The Democrats’ fiscal policy makes a mockery of their progressive pledges

It is regressive and self-defeating

12/3/2021 2:18:00 AM

Joe Biden’s plan to raise revenue is a hotch-potch of unorthodox measures—the wisdom of which is debatable

It is regressive and self-defeating

.The president was unable to whip his slim congressional majorities into reversing Mr Trump’s tax law and increasing marginal rates on capital gains, corporate profits or top individual incomes. And so his plan to raise revenue is a hotch-potch of unorthodox measures, including a new minimum tax on corporate-book income, an excise tax on stock buy-backs and a new surtax on those with incomes above $10m. The wisdom of these measures can be debated. What cannot is a last-minute addition to the bill that would spend hundreds of billions of dollars subsidising the richest residents of New York and California.

TheSALT)deduction lets Americans cut their federal-tax liability if they pay lots of income and property tax at the state and local level. Before 2017 this provision was limitless, letting plutocrats in high-tax states deduct all the property tax on their mansions and the state income tax on their millions, at the expense of federal taxpayers everywhere. Mr Trump’s tax law capped the tax exemption at $10,000. Rather than welcome this as a step towards their goal of more redistribution, Democrats in high-tax states moaned that they had been punitively targeted. Just before Build Back Better passed the House of Representatives on November 19th, they raised the cap to $80,000 a year.

The result is a fiscal fiasco. In the next five years the benefit will cost $275bn. Exactly none of it will go to the bottom 60% of earners. Instead 70% of the gains will go to the top 5%. For a party that came to power condemning Mr Trump’s tax reform for being regressive, the stain of hypocrisy will be hard to wash out.

Animals in space

If the politics are bad, the policy is worse. The central promise of Mr Biden’s agenda was to craft a more muscular state that will be able to grapple with long-term threats such as climate change, pandemics and social dysfunction. Yet what is supposedly built back better will count for nothing if it does not exist. In order to pay for that $275bn giveaway, the Democrats have jettisoned some of Mr Biden’s pledges, including free tuition at community college, and scheduled others to disappear in a few years’ time. They are betting that a future Congress will be shamed into finding the money to save these from the axe. That may turn out to be wishful thinking.

It is also callous. The expanded child benefits have significantly reduced poverty among the most needy Americans, but the programme is due to expire after just one more year. If Democrats held back the hundreds of billions from theSALTdeduction, they could almost completely fund a permanent child-benefit scheme. They prefer to give each member of the top 1% of earners an average tax cut of $15,000, five times the amount the benefit pays for each child.

The best hope of improving the bill comes in the Senate, where all Democrats must vote for it to pass. Mr Biden is so desperate to see the bill into law that he will not criticise it. Some, like Bernie Sanders, have proposed a compromise limiting the larger

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SALTdeduction to families making less than $400,000 a year—which tells you just how regressive the current bill is.There is no way to tweak theSALTdeduction to make it desirable. It should be scrapped entirely. But because that will not happen, the debate is whether it can be wrestled into something less bad. Given the steady degradation of Build Back Better, optimism would be unwise.

Read more: The Economist »

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