Washington Weekly: Wealth Tax

The Senate approved the nominations of Miguel Cardona to serve as Secretary of Education, Gina Raimondo to serve as Secretary of Commerce and Cecilia Elena Rouse to Chair the Council of Economic Advisors. It is also on the verge of passing President Biden’s $1.9 trillion COVID relief bill (this weekend). The House passed a comprehensive election reform bill (see below) and a police reform bill (see below).

The Senate will vote on various Biden administration nominees. The House is expected to pass a bill to enhance background checks for purchases of firearms and a bill to reclassify some independent contractors as employees so they can unionize.

The Next COVID Relief Bill. 

The Senate is poised to pass its COVID relief bill this weekend with an expected tie-breaking vote cast by Vice President Kamala Harris. Several provisions of the bill were altered this week by rulings from the Parliamentarian’s office, resulting in differences with the House-passed bill of last week. Therefore, the Senate-passed bill will have to be sent back to the House for a final vote there. The Senate vote should occur this weekend, while the House vote should occur early next week.

Election/Voting Reforms. 

The House this week narrowly passed a bill that would make significant changes to the rules surrounding federal elections and voting rights. The bill is controversial since it focuses on election issues that the two parties have fundamental disagreements on. While the House passed a similar bill in the last Congress, House Democrats have made some updates to reflect some of the drama and disputes of the 2020 election. In particular, the legislation has provisions on such topical and delicate issues as mail-in voting, early voting, voter registration, voter access, ballot harvesting (a process whereby individuals can designate other individuals to deliver their votes), voting by felons and public funding of candidates. The bill sets federal standards in many of these areas, preempting rules that states have set over the years. This is the biggest area of controversy in the bill. While the bill is highly unlikely to muster the needed 60 votes to advance in the Senate, Senate Democrats likely will bring it up for a vote later this year.

Wealth Tax. 

Senator Elizabeth Warren (D-MA) formally introduced her “wealth tax” proposal this week after making it a focal point of her presidential campaign last year. Her bill would impose a 2% annual tax on wealth over $50 million and 3% on wealth over $1 billion. To enforce this tax, her plan would provide the IRS with an additional $100 billion in funding. She and her supporters believe this plan would raise almost $3 trillion to help fund new domestic spending initiatives. However, we don’t envision a wealth tax being enacted anytime soon. While this proposal has support from progressive Democrats, it will not garner enough support from the more moderate faction of the party. Indeed, prior to the release of this bill, Treasury Secretary Janet Yellen indicated that President Biden does not support a wealth tax. Nevertheless, by moving the debate to the left, the legislation could bolster the prospects of more traditional Democratic proposals to increase estate taxes and taxes on capital gains. Changes to the estate tax are possible, although a few key moderate Democrat senators have expressed opposition to major changes to the tax in the past. If Democrats do end up advancing a major tax package into law, an increase in the capital gains tax rate is more likely.

April 15. 

The tax filing deadline of April 15 is just around the corner. Although the IRS is already accepting returns, like many of you we are still organizing our paperwork and dusting off the calculator to begin the painful process of filing our taxes. Last year, the filing date was postponed due to COVID. An extension for 2021 has been endorsed by Congressman Richard Neal (D-MA), the chairman of the House tax-writing committee, and is something that continues to be discussed among some Washington policy makers. While he and other lawmakers are concerned about a shortened filing season and the low volume of questions currently being answered by the IRS, the IRS actually had a higher level of returns than it usually does when it began to accept returns in mid-February. The IRS has indicated that it plans to stick with the April 15 deadline but has not completely closed the door to the possibility of an extension. Bottom line: stick to the current April 15 deadline.

Police Reforms. 

As noted above, the House passed a sweeping police reform package earlier this week. The bill targets federal law enforcement practices and encourages state and local governments to enact changes at the local level through grant awards and other incentives. Among other things, the bill bans law enforcement agencies from racial profiling and using chokeholds, updates the statute for prosecuting police misconduct, creates a national database to track police misconduct, and increases funding for police training. Perhaps the most impactful, and controversial, part of the bill is its limit on "qualified immunity," which has shielded certain government officials (including police officers) from being sued over actions performed on the job. Reforms in this regard would make it easier for individuals to sue police officers for mistreatment. The bill passed the House along partisan lines and will face challenges in the Senate, where 60 votes will be needed to pass the bill. Democratic leaders in the House already have begun having conversations with Republican Senators in an effort to craft a compromise bill that would earn bipartisan support, but, as things stand now, the two sides are no closer to reaching a deal than they were last summer. Absent changes, the House bill likely will fall short in the Senate.

SEC Agenda. 

The Senate Banking Committee held a hearing this week to consider the nomination of Gary Gensler to head the SEC (along with the nomination of Rohit Chopra to head the Consumer Financial Protection Bureau). Not surprisingly, Senators had lots of questions relating to the recent market volatility in GameStop and other stocks, with Gensler indicating that he will focus on reviewing payment for order flow practices and the gamification of certain retail trading platforms. Congressional committees will hold additional hearings on the subject, including an eventual one with the SEC, which is conducting an ongoing investigation. Gensler also highlighted the need for greater investor protection in cryptocurrency markets and indicated that increased corporate disclosure of climate risk and of other areas, including diversity and political spending, would be a priority under his leadership. Additionally, there are some issues like money market fund reform that were not raised at the hearing but that nevertheless are likely to be key priorities for the Commission in the next year or so. While the Banking Committee likely will try to quickly approve the nomination in the next two weeks, with a backlog of nominees and other pressing business in the Senate, it may still be a couple of months before Gensler enters the SEC.

Social Security. 

We have received numerous questions regarding potential changes to Social Security. Overall, we do not believe there will be any major changes to Social Security this year or next. While Social Security is under fiscal duress, it is not in the dire position it was in 1983 when it was weeks away from not being able to meet its obligations to Social Security recipients. There also is nothing resembling bipartisan agreement on potential changes to the program at this time. While Democrats are considering the use of budget reconciliation to pass a myriad of tax increases and reforms, budget reconciliation rules explicitly prohibit any provisions relating to Social Security. This means bills considered under budget reconciliation cannot include any Social Security reforms, including changes to the payroll tax that funds the program. While President Biden has spoken in the past about applying the 6.2% payroll tax to individual earnings over $400,000, we do not believe such a change would be allowed under reconciliation. We may hear more chatter in Washington about Social Security this year, but we do not believe any meaningful changes will be made to the program in the foreseeable future.

US and the Beijing Winter Olympics. 

Various lawmakers this week echoed the calls by human rights organizations for the US to boycott the Winter Olympics, which will be held in Beijing next year. We see virtually no chance of this happening unless US-China relations continue to significantly deteriorate over the next year. Relations are certainly stressed now but not at a level that we would expect the US to seriously consider dropping out of the Winter games. Various lawmakers will continue to press this issue this year (and they will continue to make headlines in the process), but their efforts won’t get very far.

Time for a Third Party? 

A recently released Gallup poll showed that 50% of Americans now identify as independents, a record high for Gallup polling. The trend of more Americans identifying as independents, which reflects record low approval ratings for both the Democratic and Republican parties, has led many to speculate about the viability of a third party. The American public supports the idea, with 62% saying that a third major political party is needed, including majorities in both parties and 70% of independents. On the surface, this would seem to indicate that the US is primed to have a viable three-party system. Despite the public appeal, we are skeptical that a viable third party could emerge soon. Minor third parties do frequently appear on the ballot and garner a small portion of the vote, but it is exceedingly hard for them to compete on a larger scale for a variety of reasons, including the structural campaign advantages afforded to the existing major political parties and the public’s ingrained expectations of elections as a contest between the two major parties. It is clear that the American public isn’t satisfied with the two-party system as it exists today, but that dissatisfaction is unlikely to result in a viable third party anytime soon.