Biden's soak-the-rich tax plan diluted by Democratic allies in Congress

President Biden campaigned on a promise to raise taxes on the very richest Americans, unfurling just months after he was elected one of the biggest tax hikes in decades to help fund his $4 trillion economic agenda. 

As part of his sweeping "Build Back Better" agenda, Biden called for a slew of new taxes on corporations and the top sliver of U.S. households, including raising the corporate tax to 28%, nearly doubling the capital gains tax rate to 39.6% from 21%, restoring the top individual income tax rate to 39.6% from 37% and taxing capital gains at death. 

"My fellow Americans, trickle-down economics has never worked," the president said in April during his first primetime address before a joint session of Congress. "It’s time to grow the economy from the bottom up and middle out." 

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But on Monday, House Democrats released a blueprint to fund the $3.5 trillion climate and family plan that watered down some of the most ambitious elements of Biden's original tax plan. 

Under the outline from the House Ways and Means Committee, the corporate tax rate would be diluted to 26.5% — and would only apply to businesses earning more than $5 million in taxable income. The tax rate would actually decline to 18% for small businesses earning less than $400,000; all other businesses would continue to pay the current rate of 21%. 

And although the measure includes a 3% surcharge on incomes exceeding $5 million, it completely excludes Biden's move to end the so-called "step-up in basis," which allows heirs to inherit assets while paying minimal capital-gains taxes (based only on the time they receive the asset and the time they sold it, allowing them to reduce the tax bite).

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House Democrats also weakened Biden's push to tax long-term capital gains as ordinary income for individuals earning more than $1 million. Instead of raising the top rate on capital gains to 39.6%, Democrats pushed it incrementally to 25%. 

Taxes on long-term capital gains – generally classified as an asset that's held for more than one year – currently range from 0% to 20%, depending on a person's income. Wealthier investors are also subject to an additional 3.8% tax on long- and short-term capital gains that's used to fund ObamaCare. Short-term capital gains on assets sold within a year are typically taxed as ordinary income.

Congress estimates that stepping up the basis of inherited assets costs the government about $43 billion a year. Eliminating the practice – coupled with raising the top statutory rate on capital gains from 20% to 39.6% – would generate an estimated $113 billion in new revenue over the next decade, according to recent findings from the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania's Wharton School.

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By scaling back the size of the tax hikes, Democrats are left with less money to use toward funding a massive expansion of the social safety net, including establishing universal pre-kindergarten, free community college, paid family leave and tax credits for low- and middle-income households. 

"It would be a monumental mistake for Congress to pass a bill that really exempts billionaires," Sen. Ron Wyden, D-Ore., said of the House's proposal. 

The tax hikes laid out by the Ways and Means Committee could generate as much as $2.1 trillion in revenue, the nonpartisan Joint Committee on Taxation estimated on Monday.