Why corporations and the wealthy should back Democrats’ middle-class tax cut

President Biden and the Democratically controlled Congress are poised to enact one of the largest middle-class tax cuts in American history. But the fate of that tax cut depends on raising taxes on the wealthiest individuals in the country as well as a hike in the corporate tax rate.

While the devil is always in the details, if these taxes on the highest earners and corporations are raised reasonably and responsibly, they should support Democratic efforts to give urgent and meaningful tax relief to roughly 100 million Americans, relief that will have the added benefit of growing the economy.

For decades, the wages of the middle class and hourly wage workers barely budged. Meanwhile, the salaries of senior executives have enjoyed a steady, upward escalator ride surpassed only by the investments they hold. No one should begrudge their success nor that of American businesses that have done well and created jobs and opportunities for countless millions. But no one can credibly argue that America’s vast middle and working classes have benefited to the level of past economic eras.

To remedy this, Biden and congressional Democrats have proposed two major changes to the tax code that together provide middle- and lower-income Americans massive tax relief. The Child Tax Credit, expanded temporarily in Biden’s American Rescue Plan, provides low- and middle-income parents a check of up to $300 per month for each child in the household. Extending this working parent dividend would give an additional $1.1 trillion in tax relief over the course of 10 years to parents to pay for clothes, braces, a car repair or whatever is necessary to make ends meet or put aside for a rainy day — and 82-cents of every dollar in tax relief would go to families making less than $160,000 per year. It would also cut child poverty in America nearly in half.

The second tax break is a needed expansion of a working wage tax credit that has been bipartisan and popular since first enacted in the 1970s. Known as the Earned Income Tax Credit, Democrats are proposing increasing the benefit that low-wage work would pay single adults such that it would add up to $1,000 to their yearly take-home pay. The total cost of this working wage tax cut is approximately $100 billion over 10 years.

Together, these tax breaks could amount to $1.2 trillion dollars and would help ensure that full-time work earns the dignity of a good life. But the way Congress has written the instructions for how this legislation (known as budget reconciliation) must move forward, this middle-class tax cut must be offset with tax increases elsewhere. That is where hikes in the corporate tax rate and higher taxes on individuals earning more than $400,000 come into play. Without those tax increases, the tax breaks for everyone else can’t happen.

On corporate taxes, the final package is likely to set the corporate rate somewhere between 28 percent, which is what Biden proposed, and 25 percent where many centrist Democrats net out. House Democrats recently floated 26.5 percent as a possible compromise. It’s worth noting that 25 percent was the rate the business community was fighting for much of the past 25 years until former President Donald Trump lowered their rates to 21 percent.

While no one wants to pay more in taxes, business has done very well in the nascent Biden era. His steady stewardship of the economy has led to an astounding 6 percent GDP growth rate so far this year. The stock market has hit more than 50 record highs in 2021. And the bipartisan infrastructure bill that will soon be ready for the president’s signature will be a major help to American businesses and the broader economy for years to come.

As for the highest earners in America, Democrats are in agreement that the top tax rate should return to the Obama level of 39.6 percent, up from the Trump level of 37 percent. But that only covers salaried income and not money earned from investments which are taxed at a much lower rate. The typical American earning more than $1 million in a given year makes less than 30 percent of their income through salary.

Democrats are all over the map when it comes to proposals to tax investment income. The hope is that Democrats reach a compromise that eliminates offshore havens, closes loopholes and raises more money from investment income while still encouraging risk capital.

In the balance is one of the most significant middle- and working-class tax cuts in history. We’ve learned through the pandemic that more money in the pockets of everyday people creates growth and economic activity. That is good for corporate America, for upper-income America and for all other Americans.

Jim Kessler is executive vice president for policy at Third Way, a centrist Democratic think tank.