Why Tax Reform Is So Hard

Democrats want “fairness” and to “tax the rich.” Each is an admirable goal, but they come at a political price.

This month, both The American Prospect’s Alexander Sammon and New York magazine’s Jonathan Chait got former Democratic Senator Heidi Heitkamp dead to rights. Last month, Heitkamp launched a new “dark money” organization to fight Joe Biden’s proposed capital gains tax reform, which would change the rules regarding wealthy estates so they are taxed at a higher rate and levied at death.

Heitkamp argues that the change would unfairly make it hard for owners of family farms and businesses to pass down their assets to their middle-class heirs. But Sammon quickly noted that back in April, Heitkamp was making the opposite argument, calling the existing rules (known as “step-up in basis”) “one of the biggest scams in the history of forever,” and “to demonize [Biden’s proposal] and say it’s going to hurt the little guy . . . that just is not factual.” The New York Times reported that Heitkamp “said she was recruited to the opposition campaign by the Democratic former senator-turned-superlobbyist John Breaux.”

However, congressional Democrats were considering massive exemptions—$5 million per person, $10 million per couple—on property transfers, which should alleviate any concerns about humble family farmers getting hosed. Chait then got Heitkamp on the phone and asked if such exemptions would assuage her concerns.

But all Chait got was circular logic:

When you look at the polling, she told me, people “didn’t believe these exclusions” would really apply. The problem was public opinion. Democrats couldn’t risk taxing vast fortunes because working-class folks think they would be targeted. That this belief was completely false seemed to be beside the point to Heitkamp. She likewise seemed untroubled by the possibility that the reason working-class people would get this false impression in the first place was that groups like hers would spread it.

So what happened after Sammon and Chait exposed the fallacy of Heitkamp’s argument? The tax-writing House Ways and Means Committee junked the proposed step-up in basis changes.

What could have possibly happened to make House Democrats flinch?

The Occam’s razor answer—Democrats capitulated to wealthy donors—strikes me as too pat. After all, with the “Build Back Better” bill, Democrats are still pursuing a multi-trillion-dollar revamping of the social contract paid for by other tax increases on corporations and the wealthy. Presumably, wealthy donors exist who aren’t thrilled about the Biden package, yet Democrats forge ahead.

So what is it about this specific tax issue—and tax reform generally—that is so complicated?

First, any policy change creates winners and losers. Politicians must worry if those policy losers become lost voters. Even if a policy provides net benefits, and even if the polling is favorable, voters who get the short end will have long memories. They may become loud opponents, driven by a single issue. And if you are a representative from a swing district, a small fraction of newly angered single-issue voters could mean losing office.

Fear of galvanizing yet another cadre of angry constituents is why Democrats are willing to create exemptions that would minimize the number of policy losers in the Build Back Better bill. But there’s a second obstacle: Tax laws are easily changed—they are eligible for filibuster-proof budget reconciliation bills—and voters rarely trust that, in the future, tax laws will change in their favor. While Democrats can pass a law today that says the first $5 million of inherited property is exempt, they can’t promise that exemption won’t get lowered or eliminated tomorrow.

Messing with the long-standing status quo can make people nervous. Beyond dark money–funded flacks like Heitkamp, actual constituents in swing districts appear to be anxious. The Wall Street Journal reported that when Democratic Representative Abigail Spanberger visited farms in her central Virginia district, she heard concerns about Biden’s proposed capital gains tax reforms. One owner of a horse-breeding farm in her district told the paper, “Doing away with stepped-up basis, that is of big concern to anyone in a family-owned small business. Things like that wind up being a very big concern for succession planning.”

This is not the first time Democrats have hesitated to raise taxes on the rich, even when the polls were on their side. Back in 2010, during the last Democratic trifecta, many Democrats were itching to at least partially repeal the George W. Bush–era tax cuts, which were heavily skewed toward the wealthy. James Carville and Stan Greenberg argued in a strategy memo that “Democrats should embrace a tax debate. Frankly, they do not have many issues where . . . there is a 17-point margin in favor of the Democratic position, 55 to 38 percent.”

Congressional Democratic leaders didn’t embrace the tax debate. In fact, they didn’t even bring Bush tax cut repeal legislation to the floor before the 2010 midterms. The New York Times reported soon after the elections, “Several [senators], including Senators Barbara Boxer of California and Patty Murray of Washington, implored [Senate Majority Leader Harry] Reid not to force the debate. He agreed. All three won re-election.” And none of those three got more than 52 percent of the vote.

Boxer and Murray were progressive senators in blue states, but states with more than a few limousine liberals. And with the country still mired in a recession months before an election, they chose to skirt the tax issue.

Were those admired liberals actually bootlicking wimps? Or clever strategists? Keep in mind, Democrats had already raised taxes on the wealthy earlier in 2010, when they passed the Affordable Care Act, which included hikes mainly falling on the top 1 percent. (Last year, the Tax Policy Center estimated that the ACA raises about $35 billion in annual revenue, almost solely from the top 1 percent of households.) Furthermore, Democrats eventually got around to a partial repeal of the Bush tax cuts; they just waited until Barack Obama won reelection in 2012 and they could pressure Republicans into making the repeal bipartisan. By 2013, The New York Times concluded that “the tax code might now be the most progressive in a generation.”

Of course, Donald Trump’s 2017 tax cut bill ruined Obama’s tax achievements, but now Joe Biden can undo what Trump did. Again, tax policy is often ephemeral, which creates a disincentive to take political risk. Why sacrifice your seat for something that might not last beyond the next election?

Democrats are reasonably and honorably taking a big gamble on the Build Back Better bill. Knowing that their impossibly thin congressional majority may soon disappear, they are crafting what is possibly the biggest single piece of legislation in history, hoping to solidify progressive reforms that Republicans will find hard to undo, even if they take congressional control. But since moderates are insisting that any such bill be “paid for,” enacting new revenue streams has become a legislative necessity. Figuring out which ones? That’s not so easy.

Tax reform is always a political minefield. It can’t be navigated by slapping a slogan on a fancy gown.

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Bill Scher

Bill Scher is the host of the history podcast "When America Worked" and the co-host of bipartisan online show and podcast "The DMZ"