According to Szapiro, every single Democrat voted against reducing the corporate business tax rate from 35% to 21% and rejected the current global income tax regime in 2017. “There are enough votes to increase it at least a few percentage points,” he said.
“There's simply no way to get to $2 trillion in tax revenue without at least a corporate business tax rate increase and, most likely, an increase in taxes on foreign profits. That's why Biden proposed both on March 31; there are not many alternatives available,” Szapiro said.
Biden’s plan would not only raise the corporate tax rate to 28%, but would also create a 15% minimum tax on corporations with book profits of $100 million or higher. The president also wants to add a new 10% surtax on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market,” his plan said. This surtax would raise the effective corporate tax rate on this activity up to 30.8%.
There is some possibility that Manchin and moderate Democrats can persuade Democrats to reduce the new corporate rate to 25%, Szapiro said. But “they may also conclude that 28% is better than the alternatives—that 3% difference is around $300 billion in revenue, which either must be made up with tax increases elsewhere, less spending, or more debt.”
The “wild-card” source of revenue would be a financial transactions tax of 10 basis points on every sale of a security, which the progressive wing of the Democratic caucus has pushed for in recent years, he said. “I wouldn’t sleep on this,” Szapiro said. “We think that such a tax is less likely, but we never want to ignore a source of $700 billion in revenue that has some Democratic support, particularly from the left wing of the caucus. We'll be publishing a longer paper on this shortly, but there are some political and mathematical challenges for such a tax."
There are a number of drawbacks to a financial transaction tax, Szapiro said. Even if investors did not immediately figure out workarounds, it would reduce securities' values since they would cost more to trade. Democrats would be blamed for falling 401(k) values and it could create liquidity issues for some securities, potentially destabilizing financial markets, he said.
Although the financial transaction tax raises revenue in theory, “many other countries that have tried these taxes have found that investors are pretty good at tax avoidance, and the taxes changed behavior more than raising cash,” Szapiro said.
With regard to individual income taxes, “we think some increases are coming for high-income families. There will also be a lot of emphasis on individual income-tax loopholes, which are perceived as unfair. But closing these loopholes does not raise that much money,” he said.
For example, the Congressional Budget Office estimates that taxing carried interest at normal income rates only raises around $14 billion over 10 years.
But raising estate taxes would net the government more. Removing the step-up basis for inherited wealth would increase capital gains for heirs when they sell inherited assets by $110 billion over 10 years.
The biggest source of uncertainty for these tax hikes “is the possibility that a Democratic senator from a Republican-controlled state dies,” Szapiro said. “There are four senators over the age of 70 from such states. When we look at the actuarial tables and crunch the numbers, it yields a 9% chance of such a death. This wouldn't be unprecedented; Democratic Sen. Ted Kennedy's death in 2009 almost derailed the Affordable Care Act.”