House Democrats this week have proposed a bill that would sharply raise taxes on wealthy Americans and corporations while slashing taxes paid by lower-income citizens. On balance, the proposal would raise an estimated $900 billion in additional revenue over 10 years to fund some of the Biden administration's expansive social spending plans.
The proposal, released by House Ways and Means Committee Chairman Rep. Richard E. Neal, a Democrat from Massachusetts, would move policy in the same general direction as a plan released by the Biden administration earlier in the year. This constitutes the opening salvo in what is certain to be a hard-fought battle over future tax policy. But the plan does not go as far as Biden favors in raising taxes on businesses, capital gains from the sale of investments, and the treatment of inherited wealth.
"I think the way to summarize it is, it's enormous," said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center in Washington. "It raises taxes by about $2.1 trillion, it cuts other taxes by about $1.2 trillion — that's moving around almost three-and-a-half trillion dollars in taxes over 10 years. That's huge."
"It's a very big mix of raising taxes on high-income people and corporations, and cutting taxes on low and middle income households," he added in an interview with VOA.
According to an analysis by the Congress's Joint Committee on Taxation, the bill would raise the average tax rate on people earning $1 million or more a year to 37.3% from 30.2%. At the other end of the financial spectrum, it would assure that people earning less than $20,000 per year would have a negative tax liability — meaning that they would receive tax refund checks from the government, even if they had paid nothing in federal taxes in a given year.
A more complex tax code
The Democrats' proposal continues the trend in U.S. policy of using the tax code as a substitute for direct legislation. The proposal contains tax credits for housing construction, union dues, green energy, local journalism, and more.
"It seems like every aspect of the [Democrats'] agenda seems to need to have a tax credit component," said Alex Muresianu, a federal policy analyst at the Tax Foundation in Washington.
"And it doesn't necessarily make sense to try to run your policymaking entirely through the tax code."
Child tax credit
As a response to the coronavirus pandemic, earlier this year Congress authorized a tax credit for families with children under 18 years of age, and structured it in a way that delivered monthly payments of several hundred dollars per child directly to parents. The infusion of cash led to a sharp decline in childhood poverty rates in the United States, and the tax proposal would make that credit permanent.
However, to avoid running afoul of budget rules, the Democrats have proposed having a number of related measures expire in 2025. At the same time, they strive to make sure that the proposal jibes with Biden's promise not to raise taxes on Americans earning less than $400,000 per year.
Personal income tax changes
The House proposal would raise the top marginal income tax rate, which applies only to earnings above $400,000 per year for individuals or $450,000 for married couples, to 39.6%. A bill passed by Republicans and signed into law by former President Donald Trump had reduced the top rate to 37% for all income over $500,000.
The House proposal includes an additional surtax of 3% on income over $5 million, creating what amounts to another tax bracket for exceptionally high-earning Americans.
Many businesses in the U.S. are structured as pass-through entities, which means their profits are taxed as personal income to their owners. Current law allows a 20% pre-tax deduction of qualifying income. The bill would cap that deduction at $400,000 for an individual and $500,000 for a married couple.
Capital gains tax changes
The proposal's change in the treatment of capital gains — the earnings an investor sees when selling an asset that has gone up in value — is far less dramatic than the Biden administration had requested. Instead of heeding the president's request to raise the 20% top rate on capital gains to 39.6%, bringing it in line with normal income, the plan would raise the rate to 25%.
Under current law, when someone dies with unrealized capital gains, those gains are wiped away when the assets are passed on to heirs. In some cases that allows the very wealthy to pass on large fortunes to their heirs tax-free.
The Biden administration had wanted the U.S. to begin taxing unrealized capital gains at death, but the Democrats' proposal does not contain a provision to do that.
The Republican-led tax changes in 2017 included a drastic reduction in the corporate income tax, from 35% to 21%. The Democrats' proposal would raise the corporate rate to 26.5%. That's not as much of an increase as the 28% the Biden administration had proposed, and is still far below the rate in force in 2017.
The business tax increases, critics say, will make the United States a less appealing place to do business.
"It's lower than previous proposals, but still, when you factor in state level corporate taxes, that would probably put us about third [highest] in the Organization for Economic Cooperation and Development countries. So that is a major downside of the plan," said Muresianu of the Tax Foundation.
International business taxes
At a time when the Biden administration is working with partners on the international stage to reform the way multinational businesses are taxed on their income, the House bill proposes a minimum tax on the foreign earnings of U.S. companies that is lower than the administration has requested.
The Biden administration has advocated for a 21% tax on the overseas earnings of U.S. businesses, but the House plan sets the levy at 16.6%.
In talks with other developed countries, the Biden administration has been pushing for the worldwide adoption of a 15% minimum tax on the domestic earnings of corporations. The idea is to make it less attractive for companies to transfer their operations to low- or no-tax jurisdictions.
Experts said it was difficult to tell what impact the House proposal might have on the Biden administration's efforts, in large part because the talks with foreign governments are considering an entirely different system that would tax companies based on where their goods and services are sold rather than where they are headquartered.