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  • Biden’s tax hikes could be a tough sell in 2021. What if he pairs them with big refundable tax credits?

Biden’s tax hikes could be a tough sell in 2021. What if he pairs them with big refundable tax credits?

By on March 23, 2021 0

Democratic presidential candidate Joe Biden would raise taxes by about $4 trillion over the next decade, almost all of it on businesses and high-income households. Although Biden has changed his plan somewhat in recent months, he still looks a lot like the proposal analyzed by the Tax Policy Center in March.

The real question for Biden is how much of his ambitious tax plan Congress could realistically pass next year. Direct tax increases can be a tough sell, but combining them with tax cuts for low- and middle-income earners could make the job easier.

In a story earlier this week (paywall), the wall street journal tax journalist Richard Rubin raised the electoral uncertainties: Unless Democrats take control of the Senate, Biden’s tax agenda could be DOA.

But a President Biden could face an even bigger stumbling block in 2021: the COVID-19 economy. The realities of an ongoing recession can interfere with his tax hikes in two ways. First, would a tax increase make sense if the economy remains in the doldrums? Such a move seems inappropriate.

A long list of things to do

Equally difficult will be Biden’s historically long to-do list. Addressing public health concerns about the pandemic itself will inevitably be at the top. Convincing many Americans to social distance and wear a mask; expand testing; and developing, distributing, and administering a vaccine will take a huge amount of Biden’s time and energy.

But covid-19 won’t be Biden’s only challenge. He must rebuild our tattered relationships with allies around the world, and he will come under enormous pressure from Democratic activists to address racial inequality, broader health care reform, climate change and immigration.

It is axiomatic that at best a new president gets a major freshman initiative. In the likely 2021 environment, it’s hard to imagine Biden choosing tax increases.

An opportunity

Still, Biden may have an opportunity. While he may not be able to raise taxes until the economy recovers, the new president could have more success with a revenue-neutral reform that shifts more from the tax burden of low- and middle-income households to those of high income.

To see the opportunity, consider what Biden is offering:

About half of his proposed tax hikes target high-income households and the other half target businesses.

For households earning $400,000 or more a year, it would raise personal income tax rates, impose the Social Security payroll tax, limit itemized deductions to 28%, and phase out the deduction. special income tax for intermediate businesses such as partnerships. . It would tax capital gains and dividends at ordinary tax rates for those earning $1 million or more, and tax unrealized capital gains on death.

At the same time, it would raise the corporate income tax rate from 21% to 28%, raise taxes on US-based multinationals, and eliminate many tax preferences for the real estate sector.

Who would pay more?

TPC estimates that the top 20% of households (who will earn around $170,000 or more) would bear nearly 93% of the burden of Biden’s proposed tax increases, and the top 1% nearly three-quarters.

In 2021, Biden’s tax changes would reduce the after-tax incomes of the top 1% of households (those earning about $837,000 or more) by about $300,000 on average, or 17%, the tax burdens of 0 .1% of the wealthiest (earning $3.7 million or more) would increase on average by about $1.8 million a year, or almost a quarter of their after-tax income.

The tax changes would reduce the 2021 after-tax incomes of middle-income people by about 0.4%, or $260, and reduce the incomes of people at the bottom of the income distribution by about 0.2%, or 30 $. Almost all of these increases represent the portion of corporate tax increases that would be borne by workers and shareholders. Low-to-moderate income households would pay roughly the same amount of personal income tax as under the current legislation.

Refundable tax credits

Here is the opportunity. Biden is not just proposing tax increases. He also suggested a modest expansion of the Earned Income Tax Credit (EITC) for childless workers. And his running mate, Senator Kamala Harris (D-CA) offered a ambitious $2.7 trillion tax credit for low- and middle-income working families, called LIFT the Middle Class Act. Law. Biden may not be able to sell even a Democratic Congress on a huge tax hike in a still shaky economy, but by passing a more ambitious set of refundable tax credits, he could convince lawmakers to shift the burden. taxes up economic food. chain.

It still won’t be an easy sale. After all, even if Democrats control the Senate, it will likely only be by a few votes — and many of those Democrats could be reluctant tax collectors. But pairing his proposed tax hikes with tax cuts for low- and middle-income households could be a way for Biden to raise taxes on the wealthy, at least in 2021.