As promised on the campaign trail, President Joe Biden is reportedly planning the largest tax increase seen in 30 years in the United States. According to the financial portal Bloomberg, Biden will propose a tax reform in order to finance his 1.9 trillion stimulus plan that was approved by Congress last week.
Biden, during his election campaign, stated that as president he would reverse his predecessor Donald Trump’s tax cuts, starting with the corporate tax cut to 21% on profits, which enacted in 2017 with the Tax Cuts & Jobs Act.
How does Biden tax reform work?
The tax reform is expected to raise the corporate tax rate to 28 %; it would also eliminate tax exemptions for so-called pass-through businesses, such as limited liability companies, sole proprietorships or S corporations, not subject to federal corporate taxes.
On the income side, Biden is expected to raise the marginal income tax from 37% to 39.6% on individuals earning more than $400,000 a year and would increase the capital gains tax from 20% to 39.6%, for those with incomes over $1,000,000. For salaries over $400,000 per year, there would be an additional social security tax equivalent to 12.4%.
In the event that the tax reform is implemented with the marginal tax increases for the highest incomes, in the states of California, Hawaii and New Jersey, the marginal rate for these incomes would exceed 60%.
For the Tax Foundation, the tax reform could raise about $2.8 trillion over a decade. However, other research centers give a more moderate amount, such as the Tax Policy Center, which estimates that tax reform will raise less than $2.1 trillion.
Regardless of the total amount raised, this seems to fall short of covering the deficit that the president’s agenda will cause considering not only the $1.9 trillion stimulus plan but also the Green New Deal that promises an additional $2 trillion in spending and the increase in Obamacare coverage that would cost approximately $750 billion.
On the surface, the plan would only increase taxes for high-income individuals, however, the Tax Foundation estimates that Biden’s plan would decrease the incomes of all Americans by 1.9%. This is due to increased labor and capital costs resulting from the reform that could affect hiring and wage growth in some sectors of the economy. In addition, it also estimates that the plan could reduce the size of GDP by 1.6% in the long run.
For the Tax Policy Center, Biden’s tax reform would lessen the burden on lower-income households, as the plan considers expanding tax credits for low-income individuals in the country.
In this regard, it is worth mentioning that recently Senator Elizabeth Warren introduced a bill to establish a 2% minimum wealth tax for the nation’s 100,000 wealthiest households, although it has not yet received support from the White House.
Biden’s tax reform has yet to gain traction in Congress
Although there has been no formal announcement yet from Biden’s cabinet, the White House indicated that tax reform would be next on the agenda after the passage of the Covid-19 emergency relief package.
For the reform to pass, the president needs at least 10 Republican senators willing to let go the filibuster. For their part, GOP members have shown no signs of concessions to the president’s plan. And, along the same lines, tax reform does not enjoy uniform support within the Democratic Party either.
For Biden’s tax plan to make it through the Senate debate, the president will have to win over more moderate senators such as Joe Manchin (WV), Jon Tester (MT) and the independent Senator Angus King (MI).
In the House of Representatives, the White House will have to convince representatives such as Abigail Spanberger (VA) or Conor Lamb (PA).