Democrats’ budget bans tax hikes for most, but here’s who could pay more

Senate Majority Leader Chuck Schumer, DN.Y., and President Joe Biden arrive at the U.S. Capitol for a Democratic Senate lunch on July 14, 2021.

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Senate Democrats aim to fund a $ 3.5 trillion budget measure in part through higher taxes for corporations and the wealthy, according to a budget framework released Wednesday.

Democrats are “banning” tax increases for households earning less than $ 400,000, as well as other groups like small businesses and family farms, as they seek to raise revenues for the initiatives. clean energy and an expansion of the social safety net, according to the outline.

The tax framework does not include details beyond these high level points. Lawmakers will now work on drafting legislation spelling out the details.

If adopted, the framework would represent a significant transfer of resources from the rich to the poor, according to some experts.

It is a very systematic redistribution of income from top to bottom.

William mcbride

Vice President for Federal Fiscal and Economic Policy at the Tax Foundation

“It’s a very systematic top-down redistribution of income, there’s no question about it,” said William McBride, vice president of federal economic and fiscal policy at the Tax Foundation. “It’s very dramatic – and that’s the design.”

Lawmakers backing the plan have called it a way to ensure a fairer U.S. tax system.

“In a time of massive wealth and income inequality and where half of our people are living paycheck to paycheck, this reconciliation bill will finally meet the needs of our working families by asking the rich and big business to pay their fair share of taxes. said Senator Bernie Sanders, I-Vt., chairman of the Senate Budget Committee.

The framework shares many elements of President Joe Biden’s tax agenda.

The after-tax income of the richest 1% of Americans is set to fall 5% next year following a White House budget released in May, the current best guide to analyzing the impact of the Democrats’ plan. Senate, according to an estimate by the Tax Foundation. .

Meanwhile, after-tax income would increase by 16% for the bottom fifth of earners in 2022, according to the analysis.

(The top 1% represents people earning more than $ 413,000 per year, and the bottom fifth includes those earning less than $ 20,000, McBride said.)

Biden’s tax plan calls for a top tax rate of 39.6% for the richest Americans, up from 37% currently.

Biden also proposed to almost double the top tax rate on long-term capital gains for those with annual income over $ 1 million a year, and tax assets with more than $ 1 million. of appreciation on the death of the owner.

The top federal capital gains rate would rise to 43.4% from the current 23.8%, after factoring in a 3.8% surtax.

Meanwhile, the Biden administration – and Senate Democrats – are reportedly extending a recent expansion of the child tax credit, the earned income tax credit and the child care tax credit and dependents.

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They would also fund two years of free universal preschool, create a comprehensive national paid vacation program, and expand health insurance to cover dental, vision and hearing costs, among other measures.

The Senate plan also calls for stricter tax enforcement. The Treasury Department estimates it can raise $ 700 billion over a decade, in part by cracking down on wealthy taxpayers who underestimate their incomes in opaque business structures.

Democrats have called for an increase in the corporate tax rate, from the 21% currently set by the Tax Cuts and Jobs Act in 2017. The White House has proposed 28% and is working with to other countries to establish a global minimum tax framework to prevent corporate flight. to tax havens.

It is not clear whether all of these initiatives will end up in legislation that Senate Democrats are working on or change as a bill is drafted.

Some tax experts are skeptical. Senate Democrats can raise the $ 3.5 trillion based on the policy ideas set out in their framework, especially without raising taxes for those earning less than $ 400,000. (Beyond taxes, Democrats would also raise revenues from measures like renegotiating the prices of Medicare prescription drugs.)

According to Jason Fichtner, vice president and chief economist of the Bipartisan Policy Center, nearly doubling the capital gains tax rate for wealthier Americans would likely lead to tax mitigation strategies that reduce the amount. revenues paid to the federal government.

Instead of selling a valued asset and paying tax, the wealthy may more frequently choose to borrow against its value or employ a strategy to offset the gain (and associated tax) against portfolio losses, a- he declared.

And while Senate Democrats will try to avoid imposing higher taxes directly on lower and middle class Americans, it might be difficult to avoid the so-called “indirect” taxes that could result from a tax rate. higher corporations, Fichtner said.

The idea here is that companies can seek to offset a larger tax bill with lower wages for employees or higher prices for their goods and services, which would likely impact some employees under 400,000. $, according to Fichtner.

But companies could also offset these tax costs by reducing dividends paid to shareholders, which would largely affect the wealthy, who own shares disproportionately, he said.

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