Why Tax Increases in 2021 Could Make it Harder to Balance the Budget in Coming Years

(Yahoo!Finance) - The House of Representatives passed the Build Back Better Act on Nov. 19. Though the bill would implement several tax increases, it's a far cry from Democrats' initial ambitions for raising revenue through taxes.

On the campaign trail Joe Biden vowed to raise the corporate income tax rate to 28% from 21%. In the end, the bill contains a less aggressive 15% corporate minimum tax.

Likewise on individual taxes: Lawmakers floated several ideas, including raising the top individual tax rate to 39.6% as well as a billionaires tax. What ended up in the just-passed bill (which the Senate is likely to amend heavily) are narrower tax hikes – an increase on net investment income and a new surcharge on modified adjusted gross income.

In fact, after years of Democratic promises to make the rich pay their "fair share," the proposal in the bill to increase the SALT cap from $10,000 to $80,000 could give many of the wealthiest Americans a net tax cut.

There’s a “lesson here,” a budget and tax expert pointed out on Yahoo Finance Live recently.

“For years, we've heard from progressives of the desire to raise taxes on billionaires and millionaires,” said Gordon Gray, director of fiscal policy at the American Action Forum. But now even with control of the White House and Congress, “they have the opportunity to do just that, and it's proven very difficult.”

Worries ‘for the green eyeshade crowd’

While this might be good news to wealthy individuals and businesses, it’s not great news for budget forecasters like Gray. 

It's notoriously difficult to get tax increases on the wealthiest Americans though Congress. That combined with President Biden's pledge to not raise taxes on Americans earning under $400,000 is impeding the government's power to raise enough revenue and get its fiscal house in order.

"What concerns me,” Gray says, is that these taxes are all devoted to new spending, so “the cupboard, for want of a better term, will be a little bare the next time members of Congress decide to maybe get around to that grand bargain that we've been hearing about for so long."

The "grand bargain" was a term popularized in 2011 when a bipartisan group of leaders, including then-President Barack Obama and then-Speaker of the House John Boehner, came close but ultimately failed to reach an overarching agreement to change the nation’s fiscal course. Since leaving office, Boehner has often said that the collapse of the deal was his biggest regret.

The U.S. national debt currently stands at nearly $29 trillion with an annual budget deficit nearing $3 trillion.

"I've always assumed – even as a conservative – that a grand bargain will involve tax increases and spending cuts,” Gray said, but the problem is “the taxes in this bill are the easy ones,” leaving fewer options in the years ahead.

Gray is a former senior advisor to Sen. Rob Portman (R., Ohio) and staff member for the Senate Budget Committee. He said some future debt reduction deal will need to include entitlement reform, “not just for the green eyeshade crowd, of which I am certainly a proud member, but also just for their own sake."

The question is whether more tax increases, like those promised by then-candidate Biden, along with changes on the spending side will ever be politically feasible. Gray doesn’t see many options, but "my experience has proven that no idea ever truly goes away in Washington, DC."

By Ben Werschkul · Senior Producer and Writer

Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.


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