Taxing Tuesday: Kamala Harris Has a Cunning Plan...

....sit down, Baldrick

Megan McArdle at WaPo: Harris has an exotic plan to tax the rich. It's not enough.

So, in recent years, the conversation has focused on more exotic plans to tax rich people's total wealth, or their unrealized capital gains (accumulated gains in assets that haven't been sold yet). The United States has historically taxed most of those gains only upon the assets' sale. President Joe Biden's administration has put forth a plan to institute a 25 percent minimum tax on people who have $100 million in assets, including their unrealized capital gains, and last week, Vice President Kamala Harris's campaign said she is adopting that plan.

The good news is that Harris understands she needs to raise more revenue. Our national debt now stands at 99 percent of gross domestic product, and this year's budget deficit is projected to be 7 percent of GDP, almost $2 trillion. Those numbers are of course projected to rise as more baby boomers retire and start tapping Social Security and Medicare. So unless politicians find some spending they're willing to cut (other than the 0.3 percent of GDP we spent on foreign aid last year), we're going to need to hike taxes on the rich significantly to put our national books in some sort of order. And the rich can spare the money more easily than the middle class.

The bad news is that Harris, like Biden, has pledged not to raise taxes on people making less than $400,000 a year. That is simply not enough to fund our existing commitments and an expansive Democratic agenda.

Blackadder the Third is my favorite season — it’s the most fun

I will be getting to this cunning plan in a moment.

Focus on that number: $2 trillion.

One-year deficit.

7% GDP.

Okay, let’s look at this cunning plan.

The cascading strictures introduced by the pledge are perhaps why Democrats are being forced into desperation moves such as taxing unrealized capital gains. These taxes have a lot of problems: They distort investment decisions, as wealth shifts toward hard-to-value assets such as art and privately held companies; they could impede capital formation; and they are an administrative nightmare for an IRS that doesn't currently have the expertise to figure out exactly how much your mansion appreciated last year. Worst of all, these taxes don't even raise that much money: $500 billion over 10 years, according to the Peter G. Peterson Foundation. Moreover, some of that simply reflects tax payments shifted forward, rather than a long-term revenue increase, since taxing gains now lessens the taxes paid when the assets are sold.

$500 billion over 10 years?

That’s spitting in the ocean.

Let’s pretend that is evenly spread over the 10 years, so that’s $50 billion per year.

How much is $50 billion compared to $2 trillion?

$50 billion is 2.5% of $2 trillion. It’s not nothing… but it’s not much.

And that’s assuming everything would go to plan.

McArdle’s piece is primarily that, if they want to fill the gaping hole for all the stuff they want to spend money on (And sorry, that involves Republicans, too — because they want to spend money on Social Security and Medicare. But more on that another day), they actually have to tax where the money is: the great masses:

There is a reason Europe's more generous welfare states don't try to fund their spending by taxing a tiny handful of extremely rich people. According to the Progressive Policy Institute, "the United States actually imposes slightly higher taxes on the incomes of households in the top 1% of the income distribution than most European countries do." The Europeans would also love to shift more of that burden to the wealthy, but experiments with things such as wealth taxes have largely failed, and their governments have clearly concluded that big welfare states can be funded only with a big, broad tax base that includes the middle class.

But wait, maybe that’s what we’ll get!

2017 Tax Cuts Expire… Meaning a Lot of Losers

WSJ: Kamala Harris’s Tax Increases and Cuts Take Shape

Vice President Kamala Harris’s tax proposals pick up the unfinished business of the Biden administration, pushing to raise taxes on corporations and high-income households while leaving most Americans’ taxes unchanged or lower. 

Harris, the Democratic nominee for president, would increase taxes by about $5 trillion over the next decade and cut other taxes by more than $4 trillion. The federal government’s total collections—projected at $63 trillion over 10 years—would be little changed, but the Harris agenda would shift who pays.

Under her plan, taxes would go up sharply on some high-income households, and top marginal tax rates would reach their highest point since 1986. The wealthiest investors and company founders would encounter sizable capital-gains tax bills that they don’t face under current law. 

….

Even if Democrats don’t win full control of Congress, a Harris administration would be thrust immediately into a tough tax negotiation in 2025 with Republicans: Major pieces of the 2017 tax law expire at the end of next year absent congressional action, an outcome that lawmakers in both parties want to prevent. The expiration could give Harris leverage to demand support for some of her tax priorities. If the president and Congress do nothing, about 62% of households will see their taxes go up in 2026, according to the Tax Foundation. 

I pointed this out back when the Trump tax cuts went into effect and people in my neck of the woods were screaming bloody murder: most people were getting a tax cut, what with the increase in the standard deduction, changes in tax rates, etc. It didn’t matter much that the SALT deduction was capped for most people, even in high-tax areas like Westchester County.

February 2019: Taxing Tuesday: Meep Files Her Taxes  

My effective tax rate is tax total vs. adjusted gross income (as opposed to taxable income).

My effective tax rate for 2018 was:
Federal: 9.4%
Connecticut: 5.1%
New York: 0%

Compare against my 2017 rates:
Federal: 10.2% (I actually have a 5-year history, so 2016-2013 went 11.4%, 9.9%, 9.7%, 10.8%)
CT: 5.1%
NY: 0.02% (yes, really)

Note: my gross income in 2017 was about $10K higher than in 2018, but the 6 years of history of effective rates represents fluctuations of up to $30K in gross income.

My gross income is fairly high — using this model of income, we’re approximately in the top 10%. I hit the SALT cap (both property taxes and state income taxes are obviously high).

And I still got an 80-basis point tax cut.

….

I also hit the SALT cap, here in high tax New York and Connecticut. I still got a tax cut. Not as large as if the SALT cap didn’t exist, but it still existed.

I’m still pro-zero SALT cap (that is, no deductibility on federal taxes — decouple the taxes!), but it’s not a popular stance around here.

What about SALT cap under Harris plans?

Let’s check this out in the WSJ story:

Harris has left a few blank spaces in her plan. Namely, like Biden, Harris hasn’t said what she wants to do with the $10,000 cap on state and local tax deductions. The limit, which also expires at the end of 2025, is wildly unpopular in Democratic states such as New York, New Jersey and California, and letting it lapse is a priority for lawmakers such as Senate Majority Leader Chuck Schumer (D., N.Y.). As a senator from California in 2019, Harris co-sponsored a bill to repeal the cap. 

Changes to the alternative minimum tax mean that many people subject to the cap actually are paying lower taxes than under the old system. And states have found ways to help business owners dodge the cap. But the limit does an effective job of raising revenues from some very-high-income households—the same people whom Democrats are trying to tax more. If Democrats have full control of Congress and the White House, they will be torn between the revenue a cap could bring and their own opposition to it.

I mean, they want money from me. Supposedly.

They need to figure out what it is they want.

I’m not going to revisit this crap right now (and while I’m all for SALT cap zero, my Republican rep, Mike Lawler, is arguing that at least married filing jointly should have double the cap) with new words, so let me link my prior posts where I had a great time showing how it was Dem v. Dem in most cases in the fight for the SALT cap: [not exhaustive]

• Aug 2023: Taxing Tuesday: SALT cap battles - the New York Republicans make their play

• Feb 2023: Taxing Tuesday: Be My Valentine, SALT Cap

• Apr 2022: Process is important: SALT cap and NY redistricting

• April 2021: SALT Cap Tussle: NY Democrats Have an Ultimatum

• August 2021: Taxing Tuesday: The SALT Cap Battle Continues

• May 2020: MoneyPalooza Monstrosity! Looking at the SALT Cap Provisions

• January 2018: Setting the Stage 2018: Don’t Fight High Taxes, Democrats! Embrace Them!

It’s an older set of stats

I am so looking forward to the next round of tax policy rumbles.