Last Updated on 03/09/2024 by Arun jain
For more than two decades, Democrats have watched with dismay as tax policy in the United States has settled into a pattern that Senator Elizabeth Warren, Democrat of Massachusetts, calls the “tax doom loop.”
It goes like this: Republicans pass huge tax cuts that are, at first, only temporary. By the time the tax cuts expire, Americans have become accustomed to owing less to the government. Hesitant to raise taxes, Democrats join Republicans in allowing many of the cuts to continue indefinitely.
For liberals, this cycle is responsible for a range of social and economic ills. expansion inequality. A ballooning deficit. A federal government without the resources to pay for a progressive agenda.
And next year, they hope, is their chance to finally stop it.
That’s because the last major Republican tax cut, President Donald J. The 2017 law, signed by Trump, expires after 2025. Progressive tax experts and activists have spent years convincing the Democratic Party that instead of extending the cuts, it needs to ensure the United States brings in more tax revenue so it can finance more generous social programs.
“People want to retaliate,” said Lindsay Owens, executive director of the Groundwork Collaborative, a progressive advocacy group that is meeting with congressional staffers and preparing an advertising campaign on the tax debate.
It’s an uphill battle. Tax cuts are a popular political promise. Mr. Trump and Republicans are pushing to extend the law and cut more taxes if they come to power. While Vice President Kamala Harris has promised to raise taxes on high-income Americans and corporations, her presidential campaign also said she would not raise taxes on any household making less than $400,000. That means he also wants to keep most of Mr. Trump’s tax cuts.
So in many ways a “tax doom loop” should begin next year, with about 98 percent of the population far from the political threshold for tax increases.
“They’ve already lost that battle,” said Rohit Kumar, a former aide to Senator Mitch McConnell, Republican of Kentucky, and co-leader of PwC’s national tax office. “For progressives to win a battle they believe they are losing, they will have to convince the president and Congress to consider a fairly significant middle-class tax increase. And that’s why they didn’t succeed.
But Democratic tax experts still see a narrow path to redemption. They have put together what they consider politically palatable plans to raise taxes on very high earners and large corporations. The goal is to generate more than enough revenue to cover the cost of extending other tax cuts.
“It’s now the case that billionaires can live lavish lifestyles and pay little or nothing in federal income tax,” Ms. Warren said. “It has to be fixed first.”
While some experts may question the policy wisdom of refusing to raise taxes on all households with incomes below $400,000, they acknowledge the political imperative. Not only does taxing the wealthy vote well, but they hope it can bring the United States closer to a more balanced time in tax policy: the beginning of the 21st century.
“In terms of the history of the last two decades, if we ask: Can we have a revenue system to support the government? The answer is yes,” said David Kamin, former top economic official in the Biden White House. “We almost had it, and we made a clear choice in the 21st century not to have it anymore.”
‘Bad Habits’
When Glenn Hubbard in 2001 President George W. The fiscal outlook was bright when Bush came to the White House as chief economist. The economy was strong, and tax revenues were plentiful—too plentiful for many Republicans.
In 2000, the government collected 20 percent of American gross domestic product in tax revenue, the second-highest share of the economy since 1930, the earliest date for statistics kept by the White House Budget Office. For two years the government also ran a surplus, bringing in more money than it spent.
Mr. Bush campaigned in 2000 to return the surplus to the American people in the form of tax cuts. For Mr. Hubbard and other Republican economic advisers at the time, the decline in additional tax revenue would make it difficult for Congress to expand government programs in the future.
“The thinking of the president’s advisers was that Congress was unlikely to save that money,” Mr. Hubbard said.
So in 2001, and again in 2003, the Bush administration and the Republican majority in Congress cut taxes. The two pieces of legislation, collectively called the “Bush Tax Cuts,” lowered marginal income rates across income levels, cut taxes on capital gains and phased out the estate tax, among other measures.
Several provisions in the Bush tax cuts were to expire to contain the cost of the legislation and to comply with procedural rules in the Senate.
But for the most part, they were not finished. Congress and President Barack Obama temporarily extended them in 2010, as the economy was still struggling in the wake of the Great Recession. Two years later, Democrats—fearing the economic and political consequences of allowing a wide range of tax cuts to expire—joined with Republicans to reextend most of them.
Vice President Joseph R. In a 2012 deal brokered by Mr. Biden Jr. and Mr. McConnell, tax rates increased only for individuals earning more than $400,000 and married couples earning more than $450,000. According to the Center on Budget and Policy Priorities, a liberal think tank, about 82 percent of the Bush tax cuts became permanent law.
For Democrats who want to meaningfully increase the amount of taxes the federal government collects, the deal has become the party’s original sin on tax policy.
“That was where we started to develop a bunch of bad habits that show up over and over again in these tax negotiations,” said Senator Michael Bennett, Democrat of Colorado. Mr. Bennet was one of only three Democrats in the Senate at the time to oppose the deal. “There’s an asymmetry because Democrats are willing to capitulate in a way that we shouldn’t have.”
A turning tide?
In 2017, after Mr. Trump unexpectedly won the White House, Republicans moved quickly to cut taxes again. The corporate tax rate dropped from 35 percent to 21 percent, marginal rates dropped in nearly every income bracket, the standard deduction got bigger and the child tax credit increased, among many other changes.
Like the Bush tax cuts, Republicans passed the Tax Cuts and Jobs Act through a congressional process called reconciliation. In order to comply with the rules of that process – and to avoid recording a drastic increase in the deficit – many provisions of the law were again temporary.
While the outcome in 2017 was familiar, some Democrats began to feel a shift. The Bush tax cuts were largely popular, and conservatives saw huge political upside in cutting taxes.
But the Trump tax cut was not popular. Democrats unanimously opposed it, calling the law a giveaway to the rich. That attack was fueled by analyzes showing that the law’s biggest benefits flowed to high-income Americans, though it also helped many working-class Americans. In the poll, many Americans said they did not know how the tax law would affect them.
The Progressives soon began to feel that they were gaining the upper hand on tax policy. Ideas about taxing the rich and corporations that had been relegated to the left wing of the party began to shift toward its center. Instead of bragging about tax cuts, Republicans Avoid them During the interim period of 2018.
“It was a moment where we really saw that progressive messaging against the tax law was actually effective,” said Brian Bennett, senior director of polling and analysis at the Hub Project, a progressive advocacy group.
The law helped jump-start some investment and economic growth. The financial cost is also significant. Mr. Kamin and Brian Deese, another former top economic official in the Biden White House, estimated in an essay last year that the tax cuts passed under Mr. Trump and Mr. Bush reduced tax revenue as a share of gross domestic product by three. percentage points.
Some conservatives agree that tax revenue as a share of GDP — which was 16.5 percent last fiscal year after a spike in 2022 — is surprisingly low given the economy’s performance.
“We’re within the range but we’re at a disturbingly low end of the range given the booming economy we’ve had in recent years,” said George Callas, executive vice president of public finance at Arnold Ventures and a former Republican tax aide. Capitol Hill.
Play hardball
Under President Biden, several tax increases were passed, requiring large companies to pay at least 15 percent on reported income to investors. The funding boost to the Internal Revenue Service is also supposed to help the agency crack down on tax evasion and collect money owed to the government.
But those measures still fall far short of addressing what progressives see as an underperforming tax system. They believe the upcoming showdown over Trump taxes undermines their best chance to stop the doom loop.
To try to soften the hearts of Democrats ahead of the negotiations, the party’s tax experts and academics are pushing the idea that letting the 2017 tax cuts lapse in full would not have such a dire outcome. They have pointed to rising deficits and argued that the economy can absorb higher taxes without slowing growth. The goal is to get the party comfortable with the possibility of walking away from negotiations with Republicans if Democrats don’t win enough — and avoid a repeat of the saga over the Bush tax cuts.
“You have the card to let it all lapse because, frankly, it’s not going to be a noticeable tax increase for middle America,” said Kimberly Close, a former Treasury official in the Biden administration.
But some elected Democrats still may not share the progressive tax world’s enthusiasm for raising taxes. In 2021, a single senator, Kirsten Sinema of Arizona, then a Democrat, rejected several promising tax increases, such as raising the corporate rate.
Next year, Democrats are likely to seek to protect tax breaks for high earners and corporate constituents. Donors are already leaning on Ms. Harris Roll back proposed tax hike on the ultrawealthy. Senator Chuck Schumer of New York, a Democrat and majority leader, recently pledged that the $10,000 cap on the state and local tax deduction would end next year, a change that would benefit wealthier Americans and cost about $1 trillion in tax revenue.
In any case, progressives know that the 2025 tax debate will not be the end of their quest to fundamentally change the tax code.
“Practically speaking, it will take a long time to come back; We’re not going to do it all at once,” said Michael Linden, a former budget official in the Biden White House. “The key is that we have to stop going in the wrong direction.”
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