Kamala Harris’s wealthy donors were getting nervous, The New York Times reported last week. They didn’t like the various tax increases that President Joe Biden proposed in his 2025 budget, which Harris supported. One of these, Harris announced Wednesday, will be scaled back. The Biden administration proposed taxing capital gains at the same rate as labor income for households earning more than $1 million. Since Biden (and Harris) wanted to raise the top marginal income tax rate from 37 percent to 39.6 percent, that would make the new capital gains rate for high earners 39.6 percent, up from the current 20 percent. Now Harris is scaling that back to 28 percent.
Among the many reasons to be dismayed by Harris’s retreat is that if she wins, and possibly even if she loses, the Democrats will be in an excellent position next year to impose higher taxes on the rich. Doing so is extremely popular with voters, and other circumstances make a substantial tax hike on wealthier Americans highly likely in 2026. This is no time for Democrats to demand less.
What are these “other circumstances”? Donald Trump’s 2017 tax cuts will expire at the end of 2025. If the House and Senate both go Republican (the former is more likely), President Harris will still be well situated to insist that whatever tax bill she signs improves on the status quo ante.* Otherwise, Harris can do nothing and let all the Trump tax cuts evaporate.
Granted, this is a simplistic way of looking at it. The GOP knows that the Democrats really want to restore the expanded child tax credit, which, during the Covid pandemic, brought child poverty down to 5.2 percent, the lowest rate ever recorded. An earlier child tax credit expansion would be lost if the 2017 tax cut expired, and the Biden administration’s large increase of the tax subsidy for Obamacare, which brought average monthly premiums down by one-third and shrank the uninsured population to a historically low 7.9 percent, also expires at the end of 2025. All that gives Republicans some leverage.
But the Democrats will have a lot more. The only circumstance to change that would be a Republican sweep of the House and the Senate and the White House. Two out of three yields a deadlock in which Democrats maintain the upper hand.
Republicans could, I suppose, claim that if Harris allowed the Trump tax cuts to expire, she’d be violating her campaign pledge (and Biden’s) not to raise taxes on people earning less than $400,000. But Harris could answer that she tried to enact such a tax plan and Republicans wouldn’t let her. And anyway, a return to the status quo pre-Trump wouldn’t hit the under-$400,000 very hard. As a share of after-tax income, according to the nonprofit Center on Budget and Policy Priorities, the 2017 tax cuts for the top 1 percent and 5 percent in the income distribution were more than triple the tax cuts for the bottom 60 percent in the income distribution—i.e., most of us.
The do-nothing fallback is not an advantage to which the Democrats are accustomed. More often, that privilege resides with Republicans, simply by virtue of the GOP favoring less government. In the past, Republicans have been willing to shut down the government to block Democratic budgets and increases in the debt ceiling. They’ve backed down only in response to voter fury at the resultant chaos. One attractive feature of the Democrats’ do-nothing fallback is that it would create no parallel crisis, hence no fury.
And yet, as Senator Elizabeth Warren pointed out in an important June speech on which The New York Times’ Andrew Duehren elaborated this week, the Democrats have blown this before. Warren called it a “doom loop”:
Tax loopholes for the wealthiest individuals and corporations mean the rich keep more and more of their money. And as the money floods to the top, so does power … we end up with tax policy that reflects the values of the top 1 percent—and mostly the top 1 percent of the 1 percent.
That’s true, but Warren left out the part where the rich take hostage the haute bourgeoisie—and even, to some extent, the middle class. Raise taxes on us, the plutocrats say, and you’ll also raise taxes on these peasants! That’s how Democrats came to protect from tax increases everybody making less than $400,000—more than 95 percent of the U.S. population, which is not any sensible person’s idea of good government. A comparable hostage-taking lies behind Harris’s retreat on capital gains. Harris justifies it as a way to protect small businesses; she also proposes raising a $5,000 tax deduction for business start-ups to $50,000. But as Michael Kinsley has observed, the widely subscribed conceit that small businesses are “owned by small people” is an anthropomorphism. Often they’re owned by very big (i.e., rich) people. When they aren’t, they don’t tend to run up large tax bills. Tellingly, the New York Times headline on reaction to Harris’s speech wasn’t “Small Business Praises Cap Gains Retreat” but “Harris Shift on Tax Cheers Her Corporate Backers.” The billionaire investor Mark Cuban crowed on X, “Kamala Harris is listening to business people and getting their feedback on what’s fair and what will lead to more investment in business.… It’s only going to get better.” Let’s hope not.
Blame Barack Obama for classifying $400,000 as a proletarian income. The last time the Democrats were in the kind of advantageous position that they’ll enjoy again next year was 2012, when the Bush tax cuts were due to expire. Obama did not play his hand well. In fairness to him, it was an election year, and the economy was recovering very slowly from the Great Recession, which had ended only three years earlier. There was, perhaps, some risk that a larger tax increase could reverse the very slow recovery.
A further complication was the threat of automatic budget cuts (“sequestration”) under a budget deal that Obama signed into law the year before to raise the debt ceiling. Barring legislative delay or cancellation, the sequester was set to occur simultaneously with the tax increase on January 1, 2013. The combined effect was dubbed the “fiscal cliff.”
Remember the fiscal cliff? At a December 21 press conference, Obama said that “every single one of us agrees that tax rates shouldn’t go up for … 98 percent of Americans.” That “every single one of us” did not include yours truly. “In nearly every respect,” I wrote, “the fiscal cliff poses no more of a threat than the Mayan apocalypse” (which had failed to occur earlier that week). In retrospect, I wish that I’d removed “nearly” from that sentence; my one reservation was that the stock market might crash. I’ve since learned that predicting when the market will or won’t crash is a fool’s errand.
Obama, who was never very good at negotiating with Congress, cut a deal that allowed him to raise the top marginal tax rate on incomes above $400,000 from 35 percent to 39.6 percent, where it had stood under President Bill Clinton. But people who made less than $400,000 got to keep their tax cut. The deal also left in place, for this group only, Bush’s cuts in capital gains and dividends taxes. In total, Obama ended up preserving an appalling 82 percent of the Bush tax cuts, according to the Center on Budget and Policy Priorities.
The “doom loop” didn’t just make the tax code less progressive. It also starved the Treasury for revenue. As Warren noted in her speech, “The United States ranks 31st out of 38 developed countries in terms of tax revenue as a share of GDP.” It’s true! Uruguay taxes more. Morocco taxes more. Jamaica taxes more.
Next year offers President Harris and/or potentially Speaker Jeffries an opportunity to end the doom loop. If Republicans won’t agree to significant progressive tax changes, the Democrats can tell them to get lost, thereby ushering in automatic increases in corporate, capital gains, and income taxes that will make the tax system more progressive than it is today. Walking away from a deal will also save the Treasury about $2 trillion over the next 10 years, because that’s the cost of Biden’s tax plan, relative to letting the entire Trump tax cut expire, according to Glenn Kessler of The Washington Post. (Harris’s concession on capital gains bumps that a bit higher.) Extending all of the Trump tax cut (which, again, Trump can achieve only with a Republican House and Senate) will cost more like $3.5 trillion.
The more I think about it, the more I like the option of doing nothing on taxes next year. That’s going to be awfully hard to beat. Let’s hope that this time around, the Democrats appreciate what a very strong hand they hold. Yielding ground on capital gains is not a good start.
* This article originally misstated the capital gains rate.
