Harris's 'Centrist' Pivot on Capital Gains Is Just Realism

She won't be able to raise the rate a lot even if she wants to, so why take the flak for trying? Trump, on the other hand, may be able to shoot for the moon.

Dear readers,

Last month, Kamala Harris declared her intention to ban “price gouging” on food, which drew cheers from left-populists who saw this as evidence of Harris continuing the leftward shift on economic policy from Obama to Biden. There were also accusations of Marxism from the right, and a lot of disappointed columns from centrist economic commentators. This month, Harris has made a series of tax policy proposals, and one marks a significant rightward shift from President Biden: Harris seeks an increase in the top capital gains tax rate, but not as much as the current administration officially wants (Harris announced a target increase from 20% to 33%, down from Biden’s desired 44.6%).¹ Now, the diagnosis is flipped: Harris is trying to show business leaders and investors that she’s not aligned to the Warren wing of the party and wishes to return to the somewhat-warmer relations between business and Democrats that prevailed under Barack Obama.²

In both cases, I think Harris is playing the politics smartly, but observers across the political spectrum are over-reading the implications of her pronouncements. Opposing “price gouging” is a popular talking point, many states have laws about the practice that don’t affect the economy much for good or ill, and Harris’s commitment to fight it was vague — nowhere in her speech did she endorse the specific, far-reaching price-control legislation that some leftists want, and even if she did endorse it, she’d never get it through Congress. Similarly, proposals to sharply raise capital gains taxes are a major pain point in Democrats’ relationship with business owners and leaders. A capital gains tax rate over 40% is something else Congress won’t pass, and conceding that reality is an easy way to dial tensions down with the business community.

In each case, she’s picking her shots — supporting a vague and popular idea, while moderating away from a doomed one that causes political problems for her party. That one shot takes her to the “left” and another to the “right” is almost beside the point. To me, it indicates Harris’s intention to muddle through — if she wins, she will either run a divided government or one with the narrowest of Democratic majorities, and she’ll face budget deficits that significantly exceed appropriate levels for current economic conditions. She won’t have a lot of room to do big things. I expect her to pocket the relatively modest tax increases she can get through Congress (even with a divided Congress, she’ll have some leverage due to the 2025 expiration of most of the Trump tax law). I expect her to seek some sort of expansion of the child tax credit and the EITC, though the size of that expansion will be limited by fiscal and political conditions. There will be other small-bore changes, like the politically popular small-business tax cut ideas she announced this week. And otherwise, I just don’t expect a lot to change.

Democratic presidential nominee Kamala Harris waved to the crowd during a campaign stop at the Throwback Brewery on September 4, 2024 in North Hampton, New Hampshire. During the visit, Harris proposed an increase in the capital gains tax rate for high earners, and new tax cut to help entrepreneurs with the costs of starting small businesses. (Photo by John Tully/Getty Images)

There’s an asymmetry here with Donald Trump. If he wins, he’s likely to have more room to run. He will very likely have a Republican congressional majority, and he is likely to have enough Republican senators — 52 or 53 or 54 (or, with a very good night, more) — to move his policy agenda more effectively than he did in 2017-18. He’s also more likely than Harris to make economic decisions without regard for their effect on inflation and interest rates. She would be strongly motivated to avoid having to defend 5% inflation in a midterm election, but he might not heed his economic advisers’ warnings about the risks of exploding deficits, or he simply might not care.

That’s worth keeping in mind when Trump says he’s going to cut the corporate income tax rate from 21% to 15%. Trump clearly expects, if he wins, to expand on his playbook from the first half of his first term — use a Republican congressional majority first and foremost to cut taxes, especially on high earners and businesses. The problem for him is the great difference in economic conditions between now and 2017. Unlike then, a large, deficit-financed tax cut risks causing a major spike in inflation. Trump seems to think his additional tax cuts will be addressed through sharply increased tariffs and/or sharp spending cuts that Elon Musk will figure out. Of course, you can’t materially reduce the federal budget simply by eliminating “waste” — you have to cut spending on things people value. Sharply higher tariffs will lead to the same political problems with consumer prices that high inflation would.

The most obvious way for Trump to cut taxes much more without spiking inflation or interest rates is for him to also cut spending a lot. Perhaps, with a slightly larger congressional majority, Trump will manage this time to pass some form of Obamacare repeal — slash Medicaid, break the system of subsidies that undergirds the individual health insurance market, and thereby save a lot of money and make fiscal space for more tax cuts.³ And if Republicans hold a narrow majority — say, just 51 seats in the Senate — Obamacare repeal will be off the table, along with plans to slash other safety-net programs like food stamps. In that case, Trump may be consigned to simply muddle through, too — or to make a big and unpopular mess in the economy by cutting taxes but not spending, and causing another huge spike in inflation.

Very seriously,

Josh

1. You may see the proposed top rates discussed elsewhere as being 28% and 39.6%, respectively. Those would technically be the top federal income tax rates on capital gains under Harris’s and Biden’s plans. But high earners also pay an income surtax called “additional Medicare tax.” Currently, this tax is 3.8%, though Harris and Biden would raise it to 5% for the highest earners. When you add those taxes together, you get true effective federal tax rates on capital gains of 33% and 44.6% under the respective plans. For comparison, the current top rate is 23.8% — that is, 20% income tax plus 3.8% additional Medicare tax.

2. The idea that Obama had warm relations with “business” reflects a somewhat Silicon Valley-centric view of what “business” is. I recall a lot of bankers being awfully whiny about the way Barack Obama talked about them in the financial crisis and its aftermath, even after he worked with George W. Bush to push an unpopular rescue of the industry through Congress and then chose not to seek a lot of financial-industry scalps through prosecutions.

3. I do think the question of whether he could and would do this is more open than people assume. Could Republicans pass something akin to “skinny repeal” with 52 senate seats — that is, assuming that Sens. Susan Collins and Lisa Murkowski would oppose repeal like they did in 2017, but all other Republicans would support it? On one hand, economic conditions now create greater pressure for Republicans to find significant spending cuts. On the other hand, the Affordable Care Act has been woven deeper into our country’s health-care financing fabric in the ensuing years, with many conservative states implementing the Medicaid expansion. This means repeal would cause more economic and political disruption than would have been the case in 2017. Plus, Obamacare repeal is no longer the rallying cry for Republicans that it once was. I’m sure, with a large enough majority, the party would go for it. But I don’t know that 52 seats would be enough.