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. not pay a single penny more in taxes. . “
For example, recent articles shared by several conservative-leaning Western Journal affiliate websites said, “Analysis: 60% of Americans will be forced to pay more taxes under Biden’s plan.
Given that only about 4% of U.S. households earn $ 400,000 or more, that would mean that many people below that threshold would pay more according to Biden’s proposals.
The Western Journal article accompanying the post stated that the analysis – conducted by the non-partisan tax policy center Urban Institute-Brookings Institution – “contradicts Biden’s false account that his tax hikes will only affect businesses and households earning over $ 400,000. one year.”
Strictly speaking, the Tax Policy Center’s analysis supports the idea that about 60% of taxpayers will see less income in their pockets if Biden’s tax changes are passed.
But that’s not the end of the story. In fact, the Tax Policy Center’s overall analysis is more optimistic about the impact for typical taxpayers under Biden’s plan than a reader could take away from social media talking points alone.
Overall, it’s a bit of a half full glass, half empty glass scenario. Let’s take a closer look. (Neither the White House nor the Western Journal responded to us for this article.)
How many Americans would see their incomes drop?
Americans pay all kinds of taxes, some levied by states or localities, and others by the federal government. Federally, Americans are taxed directly on their income, as well as through payroll deductions for Social Security and Medicare.
Meanwhile, by using a separate tax code, corporations are taxed as well – and the impact of those corporate taxes is at the heart of differing interpretations of how Biden’s tax proposals will affect ordinary Americans.
A centerpiece of Biden’s tax plan is to raise the corporate tax rate from 21% to 28%. This increase would leave the rate below 35% it was before President Donald Trump signed tax law in 2017. Republicans argue that an increase to 28% would leave the United States at a competitive disadvantage, and some Senate Democrats, like Joe Manchin. of West Virginia, said they oppose any increase beyond 25 percent.
Wherever the number ends if a deal is made with Congress, the White House’s argument has been that corporate taxes are not personal taxes. So as long as Biden avoids any other type of tax on households earning less than $ 400,000, he and his allies argue that he will have kept his promise even if he raises corporate taxes.
But would higher corporate tax rates ultimately affect people earning less than $ 400,000? This is a point of contention, with credible arguments advanced on both sides.
“It depends on how the commitment is interpreted,” said Garrett Watson, senior policy analyst at the Tax Foundation.
The Tax Policy Center and other groups that study tax policy use mathematical models to project how tax code changes would affect taxpayers of different income levels, and these models take into account the indirect impact of increases in the tax code. corporate tax on individuals. The idea is that companies will pass the cost of these tax increases on to ordinary people, mainly through lower returns for investors and lower wages for workers.
The Center for Tax Policy model measures the overall impact of tax changes on taxpayers in each of the five income levels, or quintiles. In addition, the model seeks to capture the impact on particularly wealthy households by studying what would happen to subgroups within the highest tier: the 80th to 90th income percentiles, 90th to 95th percentiles, 95th to 95th percentiles. 99th percentiles, the 1% and the top 0.1%. (A separate analysis by another group, the Tax Foundation, produced broadly similar projections.)
In its analysis, the Tax Policy Center sought to separate the “winners” from the “losers” of Biden’s tax proposals. He did this by breaking down the percentage of taxpayers in each of these income groups who might expect their after-tax income to decline, as well as the percentage who might expect their after-tax income to increase. The analysis also provided the average amount of income earned or lost for members of each of these groups.
The analysis found that for the bottom fifth of earners, only about 30% would see a tax increase if Biden’s proposals were passed. But for households between the 20th percentile and 90th percentile – an income range of about $ 25,700 to $ 243,000 per year – between 63 and 74 percent would experience a tax increase. In the 90th to 95th percentile of incomes, which would still be below the $ 400,000 threshold, about 90% of households would see their after-tax income decline because of Biden’s proposals.
So, focusing closely on this statistic, the social media posts present Biden’s tax plans as a broken promise.
However, Biden’s supporters – and the Tax Policy Center’s analysis itself – suggest that this talking point distorts the impact on taxpayers by obscuring the tax benefits many might receive.
Indeed, in announcing the analysis, the Tax Policy Center headlined its findings by stating that “almost all of the tax increases proposed by President Biden would be borne by the top 1% income of households – those who earn around $ 800,000 or more “and that” Biden will cut taxes for many low- and moderate-income households and cut them dramatically for those with children.
These cuts would stem from Biden’s proposals such as temporary increases in the child tax credit, the child care and dependents tax credit, and the earned income tax credit.
How corporate taxes work
The analysis therefore concludes that many lower income taxpayers will see lower after-tax income, but also have a lower tax bill.
How can these two be true?
The Tax Policy Center notes that with the exception of the wealthiest taxpayers, the after-tax income cuts would come almost exclusively from Biden’s proposed corporate tax hikes, including the higher rates.
Other experts agree with this analysis. “Corporate tax increases are the reason” for expected declines in after-tax income, said Kyle Pomerleau, resident researcher at the American Enterprise Institute. “Personal income tax increases target very well-off households very narrowly.
Corporate taxes are not paid directly by taxpayers. And while ordinary taxpayers may indirectly shoulder some of the cost of corporate tax, exactly how much is delicate and subject to academic debate.
In its model, the Tax Policy Center estimated that 80% of the corporate tax increase would be borne by corporate shareholders, said Thornton Matheson, senior researcher at the group. The remaining 20% would be borne by the workers in the form of reduced wages. Matheson said this breakdown is similar to those used by the Treasury Department and the Congressional Joint Committee on Taxation.
Some households could be affected by both impacts. For example, members of a household may see lower returns on equity investments in their 401 (k) as well as lower wages.
Lower wages are largely where Biden’s plan would hit ordinary taxpayers. And there is an important context to know as to how that would play out.
First, the burden on individuals resulting from the corporate tax hike, while widespread, would be modest. For example, among taxpayers in the second lowest income quintile who will see their after-tax income decline, the average loss would be $ 170. For the middle quintile, it would be $ 330. Either would represent a drop of more than 1% in household income in these groups.
In comparison, taxpayers in those categories who find themselves better off because of Biden’s changes will see more substantial gains. For winners in the second lowest quintile, the average increase would be $ 2,460. For the middle quintile, it would be $ 2,370. That’s a gain of about 2% to 4% of income.
Second, the burden of increasing corporate tax on middle-income taxpayers would be spread over a long period and across the family budget. Wage stagnation can last for years, and households typically cannot touch 401 (k) assets until retirement.
This loss of income would not be an item on an individual’s income tax returns, or appear separately on a receipt, as would a gasoline or sales tax. Thus, for some tax professionals, the possibility of lower wages or lower returns on investment in the years to come does not appear as a “tax increase”.
For Matheson, Biden “was talking about taxes on your tax return, in which case his commitment is mostly true” despite the impact of corporate tax.
But Watson said that can be a tricky distinction, “because the two effects lead to the same result: lower net incomes for American households.”