From Pro-Growth to Anti-Growth
A Sample of Democrats’ Plans to Raise Taxes
House Minority Leader Nancy Pelosi described as “accurate” reports that Democrats would increase taxes and roll back the Tax Cuts and Jobs Act (TCJA) if they controlled Congress. Below is some of what could be in store.
1. Raising taxes by $1 trillion to fuel more spending, not reduce deficits. When the tax relief in TCJA was enacted Democrats expressed concern about the national debt. Yet, the Senate Democrats’ infrastructure plan would increase taxes by $1 trillion—not to reduce deficits but to increase government spending.
2. Hiking middle-class taxes through the AMT. Democrats apparently believe that earning $55,000 makes you wealthy because they plan to roll back middle-class Alternative Minimum Tax (AMT) relief to 2017 levels. The AMT was originally intended to prevent wealthy individuals from paying little or no taxes, but before TJCA, it hit millions of taxpayers, including many with modest incomes. If triggered, the AMT requires taxpayers to calculate their tax burdens under two different tax systems and pay the higher amount. TCJA gave relief to middle-income taxpayers by increasing the amount of income exempt from AMT from $54,300 under 2017 law to $70,300 in 2018.
4. Hiking small business taxes. Small business confidence is at record levels and owners are increasing compensation for their workers at the highest rate ever. Democratic plans threaten to erase this progress by raising the top individual rate to 39.6% and reportedly eliminating the pass-through deduction as well. The vast majority of small businesses are set up as “pass-throughs,” which means they pay individual rather than corporate taxes and are therefore very sensitive to high individual tax rates. TJCA provided tax relief to small businesses by lowering the top individual rate to 37% and allowing a pass-through deduction for 20% of business income. This made the top small business rate effectively 29.6%, just slightly above the 28% rate set by the bipartisan Tax Reform Act of 1986.
5. Making the estate tax more painful for family-owned businesses and farms. Democrats plan to cut the estate tax exemption in half, exposing more family-owned businesses and farms to steep taxes and discouraging them from hiring and expanding operations. The estate tax imposes taxes as high as 40% on the value of taxpayers’ estates when they pass away. In 2017, the tax code exempted up to $5.49 million in assets ($11.18 million for married couples) from the estate tax. While this may seem high, assets in a family business or farm—such as farmland, factories, other buildings, equipment, and inventory—can add up quickly. As a result, the NFIB reported that nearly half of small businesses either have done or plan to do costly estate planning to ensure the company can survive to the next generation. TCJA provided additional relief by doubling the amount of assets exempt from the tax.
