow for policy and welfare at the Niskanen Center, a center-right think tank. “The amount of revenue you can get from squeezing folks making more than $400,000 per year is small, and if you’re looking at billionaires it’s even smaller.”
The proposal would be incorporated into the reconciliation bill that Democrats hope to pass soon and could help offset the roughly $2 trillion the bill is likely to spend over 10 years on a variety of new federal programs.
The administration recently briefed congressional Democrats on other new sources of revenue that would raise trillions of dollars without increasing the corporate tax rate. Those included tougher tax enforcement by the IRS, a new global minimum tax and a new 15 percent minimum tax on corporations, among other measures.
White House press secretary Jen Psaki said Friday that the spending plan could “absolutely” be paid for without an increase in the corporate tax rate, citing these options.
Democrats are still struggling to reach agreement on their broader measure, although House Speaker Nancy Pelosi (D-Calif.) said Friday that lawmakers hope to have a deal within days. The tax component is just one of the many impasses Democrats must resolve, as the party remains divided over a raft of competing legislative priorities.
The billionaire plan newly under consideration by the Senate faces objections from House Democrats, who already advanced a roughly $2 trillion package that included rate hikes on the rich and on corporations. Some tax experts are also wary of creating a complicated new system of taxation in a matter of days. House Ways and Means Committee Chairman Richard E. Neal (D-Mass.) said the Wyden plan could “become really complex.”
“When you do rates, they’re efficient and they’re easily implemented. Unlike the more esoteric ideas of taxing this or taxing that, rates are simple by nature. People understand them,” Neal said. “There’s only one proposal on revenue that has passed a legislative body. It’s ours.”
Currently, wealthy Americans do not have to pay taxes on vast accumulations of wealth because they are taxed only once an asset is sold. Billionaires often borrow against their non-taxed assets, allowing them to spend enormous sums of money while effectively paying very low taxes relative to their income and worth.
Under the “Billionaire Income Tax” proposal, a summary of which was obtained by The Washington Post, the federal government would require billionaires to pay taxes on the increased value of assets such as stocks on an annual basis, regardless of whether they sell those assets. Billionaires would also be able to take deductions for any annual loss in value of those assets.
The plan would also set up a system for taxing assets that are not easily tradable, such as real estate. The tax would apply to billionaires and people earning more than $100 million in income three years in a row.
“A key of engine of the rise of wealth inequality is the very low effective tax rates billionaires currently have,” said Gabriel Zucman, an economist at the University of California at Berkeley. “Since the proposal would significantly increase their effective tax rate, it would be a significant step toward limiting the rise of wealth inequality.”
The White House’s legislative ambitions have generally narrowed in recent weeks as Sinema and Sen. Joe Manchin III (D-W.Va.) have demanded major cuts to the size of the spending legislation. But the centrists have appeared open in recent days to aggressively taxing America’s billionaires — typically a demand of the left.
Sinema has balked at seemingly more modest proposals to raise tax rates on wealthy individuals and big corporations, and they appear to have fallen out of the legislation. That has led to a surprising renewed exploration of taxing billionaires, in part because there may be a political upside for Democrats in training the tax hikes on the extremely rich — most of whom live in California and New York, rather than swing states — rather than on the merely rich.
A spokesman for Sinema, John LaBombard, did not confirm or deny her support for the billionaire tax. He said in a statement that the senator “is committed to ensuring everyday families can get ahead and that we continue creating jobs. She has told her colleagues and the president that simply raising tax rates will not in any way address the challenge of tax avoidance or improve economic competitiveness.”
White House officials have been involved in crafting the plan, while officials at the Treasury Department have provided guidance as well, people familiar with the matter said. Biden has already publicly endorsed the concept.
Seung Min Kim contributed to this report.