This year, the stakes for Democratic lawmakers in Washington are higher than they have ever been. A recent poll found voters overwhelmingly disapprove of the job Congress is doing — by more than 43 percentage points. And Democrats can’t count on President Biden to save them because he’s not faring much better. Add to that the signal last fall from state races in New Jersey and Virginia in which Republicans outperformed in states that President Biden won, and the picture looks bleaker for the Democratic control of Congress that will continue next year.
So Democratic lawmakers are doubling down this year to remind voters they care about their core issues and have a plan for them to address issues like the economy, the ravages of COVID, fair and transparent voting and stemming the tide. of climate change. Chief among these concerns should come as no surprise: to quote one former president, “it’s the economy, you idiot.” In fact, several recent voter polls put the economy at the top of the list with COVID in second place.
Building back better
The Build Back Better (BBB) Act aimed to address many of these issues and make voters feel better about their finances, with the $3.5 trillion social spending plan funded by hikes. taxes on wealthy taxpayers. Despite passing the House of Representatives easily in November, the BBB Act met its fate in the Senate late last year and is unlikely to make significant progress this year.
Addressing Wealth Disparities
So where will the Democratic majority pivot? Perhaps to smaller bills to show voters they can lead and respond to pressing issues. But the legislation means careful compromise — and not just with Republicans but increasingly with members of their own party; it’s much easier to hold hearings and press conferences to talk about vexatious voter problems and the solutions Democrats intend to legislate. Our instincts point to upcoming congressional hearings highlighting economic inequality (exacerbated by the uneven economic rebound amid COVID), coupled with tax planning used by the wealthy to legally avoid taxes; the latter has been discussed in detail by widely read publications that refer to GRATs (grantor-retained annuity trusts) as a widespread estate tax loophole and IRAs as abusive tax shelters, to name a few- one. Our instincts were privately confirmed by a senior congressional official who recently shared that plans are underway for several Senate hearings on taxes that wealthy individuals avoid.
It’s not just the midterm elections that lawmakers are interested in at these hearings. Privately, lawmakers point to the oft-cited $70 trillion wealth transfer over the next 25 years as an important reason to have conversations about wealth redistribution, as both Democratic and Republican lawmakers quietly admit to having harder to justify inaction on wealth disparities.
So what other proposals could Congress discuss to address these issues? Some that target wealth inequality and are already on the table in the BBB include a 5% surtax on modified adjusted gross income over $10 million (with a 3% surcharge for income over $25 million ) and a limitation on Individual Retirement Account contributions for accounts over $10 million or taxpayers with income over $400,000.
Ideas lawmakers are likely to consider
If lawmakers want to get creative and tackle even greater redistribution of wealth, they can consider the following ideas that have been floated out loud but have so far remained on the back burner:
- increasing the top tax bracket from 37% to 39.6% for income over $400,000;
- increase the capital gains tax rate to 25% for wealthy taxpayers (those with incomes over $400,000);
- restrict the use of valuation haircuts;
- eliminate the use of grantor trusts as a method of transferring wealth; and,
- tax or regulate charitable donors.
When it comes to estate tax changes over the next year, there’s just too much headwind from Democrats in farm states to make any changes. That said, the 2017 tax law, which doubled the estate tax exemption from $11 million to over $22 million per couple, sunsets at the end of 2025. So change is happening even if Congress does nothing.
The challenge every lawmaker will have with these proposals is to find the right balance between raising taxes and not offending their donor base. Many of these tax increases focus on the “working rich” – those earning more than $400,000 a year who hardly fall into the megamillionaire category, especially for taxpayers living in many metropolitan areas. . This sentiment was echoed by billionaire Leon Cooperman, who recently agreed that the wealthy should pay more taxes, but that he doesn’t consider someone who earns $400,000 a year “rich”. From a practical standpoint, it also makes sense that these tax increases target the same group of individuals most likely to support congressional candidates financially. So what is a realistic outcome?
Extremely thin margins in Congress bode little for tax increases because lawmakers are loath to bite the hand that’s funding their campaign coffers. And partisanship dampens the passage of most other laws. But the hearings offer Democrats the best of both worlds. Their control of Congress gives them the luxury of picking the topics they want to push and scheduling them at a time that maximizes their impact.
Looking ahead, we expect the hearings – and many of them – to flesh out the arguments (pros and cons) on provisions that address publicly demonstrated wealth inequality and the value of redistribution. This is where we think the action, anger and insults will happen this year. In the meantime, any real progress toward change will likely have to wait.
Sandra Swirski is co-founder of Urban Swirski & Associates LLC and Steve Aucamp is Chairman of Tiedemann Trust Company and Managing Director of Tiedemann Advisors