by Greg Valliere, AGF Management Ltd.
HOUSE DEMOCRATS have already begun to negotiate with themselves on the $3.5 trillion social spending bill — which almost certainly will get a haircut, as we have predicted for months.
THE EMERGING BOTTOM LINE is that tax hikes will be less onerous for business than favored by progressive Democrats, who face just enough opposition from moderate Democrats to make this a roughly $2 trillion bill, not a $3.5 trillion package.
ALL EYES ON THE HOUSE WAYS AND MEANS COMMITTEE: Its chairman, Richard Neal, and many key members have been tight-lipped on their tax proposals; Neal believes that if his proposals are in public for weeks, they will attract incoming fire.
NEAL CIRCULATED A DRAFT YESTERDAY that included some significant changes, however. He would raise $2.9 trillion in taxes, which could leave a $600 billion hole to fill — largely paid for by a vague “dynamic scoring” provision, plus drug price controls and stronger IRS enforcement. But he may need even more money, since he didn’t include liberalization of the state and local tax (SALT) break or a permanent extension of the child tax credit.
SIGNIFICANTLY, NEAL WOULD LOWER Biden’s proposed 28% top corporate rate proposal to 26.5%, with lower rates for small businesses. This is the first haircut on corporate rates, but Manchin probably will get more — a 25% top rate. A 39% top individual tax rate is likely to prevail.
RESPONDING TO INTENSE PRESSURE FROM INVESTORS, the Neal proposal would raise the top capital gains rate only to 25%, up from the current rate of 20%. Biden wanted to roughly double the cap gains rate.
THE NEAL PLAN CLEARLY goes after the super-rich and big corporations. There would be a 3% surtax on high-income individuals who make more than $5 million a year, and only firms earning more than $5 million annually would be subject to the top corporate rate. As expected, there are sharp limits on U.S. firms’ deductions of taxes they can claim on foreign earnings.
THESE PROPOSALS ASSUME that the House can pass a bill by Sept. 27, the goal set by House Speaker Nancy Pelosi. Not only is that unlikely, a bigger issue is whether Manchin and a handful of moderate Democrats could scuttle the entire package.
OUR ODDS ARE 60-40 that Congress will pass the initial $1 trillion infrastructure bill and a slimmed-down second package of social spending and tax hikes. But as Bernie Sanders made clear yesterday, a skinny second bill could prompt progressives to reject everything. Gridlock is a real threat.
THUS NEAL IS WORKING ON A NARRATIVE that the tax hikes will largely hit the very wealthy and huge corporations, a shrewd political move. But Manchin and others dislike many of the provisions and — more importantly — they object to the enormous price tag, which they say will drive inflation higher.
THERE’S MORE WORK TO DO before all the Democratic factions are on board, complicated by an issue that will compete for attention — raising the debt ceiling before a crisis erupts in about a month.
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This post was first published at the AGF Perspectives Blog.