Critics of President Joe Biden say his proposal to raise corporate tax rates could break one of the most high-profile promises of his 2020 presidential campaign – that “if you make less than $ 400,000, you won’t pay a penny more in tax.”
For example, recently published posts on several websites affiliated with the conservative Western Journal stated, “Analysis: 60% of Americans Will Be Compelled to Pay More Taxes under the Biden Plan.”
With only about 4% of US households making $ 400,000 or more, it would mean many people below that threshold would pay more, according to Biden’s suggestions.
The Western Journal article that accompanied the post said the analysis – conducted by the impartial Urban Institute-Brookings Institution Tax Policy Center – “contradicts Biden’s false story that his tax hikes would only affect businesses and households, who earn more than $ 400,000 a year. “
Strictly speaking, the Tax Policy Center’s analysis supports the assumption that around 60% of taxpayers will see less income in their pockets when Biden’s tax changes go into effect.
But that’s not the end of the story. In fact, the Tax Policy Center’s overall analysis of the impact of Biden’s plan on typical taxpayers is more confident than a reader alone could get out of the talking point on social media.
All in all, it’s a bit of a glass-half-full, glass-half-empty scenario. Let’s take a closer look. (Neither the White House nor the Western Journal contacted us for this article.)
How many Americans would see their incomes fall?
Americans pay all kinds of taxes, some state or municipal, some federal government. At the federal level, Americans are taxed directly on their income and through deductions from their Social Security and Medicare payrolls.
Meanwhile, corporations are taxed under a separate tax law – and the impact of those corporate taxes is at the heart of various interpretations of how Biden’s tax proposals will affect ordinary Americans.
A key element of Biden’s tax plan is to raise the corporate tax rate from 21% to 28%. This increase would keep the tax rate below 35% before President Donald Trump signed a tax bill in 2017. Republicans argue that a 28% hike would put the United States at a competitive disadvantage, and some Senate Democrats, like Joe Manchin of West Virginia, have said they oppose any hike above 25%.
Wherever the number ends, when an agreement is reached with Congress, the White House argues that taxes on corporations are not taxes on individuals. So, as long as Biden avoids all other kinds of taxes for households making less than $ 400,000, he and his allies argue that even as he raises corporate taxes, he has kept his promise.
But would higher corporate tax rates ultimately affect people earning less than $ 400,000? This is a point of contention with credible arguments on both sides.
“It depends on how the pledge is interpreted,” said Garrett Watson, a senior policy analyst with the Tax Foundation.
The Tax Policy Center and other groups dealing with tax policy use mathematical models to project how changes in tax law would affect taxpayers of different income levels, and these models take into account the indirect effects of corporate tax increases on individuals. The idea is that corporations pass the cost of these tax increases on to ordinary citizens, mainly through lower returns for investors and lower wages for workers.
The Tax Policy Center model measures the overall impact of tax changes on taxpayers in each of the five income brackets, or quintiles. In addition, the model seeks to capture the impact on high-income households by examining what would happen to subgroups within the highest tier: the 80th to 90th percentile of income, the 90th to 95th percentile, the 95th percentile to the 99th percentile, the top 1% and the top 0.1%. (A separate analysis by another group, the Tax Foundation, has produced broadly similar projections.)
In its analysis, the Tax Policy Center tried to separate the “winners” from the “losers” of Biden’s tax proposals. It did this by breaking down the percentage of taxpayers within each of these income groups who could expect their after-tax profit to decrease, along with the percentage that could expect their after-tax profit to increase. The analysis also provided the average income gain or loss for the members of each of these groups.
The analysis showed that for the bottom fifth of earners only about 30% would experience a tax increase if Biden’s proposals were implemented. But for households between the 20th percentile and the 90th percentile – an income range of about $ 25,700 to $ 243,000 per year – would see a tax increase between 63% and 74%. In the 90th to 95th percentiles of income, which would still be below the $ 400,000 threshold, about 90% of households would see a decline in after-tax profit because of Biden’s proposals.
Due to the close focus on these statistics, the social media posts rate Biden’s tax plans as a broken promise.
However, proponents of Biden – and the analysis of the Tax Policy Center itself – suggest that this discussion point skews the taxpayer impact by obscuring the tax benefits many receive.
When announcing the analysis, the Tax Policy Center headlined its findings that “almost all of President Biden’s proposed tax increases would be borne by the top-income 1% of households – those on about $ 800,000 or more” and that ” Biden cut taxes for many low- and middle-income households and cut taxes significantly for those with children. “
These cuts would be due to Biden proposals such as temporary increases in child tax deduction, child and care tax credit, and income tax deduction.
This is how corporate taxes work
The analysis therefore comes to the conclusion that many taxpayers with moderate incomes will achieve lower after-tax income, but also lower tax burdens.
How could these two be true?
The Tax Policy Center notes that the cuts in after-tax income, with the exception of the richest taxpayers, were almost entirely due to Biden’s proposed corporate tax hikes, including the higher rates.
Other experts agreed with this analysis. “The corporate tax increases are causing” the projected declines in after-tax income, said Kyle Pomerleau, a resident fellow at the American Enterprise Institute. “The individual income tax increases are aimed very closely at households with very high incomes.”
Corporate taxes are not paid directly by the taxpayer. And while ordinary taxpayers can indirectly bear part of the cost of corporate taxes, it is difficult to measure exactly how much and is scientifically debated.
In its model, the Tax Policy Center estimated that 80% of the corporate tax increase would be borne by corporate shareholders, said Thornton Matheson, a senior fellow with the group. The remaining 20% would be borne by the employees through reduced wages. Matheson said this division is similar to that used by the Treasury Department and the joint congressional tax committee.
Some households could be affected by both effects. For example, members of a household might see lower returns on the stock investments in their 401 (k) as well as lower wages.
The lower wages are largely where Biden’s plan would hit ordinary taxpayers. And there is an important context to know about how this would play out.
First, the corporate tax hike, while widespread but modest, would place the burden on individuals. Among those taxpayers in the second lowest income quintile who will see a decline in after-tax income, the average loss would be $ 170. For the middle quintile it would be $ 330. Both would mean a decrease in income of more than 1% for the households of these groups.
In comparison, taxpayers in these categories, which are better off due to Biden’s changes, will see more substantial profits. For the winners in the second lowest quintile, the average increase would be $ 2,460. For the middle quintile, it would be $ 2,370. That is a gain of around 2% to 4% of income.
Second, the burden on middle income taxpayers of higher corporate taxes would be spread over a long period of time and across the family budget. Wage stagnation can drag on for years and households typically cannot touch 401 (k) assets by the time they retire.
This lost income would not appear on an individual’s tax return or would appear separately on a receipt, as would be the case with gasoline or sales tax. The possibility of lower wages or investment income in the coming years therefore does not appear to some tax experts as a “tax increase”.
For Matheson, Biden spoke “about the taxes on your tax return, in which case his promise broadly holds” despite the corporate tax impact.
But Watson said this can be a difficult distinction, “because both effects lead to the same result: lower net income for American households.”