Joe Biden gets ready to soak the rich
It's what the people want
Matthew Yglesias
Apr 27
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The weirdest thing about the media response to details of Joe Biden’s plan to raise taxes that leaked last week is that it was widely covered as a kind of surprise when we are literally talking about the idea he campaigned on.
Twitter avatar for @axios
Axios
@axios
President Biden in the next few days will unveil eye-popping new tax rates for the wealthiest Americans —a top marginal income tax rate of 39.6% and a capital gains rate of 43.4%.
Biden will unveil eye-popping new tax rates for wealthiest Americans
Officials haven’t made clear whether the rate would apply in 2021 or 2022.
axios.com
April 23rd 2021
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I know because almost a year before Election Day, I wrote “Joe Biden’s plan to raise taxes on corporations and the rich, explained” and made this chart.
A bunch of other stuff has changed since December 2019, but essentially Biden is proposing these business tax changes to pay for the American Jobs Plan. Meanwhile, the changes to individual income taxes will offset the cost of the forthcoming American Families Plan that will have things like Child Tax Credit, money for child care, and money for healthcare. What seems to have gotten the business press spun up is that in some cases, this will create a situation where investment income is taxed at a higher rate than labor income. This is just a straightforward consequence of applying these ideas, but I guess it was not previously noticed in some circles.
It also plays as surprising, I guess, because it’s at odds with the demographic shifts in the electorate. Biden did better with rich people than any Democrat on record, while Trump seems to have matched George W. Bush’s reelection performance with non-white voters. That combined to create the least income-polarized voting patterns we’ve ever seen, with Democrats dominating favored quarter suburbs and Republicans attempting to mobilize class resentment against Democrats.
But on taxes, Democrats really want to tax the rich, and Republicans really do not.
Biden wants to tax rich people’s investment income
The American tax code has usually, though not always, reflected the idea that capital gains income should be taxed at a lower rate than labor income. The best way to think about justifying that is probably to think in lifecycle terms. If you imagine two different workers who have similar earning trajectories throughout their lives but one saves 5% of his income and the other saves 15% of his income, the more frugal guy will end up with a much higher investment income for the final 20 years of his life. The idea of favorable tax treatment for investment income is that we should minimize the extent to which the frugal guy gets hit with a higher tax bill.
The tax preference for investment income is actually very multi-faceted in a way you need to understand if you want to understand Biden’s plan:
The first $140,000 or so of wage income is subject to Social Security tax, and investment income is not.
The capital gains on owner-occupied housing are not taxed.
You can shelter a lot of investment income in tax-advantaged retirement accounts like a 401(k) or an IRA or the more rarely used 529 if you want to save money with tax benefits for your kids’ college tuition.
The headline tax rate on capital gains income is lower than the ordinary income rate.
If you die and pass assets on to your heirs, the tax basis for their future capital gains is “stepped up” to whatever it’s worth at the moment of your death, so all the gains accumulating during your lifetime accrue tax-free.
A key aspect to the Biden plan is that he’s not touching numbers one through three, and while he’s seeking to end four and five, he is doing so only for people whose income is over $1 million.
The richest county in America is Loudoun County in Virginia, with a median household income of about $140,000 a year. And this underscores an important aspect of why Biden’s ideas work politically. It’s true that he’ll be raising taxes on many Biden voters. But it’s also true that he’s raising taxes on what’s really a very small group of people — there’s no county in the United States that a tax increase on people earning over $400,000 hits the typical family.
And by the same token, normal frugal, prosperous person behaviors like owning a very expensive house and having maxed-out retirement accounts are still tax-advantaged under Biden’s plan.
By contrast, if you are a hedge fund manager pulling home a low seven-figure income mostly structured as lightly taxed “carried interest,” you are really screwed here. At that level of richness, you’ve blown through all your tax-advantaged account options and are just benefitting from the fact that capital gains income is taxed at a lower rate. Biden is going to be pumping your numbers way up. Indeed, because the Affordable Care Act created a small tax on investment income to help pay for Medicare, if you’re earning over $400,000 a year, investment income is actually going to be taxed at a higher rate than ordinary labor income. So all the clever lawyers who came up with carried interest are going to have an incentive to reclassify investment managers’ income as ordinary labor after all. And a super-rich athlete will end up paying a lower tax rate than someone cashing-in stock options, contrary to the current setup.
Last week, the White House seemed a little annoyed by some of the framing with which this all got written up in the business press. But talking to administration officials and also to key people in the Senate, I really can’t underestimate the extent to which they welcome a big fight on this topic. Democrats are the party that wants to raise taxes on people who are pulling in 10 times the median household income, and they would like more people to know that.
Taxing the rich is very popular
Taxing rich people is just very popular. Something I want to say before I put these numbers out is that I’ve been consulting with folks who do public opinion work and want to put out the cautionary note that conventional public issue polling overstates the possibility of basically everything. No proposal survives an extended public argument with extensive partisan cues unscathed. So when you see numbers like what I’m about to present, take it with several grains of salt.
Still, the point is that broadly speaking, people like the idea of taxing the rich in part because a healthy minority of Republicans — especially poorer ones — like the idea.
Majorities of Democrats across income levels favor raising taxes on households earning over $250,000
A good Gallup writeup in 2019 confirmed that taxing the rich is very popular but also offered the cautionary note that there’s very little evidence this is a high priority for voters.
“Very few (1% in our latest February update) mention inequality as the most important problem facing the nation,” Frank Newport wrote. “A December measure of Americans’ priorities for the president and Congress found that ‘the distribution of income and wealth’ tied for last in a list of possibilities.”
This is why even though issues of tax and spending are an incredibly large share of the federal government’s responsibilities, it’s relatively easy for Republicans to secure the votes of lots of people who disagree with them about taxing the rich. But it also means that an extended debate that raises the salience of this issue is likely in Democrats’ interest, even if it ends up eroding the popularity of the underlying idea somewhat.
Inflation-adjusted interest rates remain extremely low — indeed mostly negative — so on the merits, my instinct for now would be to say that if Biden has good spending ideas he should keep piling on more debt. But Democrats seem very convinced that taxing the rich is better politics than not taxing them, and Republicans have boxed themselves into a kind of populist corner where I think they’ll struggle to argue against this. And on the merits, Biden’s ideas seem okay.
Capital is plentiful in America
One reason that I’m able to do this site is that when I was contemplating launching a solo subscription venture, Substack’s executives offered me a minimum revenue guarantee. That sharply limited my downside risk and made doing this a much more plausible thing for a responsible dad-type like me to do. And one reason Substack was able to offer that deal (and similar deals to others) is that they have raised — and continue to raise — venture capital (VC) investment.
There are plenty of VCs who have bad political opinions and/or are obnoxious on Twitter, so there are segments of the media where VC is currently held in low repute as a field. But I think it’s pretty clear that the existence of a robust venture capital ecosystem is good for America.
After all, it’s not just newsletter startups. Until very recently, the mRNA-focused biotech company Moderna was considered the kind of risky startup that depended on VC investors seeking outsized upside to stay viable.
So that personally is one of my big “I will change my mind if this happens” criteria — if you see the VC sector start to wither away and start reading stories about meritorious startups being unable to secure funding on reasonable terms, then we’ve probably gone too far with the tax hikes.
What’s the current situation? Well, five days ago I read a story in Pitchbook about how VC firms with a lot of expertise in working with founders are getting squeezed out of deals by hedge funds offering super-high valuations:
"The founder told us that they wanted to work with us, but the other bid was an order of magnitude higher," said Chase Roberts, a principal with Vertex US. The firm's small fund, its second vehicle of $150 million, precluded Vertex from writing a larger check, and Roberts had no choice but to step aside.
These situations where traditional VC firms are significantly outbid by hedge funds and other crossover investors have become a frequent occurrence in the red-hot venture capital market.
The trend of wooing fast-growing startups by offering to pay as much as 50% to 100% higher than traditional VCs is led most famously by Tiger Global and Coatue Management.
But the practice of paying significantly more for a chance to get into hot companies is increasingly common at other multi-strategy firms such as Altimeter Capital, Dragoneer Investment and D1, venture capitalists said. Other firms they cited include growth equity investor Insight Partners and Addition, a VC-focused offshoot of Tiger Global.
In other words, at the moment there appears to be no shortage of financial capital available to finance investments in the kinds of things that the VC sector thinks are worth investing in. It’s possible that due to groupthink, prejudice, or some other error, they are ignoring big classes of potential projects or founders. But it’s not for a lack of available capital.
The biggest investment barriers are regulatory
One reason that I think we’ve had little reason to worry about a VC drought is that relatively few tech investors are interested in financing extremely capital-intensive projects anyway. The whole appeal of software as an investing thesis is that a relatively small team of smart engineers can build something that’s capable of achieving massive scale.
All the way at the other end of the spectrum, you have something like the housing sector. Housing is the ultimate low-risk, low-reward investment.
And here, what we keep seeing is that the availability of investment capital just isn’t the limiting factor to getting new dwellings built. That’s a contingent fact about American history, not a law of nature. You could imagine a country where a lack of available financial capital for homebuilding is creating a housing shortage. But that’s not the world we live in. Instead in the United States, the proximate barrier to adding more dwellings is regulatory curbs on construction (and I suspect that relatively soon, a paucity of immigrant labor is going to be an issue as well).
We should reduce these barriers, and if we do, the availability of investment capital may in the future become more of a constraint. For now, though, I still say full speed ahead.
The limits of a narrow tax base
Broadly speaking, I hope this Biden families proposal passes — it stands to do a lot of good for a lot of people.
From a standpoint of where I’d ultimately like to see the country go, though, what’s striking about it is that as aggressive as Biden’s revenue strategy is, it doesn’t raise enough. He’s not making the child allowance permanent. He’s improving the Affordable Care Act but still leaving meaningful gaps in American healthcare. We still don’t have the full details on the spending, but from what I’m hearing, he’s likely to put something on the table that I don’t think is quite optimal and in which you could improve the proposal by shifting some of the money around.
But fundamentally, we’re going to see that while taxing the very rich can in fact raise a lot of money, it cannot raise enough money to create a fully adequate welfare state for the United States.
To get that you’d have to talk people into agreeing to some broad-based tax increases that would hit the middle class as well as the very rich. As an advocate of a popularist approach to politics, I think that public opinion is not there yet, and it’s wise of Biden to shy away from it. The responsibility for persuading people of the merits of that approach lies with people like me, not with present-day elected officials.
What’s interesting is that for a long time, this felt very theoretical to me. And given the narrowness of the Democratic legislative majorities, it certainly might stay theoretical. But the numbers really are there in terms of public opinion and vote count to imagine the Senate doing something like the Jobs Plan and the Family Plan, which if combined, really would dramatically push the limits on what you can achieve by taxing the wealthy.
The debt option is still available
All that said, I remain concerned about the grip that what you might call “progressive austerity” holds over the Democratic Party's imagination.
People like simplistic political narratives, so a lot of folks want to squeeze all their complaints with the Obama administration into a single tube of his team being insufficiently populist. But the truth is that the turn to austerity budgeting, especially after the 2010 midterms, was intimately linked to Obama’s very sincere desire to raise taxes on the rich. He successfully pulled this off during the 2012-13 lame duck session. But the price was years of too-small stimulus and too-slow economic growth. This was a bad trade, I think. But Obama’s critics on the left have never really acknowledged that in real-world congressional terms, the price he’d have had to have paid for a more stimulative macroeconomic environment would’ve been more tax cuts for the rich.
Back when I thought Mitch McConnell would likely be Majority Leader, my advice to Biden was to do the opposite of what Obama did and try to strike bipartisan deals that swap regressive tax cuts for useful progressive spending.
Instead, Democrats got the majority and we got the American Rescue Plan. And if making further spending “paid for” by taxing the rich is what the narrow Democratic congressional majorities want, then so much the better. But I hope everyone involved keeps in mind that this is a political choice more than an economic policy one. In particular, there’s no reason the numbers need to add up exactly. If some particular element of this tax mix turns out to be a sticking point, you don’t need to scale back the spending to match it. Or if there’s some incredibly compelling spending idea, you don’t need to leave it out just to make the taxes worse.
People don’t like to sully their pristine budget math with political calculations, but it’s worth remembering that things like a 10-year forecast of the budget impact of a capital gains tax increase are themselves political fiction. There are always more elections and more changes to tax policy, and the only thing you can really control is the short term, and in the short term, more deficit spending is fine. A really profound long-term change where we get a bigger, more universalistic welfare state in exchange for bigger, broader tax increases needs to wait for some other turning of the great wheel of politics.
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