Pretend it’s April 2021. President Joe Biden, House Speaker Nancy Pelosi, and Senate Majority Leader Chuck Schumer are putting the finishing touches on the conference report for H.R. 1, the “COVID Emergency Relief Reconciliation Act of 2021,” which everyone on Capitol Hill calls by its acronym, “CERRA.” It only requires a bare-majority, party-line vote in both chambers (without resorting to any Senate nuclear options), since Democrats have chosen to use budget reconciliation rules. Because CERRA raises tax revenue outside the budget window, all of its tax increases are permanent law. Using the precedent of the 1993 Clinton tax hike, the tax increases in CERRA are retroactive to the beginning of 2021.
The revenue title of CERRA is the most liberal, radical tax legislation Washington has seen in decades. It raises the top tax rate on wages from 40.8% to a modern record 55.8% (accounting for the federal income tax, the Medicare payroll tax, and the Social Security payroll tax increase). That’s the highest tax rate on labor income seen since the Jimmy Carter administration. When states and localities are added in, top wage earners could easily surrender over 60% of their marginal income to the government.
CERRA raises the corporate income tax rate from 21% to 28%. This means that, once again, the United States would have the highest corporate income tax rate in the developed world (when state corporate income taxes are included, as they must be for cross-country comparisons). We would have a higher corporate income tax rate than China, Canada, Mexico, Japan, the United Kingdom, Germany, and France. The corporate inversions that stopped when we lowered our uncompetitive corporate rate would start right back up again.
For family-owned firms such as sole proprietorships, general partnerships, and LLCs, repealing the qualified business income deduction when combined with the other tax hikes raises their top rates from 33.4% to the same 55.8% faced by top wage earners (I’m including the Medicare and Social Security tax rate in there). Again, when states are factored in, America’s successful small and family-owned businesses will see marginal tax rates on their profits exceed 60%. Investors in S-corporations and limited partnerships would see a rate hike from 29.6% to 39.6%.
The top tax rate on capital gains and qualified dividends goes from 23.8% to an astounding 39.6%. The tax rate on long-term capital gains has never come close to that high. CERRA raises the death tax rate from 40% to 45% and reduces the death tax “standard deduction” from just under $12 million ($24 million for some married couples) to $3.5 million — which is on top of a new and radical rule requiring a capital gains tax to be paid at death.
There you have it: radically higher tax rates on labor, capital, and business income. In some cases, tax rates this high haven’t been seen since the stagflationary 1970s. In other examples, tax rates have never been this high. The corporate income tax rate needs to be compared not to its own history, but rather to the tax rate of its competitors around the world. And by that measure, CERRA’s corporate tax rate is as high as we’ve ever seen it.
In one fell swoop, CERRA (which, in case you haven’t guessed, is nothing more than the tax increase plan Biden is running on) would not only retard our economic recovery from the Chinese coronavirus, but it would also undo four years of prosperity enjoyed by middle-class families. Biden’s promise that no taxpayer making less than $400,000 will see any tax hike at all is put to lie by his plan’s restoration of Obamacare’s individual mandate tax penalty and the new capital gains tax imposed at death (to say nothing of the loose rhetorical language that he has used about raising taxes on everyone).
Wags with blue checkmarks on Twitter were shocked to find that a record 56% of registered voters said in September 2020 (so, with the full virus effect baked in) that they were better off than they were four years ago. Experts should not have been so flabbergasted if they had been keeping track of the data most important to these voters.
Let’s start with the biggest investment for many families, their homes. According to the National Association of Realtors, the median sales price of existing single-family homes when President Trump entered office was just over $227,000. As of this past month, that figure is nearly $312,000. In less than four years, the sales price of a median existing home has jumped by over 37%, giving the typical homeowner additional equity of $85,000. Combine that with a 30-year mortgage interest rate of 2.5%, and homes are once again a driver of middle-class wealth.
What about this family’s retirement and other savings? The Investment Company Institute keeps track of 401(k) and IRA ownership. At the beginning of the Trump administration, 401(k)-type pensions and IRA assets totaled $15.7 trillion. Today, they are closer to $20 trillion, an increase of 25%. The average 401(k) plan balance for Fidelity Investments’ long-term managed plans has grown from $240,000 to over $400,000 during the course of the Trump administration, an increase of $160,000 or an astounding 67%. College savings account 529 plans have also grown, from $251 billion to $348 billion, an increase of just under 40%. This is not surprising, since the total return (price increase plus dividends) in the S&P 500 index has grown by 64% under Trump.
Real median family income hit a record high before the virus to just under $69,000. That’s an increase of almost 10% after inflation during Trump’s first term. At the same time, as income and wages were rising smartly for the first time in years, poverty rates plummeted. The headline poverty rate fell to 10.5%, a record low. Four million people were lifted out of poverty in the years leading up to the virus, a record unmatched in half a century. Unemployment fell to just 3.5% before the shutdowns — a tight labor market that was producing wage hikes for workers, especially blue-collar workers. All these numbers above improved at a greater rate for black people and Hispanic people than for white people.
Voters are asking what the unprecedented tax increases Biden is running on will do to the Goldilocks economy we enjoyed before the Chinese coronavirus. Does it really make sense to have a top rate on wages and small businesses of over 60%? Is it internationally competitive to have the highest corporate income tax rate in the developed world (again)? Does a record-high capital gains tax rate sound like a recipe for a bigger 401(k)? Common sense and basic intuition make the answers obvious.
Ryan Ellis (@RyanLEllis) is the president of the Center for a Free Economy.
