Democrats’ budget bars tax hikes for most but here’s who may pay more

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

Drew Angerer | Getty Images News | Getty Images

According to a budget framework released Wednesday, Senate Democrats want to fund a $ 3.5 trillion budget measure, partly at the back of higher taxes for businesses and the rich.

The Democrats would “ban” tax increases for households with incomes less than $ 400,000 and other groups such as small businesses and family businesses as they seek to generate revenue for clean energy initiatives and social safety net widening, he said Design .

The tax framework does not contain any details beyond these high-level points. The legislature will now work to draft a law that will work out details.

According to some experts, if passed, the framework would mean a significant shift in resources from the rich to the poor.

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

William McBride

Vice President for Tax and Economic Policy of the Federation of the Tax Foundation

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

Legislators who support the plan cited it as a way to ensure a fairer US tax system.

“At a time of massive wealth and income inequality, and when half our population lives on paychecks, this reconciliation law will finally meet the needs of our working families by asking wealthy and large corporations 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.

After-tax income for the top 1% of Americans would fall 5% next year based on a White House Budget released in May, the best current guide to analyzing the impact of the Senate Democrats’ plan, according to an estimate by the Tax Foundation.

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

(The top 1% represent people who make over $ 413,000 a year, and the bottom fifth includes those who make less than $ 20,000, McBride said.)

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

Biden also proposed nearly doubling the maximum tax rate on long-term capital gains for those with annual income greater than $ 1 million a year and taxing assets greater than $ 1 million in value after the owner died.

The top tax rate for capital gains would rise from the current 23.8% to 43.4% after taking into account a surcharge of 3.8%.

In the meantime, the Biden administration – and Senate Democrats – would renew a recent expansion of the child tax credit, the earned income tax credit, and the child and dependent child tax credit.

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They would also fund two years of free universal preschool, create a nationwide comprehensive paid vacation program, and expand Medicare to include dental, vision, and hearing aid costs, among other things.

The Senate plan also calls for stronger tax enforcement. The Treasury Department estimates it could raise $ 700 billion in a decade, in part by cracking down on wealthy taxpayers who fail to report income in opaque business structures.

The Democrats called for a rise in the corporate tax rate from the current 21%, which was set by the Tax Cuts and Jobs Act in 2017. The White House has proposed 28% and is working with other nations to create a global minimum tax framework to prevent businesses from escaping to tax havens.

It is unclear if all of these initiatives will end in legislation that Senate Democrats are working on or if they will change as a bill is drafted.

Some tax experts are skeptical that Senate Democrats can raise the $ 3.5 trillion based on the policy ideas outlined in their framework, especially without increasing taxes for those who earn less than $ 400,000. (In addition to taxes, the Democrats would also get revenue from actions like renegotiating Medicare prescription drug prices.)

According to Jason Fichtner, vice president and chief economist of the Bipartisan Policy Center, nearly doubling the capital gains tax rate for the richest Americans would likely result in tax-minimizing strategies that reduce revenue to the federal government.

Rather than selling a valued asset and paying a tax, the wealthy could more often choose to borrow against its value or employ a strategy to offset the profit (and associated tax) with portfolio losses, he said.

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

The idea is that companies could try to offset a higher tax burden with lower wages for employees or higher prices for their goods and services, which, according to Fichtner, would likely hit some earners under $ 400,000.

However, companies could also offset those tax costs by cutting dividends to shareholders, which would hit the wealthy especially, who own disproportionately large shares, he said.

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