Wall Street has been cheering the election results, believing that the lack of a big blue wave for Democrats means that the major tax increases proposed by the Biden campaign are not going to happen anytime soon. While control of the Senate will not be decided until the Jan. 5 runoff elections in Georgia, most observers believe that it is unlikely that the two Democratic challengers will win and tip control of the Senate to the Democrats.
In Wall Street’s view, Republican control of the Senate makes the chances of the tax increases advocated by President-elect Joe Biden unlikely. As the Wall Street Journal wrote, “Without Democratic control of the Senate, the tax increases would be off the table.”
However, major tax increases are still very much on the table and could still be enacted in the first few months of next year. While the entire Biden tax plan has no chance of passing, a bill raising tax rates on corporations and the wealthy could very well pass the Senate with the support of just two Republican senators.
The Biden administration can be expected to move quickly to propose a major fiscal stimulus package and use budget reconciliation to expedite its passage through the House and the Senate. Budget reconciliation is a budget process technique that would allow the Biden plan to avoid a Republican filibuster, limit debate in the Senate to 20 hours, and pass the Senate with only 51 votes.
The new administration could put together an economic package that could win the support of Democrats in the House and the Senate as well as two Republicans in the Senate. This package could contain $2 trillion or more in new stimulus spending for COVID-19 relief measures for small businesses, unemployment assistance, state and local government aid, money for hospitals, rental assistance, food aid, and other social services.
The package could also include $1 trillion in targeted tax relief and tax cuts that Biden proposed during the campaign. These tax cuts include an expanded child tax credit and child and dependent care tax credit, a first-time homebuyer credit, a renters’ tax credit, and various tax credits for renewable energy and domestic manufacturing.
This tax package could be paid for with a revenue-raising package aimed at corporations and the rich. Possible tax increases could include raising the top individual tax rate to 39.6%, raising the corporate tax rate to 28%, taxing capital gains as ordinary income on income above $1 million, and targeting several corporate tax loopholes.
It could also include provisions Biden called for during the campaign, such as a new corporate minimum tax and the repeal of tax provisions used by real estate investors.
Imposing such massive tax increases on our still fragile economy would be a mistake for the new administration. These tax increases would reduce investment, curb job creation, and slow economic recovery.
But a big new COVID-19 relief package with trillions of dollars of new spending and targeted tax cuts, partially paid for by tax increases on big corporations and the wealthy, is the type of economic package Biden’s new economic team is likely to come up with in the coming weeks.
Although most Republicans would oppose such a package, it is not hard to envision two Republican senators willing to support the new president’s program and voting to pass $1 trillion in new tax increases.
Bruce Thompson was assistant secretary of Treasury for Legislative Affairs during the Reagan administration and the director of Government Relations for Merrill Lynch for 22 years.
