ANOTHER VIEWPOINT: A chaotic approach to tax reform

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Under pressure of successive self-imposed deadlines, with a befuddled country looking on, Democrats in Congress continue to wrestle with a supposedly transformative spending plan and the means to pay for it. On Thursday, President Joe Biden announced yet another version of what this might involve. The eventual outcome is still anybody’s guess.

There’s a reason for the protracted muddle. Democrats set out with two overriding priorities. First, their spending commitments must be huge. (Exactly how and where the money would be spent was less important.) Second, the vast majority of Americans should face no tax increase. That basic contradiction explains much of the subsequent confusion. Somehow, the gap between ends and means needed to be scaled down — but without owning up to diminished ambition and without asking anybody but the very rich to pay more tax.

In recent days, efforts to resolve the dilemma have intensified. Having shelved one idea for raising taxes on the wealthy, partly on grounds of practicality, Biden and his allies turned their attention to another — more radical, more complex, and much more difficult to administer than the first. To nobody’s surprise, this so-called billionaire tax also met strong opposition, and not just from Republicans. This too now seems to have been set aside. Biden’s outline has moved on to Plan C, a 5% surtax on incomes above $10 million.

What’s strange is that the first tax plan, supported by Biden during his presidential campaign, did in fact make sense: Reform the taxation of assets at death. Unrealized capital gains, which constitute a large part of the wealth of the richest Americans, would no longer escape tax through a provision called “stepped-up basis.” Yet some centrists were unpersuaded, inviting the next iteration: Tax unrealized gains not just once per lifetime but every year, with the change confined to 700 or so billionaires. This smaller target group would have made the plan easier for the IRS to administer, but would’ve created countless further complications, prompted prolonged legal challenges, and possibly violated the Constitution.

The latest idea — a surtax on very high incomes — faces problems of its own. By leaving unrealized capital gains untaxed while raising the rate on ordinary income, it maintains the principal channel of tax avoidance by the well-to-do and increases their incentive to exploit it. So it would raise much less revenue than simple arithmetic suggests. In other words, Biden’s outline still hasn’t bridged the gap between ends and means. One suspects that many Democrats have no problem with that. Fiscal gimmickry has been a recurring theme of this chaotic effort.

Biden and his allies are right, to be sure, that the well-off should pay their fair share. They’re also right that the tax treatment of capital gains is an anomaly that the wealthy have been able to exploit. Abolishing stepped-up basis at death is a relatively straightforward and constitutionally sound way of addressing the problem. It’s to be hoped that this approach can yet be revived — and that what’s valuable in the spending plan (not to mention the infrastructure bill that progressive Democrats have shackled to it) won’t be discarded.

Meanwhile, the country can only be dismayed by the Democrats’ ongoing disarray. It inspires no confidence in their ability to deliver, and pay for, the transformation they promised.