HomeBudget & Tax NewsDemocrats' Whatever-Tax-That-Can-Pass Approach (Opinion)

Democrats’ Whatever-Tax-That-Can-Pass Approach (Opinion)

Democrats’ whatever-tax-that-can-pass approach ignores whether the tax will raise revenue or damage the economy, says Merrill Matthews.

Economists know that taxes and government spending can distort individuals’ and companies’ economic decisions in both good and bad ways. And so responsible policymakers look for taxes that minimize those distortions.

That is not the Democrats’ approach.

As we saw in the recent Senate machinations to get 50 Democratic votes for a scaled-down version of President Biden’s Build Back Better bill—now bizarrely named the Inflation Reduction Act—what or who was being taxed, and by how much, made little difference.

The only question that mattered was what it would take to garner 50 Senate votes—plus the vice president’s vote.

Democrats proposed several different tax options over the past year and a half.  The latest iteration, conceived by Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV), included a replacement for the tax on “carried interest.” The carried interest proposal sought to tax the income of hedge fund managers and private equity investors at the regular personal income tax rate rather than the lower capital gains rate.

The carried-interest provision was estimated to bring in only about $14 billion over 10 years. It wasn’t a serious way to raise revenue for the government; it was a serious way to stick it to the rich, which is why Democrats like it.

But Senator Kyrsten Sinema (D-AZ), who Dems needed to provide the 50th vote, objected. So it was dropped and replaced by a 1 percent tax on company stock buybacks, which apparently Sinema would vote for.

Which tax caused the fewest economic distortions? Didn’t matter. I’m not sure that question was even considered.

Democrats had also been pushing a 15 percent minimum corporate income tax as part of Biden’s and Treasury Secretary Janet Yellen’s effort to create a global minimum tax.

They didn’t have the 50 votes for the global tax either, so they settled for an alternative minimum tax of 15 percent on companies with $1 billion in profits.

While the global tax and the alternative minimum tax appear somewhat similar, they are not the same, as the Tax Foundation’s Daniel Bunn explains.

The Tax Foundation also asserts, “The proposed 15 percent minimum tax on corporate book income is the most economically damaging provision in the bill, reducing GDP by 0.1 percent and costing about 20,000 jobs.”

We’re glad the Tax Foundation weighed in with an assessment, but again, Democrats weren’t looking for ways to increase federal revenue while minimizing economic distortions.

They were looking for whatever tax that could get 50 Democratic votes in the Senate. And they got it.

Originally published by  Institute for Policy Innovation. Republished with permission.

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Merrill Matthews
Merrill Matthews
Merrill Matthews, Ph.D., is a resident scholar with the Institute for Policy Innovation.

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