What the war of moderates vs. liberals over taxes on the rich is really about
Opinion by Paul Waldman
As negotiations over the reconciliation bill enter the home stretch, a predictable conflict has developed between moderates and liberals. Here’s what it all comes down to: First, overall the bill will be quite progressive, generating most of its revenue from higher taxes on the wealthy and corporations. Second, the really transformative changes liberals wanted are already off the table. Third, moderates are working hard to minimize the taxes the wealthy have to pay.
In other words, the end result will almost certainly be some kind of compromise that no one thinks is perfect. But like it or not, this is the nature of Democratic governance today: Progress will be made on liberal goals, but there will always be conservative forces within the party trying to prevent too much progress from being made.
It’s illustrated by some remaining points of contention in the reconciliation bill:
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The 2017 Republican tax cut limited the deduction people can take on their federal income taxes for the state and local (SALT) taxes they pay. Moderate Democrats from some high-tax states want to repeal that measure, but liberals don’t (more on this below), and some of those moderates say they’ll kill the entire bill if they don’t get their way.
President Biden wanted to eliminate the “stepped-up basis” rule that allows much of wealthy fortunes to be passed to heirs tax-free, but that idea has been dropped. So, it appears, has the idea of a tax not on income but on wealth.
The version of the plan put out this week by the House Ways and Means Committee would temporarily extend the enhanced Child Tax Credit (CTC) enacted earlier this year, and would make permanent the refundability of the credit, extending it to even low-income taxpayers who have zero tax liability. But Sen. Joe Manchin III (D-W.Va.) wants to put work requirements on the CTC; he has echoed the contemptuous rhetoric we usually hear from Republicans when talking about poor people.
The bill includes both tax cuts and tax increases that could be pared or eliminated, including new tobacco taxes and clean energy credits.
Two of these key unresolved questions illustrate the ideological conflict at work.
On Manchin’s demands for the CTC, the entire point of work requirements is to punish and humiliate poor people: It starts from the presumption that you have to prove you’re morally worthy by documenting that you have a job — and lose the benefit if you don’t.
This creates what can be a tremendous bureaucratic burden — getting your boss to sign time sheets every week and submitting them to the government, for instance — that we would never impose on those who aren’t poor.
The political problem with putting work requirements on the CTC is that right now it goes to families making up to $150,000 a year, i.e., millions who aren’t poor. Do you think Manchin and the other moderates really want to treat their middle-class constituents that way? Not on your life.
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Which is why Manchin also wants to scale back the CTC so it goes to fewer middle-class people; the remaining recipients could then be treated with the proper contempt. But the chances that other Democrats will agree to take away a benefit from millions of middle-class voters is slim.
Now let’s consider the state and local tax deduction. What’s happening here — as with inheritance taxes — is that the moderates want to maintain some of the complexity of the current tax system, because that complexity creates opportunities for the wealthy to pay less.
The context is that while the main objective of the 2017 Republican tax law was to cut taxes for the wealthy and corporations, it also dramatically reduced the number of people who itemize deductions, by around 60 percent. That’s because it significantly increased the standard deduction, so for people who had only a few deductions — charitable giving, the mortgage interest deduction, and yes, state and local taxes — it no longer made sense to itemize.
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But you know who wasn’t affected by that change? The rich, of course. Almost everyone in the top 1 percent itemizes their deductions, before and after the 2017 cuts. So for them, every loophole, carve-out and special treatment for a particular kind of income is valuable.
Say you’re a legal secretary living in New Jersey and you earn $75,000 a year. Maybe you itemized before 2017, but now you don’t since the standard deduction is worth more than your itemized deductions would be. You don’t care whether the SALT deduction is restored; it won’t make a difference to you.
But you know who will benefit from it? Your boss, who makes half a million a year, pays substantial state and local taxes, and itemizes his deductions. He also happens to have the ear of your congressman.
It’s hard to know how this will all be resolved, but the bill covers so many different areas that there’s plenty of material to craft a compromise. Whether you’re in the center or on the left, there will be parts of that compromise that make you mad. But if you expected something different from Democratic rule in a time of razor-thin congressional majorities, you weren’t being realistic.
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