Here's what's in Biden's $3.5 trillion plan to tax the rich
President Biden's ambitious spending plans would significantly increase what the federal government lays out for childcare and education and spend trillions more on infrastructure. It also comes with the biggest tax increases in decades.
How big? A study by the liberal Institute of Taxation and Public Policy predicts Mr. Biden's plan would increase by more than $100,000 a year what someone in the top 1% of earners pays Uncle Sam. President Obama in 2013 raised taxes on that same group by $83,000. President Trump in 2017 cut their taxes by about $50,000 a year.
The top 1% of Americans earn about 20% of all income in the U.S., but they pay nearly 40% of all federal income taxes. The Biden plan will put even more of the tax burden on the wealthy. "It's time for corporate America and the wealthiest 1% of Americans to just begin to pay their fair share," he said Wednesday in his speech to Congress.
Proponents of Mr. Biden's tax increases say America's richest citizens can afford to pay more. While $100,000 is real money, it will be paid by a group of people who earn an average of $2.2 million a year. What's more, the share of taxes paid by the top 1% is actually down in recent years, from 50% in 2014, for instance.
"An income of $400,000 a year is not an extraordinary amount of money to my friends and the people in my professional network," said Charles Meyer, a former Wall Streeter who now runs the policy consulting firm Signum Global Advisors for institutional investors. "I have had to explain to my friends that Biden's tax plan is not as radical as the 1% says it is."
Still, Mr. Biden's plan is a departure from the political and economic rhetoric of the past few decades that lower taxes are better for all Americans. Here are the many ways in which he wants the wealthiest to pay an estimated $3.5 trillion more over the next decade.
Raise the top income tax rate
What: Return the top income tax rate to 39.6%, from 37% under Donald Trump's tax cuts
Who pays: Individuals making more than $453,000 a year and couples making more than $509,000
How much more the rich would pay: $100 billion over 10 years
It's probably the most talked-about tax hit to the wealthy that Mr. Biden has proposed, but it actually raises the least in revenue among his various tax plans.
Mr. Biden proposes returning the top tax rate on income over $400,000 to 39.6%. That's what it was before Trump's tax cut of 2017 lowered the top rate to 37%.
But as with all income taxes, that represents the so-called marginal rate, meaning that in this case it only applies to income over $453,000. Mr. Biden's increase could cost a couple making a combined $800,000 a year an additional $5,200 a year in taxes. A couple with household income of $2 million could pay an additional $36,500 a year.
Reverting to the pre-Trump income tax rate on top earners would generate $100 billion over a decade, according to the centrist Committee for a Responsible Federal Budget.
Raise corporate tax rates
What: Increase the corporate rate to 28% from 21%
Who pays: Not corporations. They pass the added tax costs to customers, employees and shareholders
How much more the rich would pay: $2.1 trillion over 10 years
Former President Donald Trump's signature tax bill lowered the corporate income tax rate to a flat 21% from a top rate of 35%. Mr. Biden's plan is to raise the corporate rate to 28%. He would also like to eliminate some of the tax breaks U.S. companies get for paying taxes overseas as well as moving operations overseas.
The most novel portion of Mr. Biden's plan is to make sure all corporations pay at least 21% of their income in taxes, no matter what deductions they claim.
Companies can pass along some portion of their tax increase to customers, by raising prices, and to workers, by cutting wages or limiting raises. Researchers at the University of Pennsylvania's Wharton business school predict Mr. Biden's proposed corporate tax increases will hold back wage growth.
But the vast majority of corporate taxes are paid by a company's investors, experts say. What's more, those investors are mostly wealthy Americans.
The centrist Tax Policy Center estimates that roughly 70% of corporate taxes are paid by the top 5% of American earners, who have income of about $300,000 a year. That's lower than the $400,000-and-up income level that Mr. Biden says his tax increases will impact. But in terms of targeting the wealthy, Mr. Biden still appears to be aiming pretty high.
"Having larger companies in the U.S. pay their fair share is a good thing," Signum's Meyer said. "And that fair share is being set at a level that is still under where it was before the corporate tax rate was lowered by Trump."
Wharton's researchers estimate Mr. Biden's corporate tax increase will generate $2.1 trillion over the next decade. With 70% of that being paid by the richest Americans, the increase in the corporate tax translates to about $1.5 trillion in new taxes for the wealthy.
Target wealthier tax cheats
What: An $80 billion budget boost for the IRS to expand its audit powers
Who pays: Top earners who would account for the bulk of new and more aggressive tax audits
How much more the rich would pay: $700 billion over 10 years
After raising corporate taxes, Mr. Biden's second-largest tax increase on the wealthy would not come from higher rates but rather from tighter enforcement of existing tax laws.
A recent study by economist Gabriel Zucman and others, including IRS researchers, found that tax dodging, especially by the top 1%, was a significant driver of lost revenue for the U.S. The study found the top 1% tended to underreport their income by as much as 20% to the IRS. The White House said that amounts to $175 billion annually in lost federal revenue.
Mr. Biden's proposal is to pump $80 billion over 10 years into the IRS so the agency can hire more staff to conduct audits and catch cheats. His administration also wants to require banks to report more data on the flow of money in and out of the accounts of their wealthiest clients. That information could go a long way toward curbing tax evasion, but banks are likely to fight a provision that would require them to essentially spy on their customers.
A study co-authored by former Treasury Secretary Larry Summers found the government could recover as much as $1.1 trillion in lost revenue over a decade. The Biden administration has said its reforms would allow the IRS to collect $700 billion over 10 years. But even that lower number might be overly optimistic.
The Congressional Budget Office last year determined that a $40 billion investment in the IRS over a decade — half of what Mr. Biden is proposing — would yield an additional $103 billion in revenue for the government — a seventh of what the administration claims. Former IRS commissioner John Koskinen, who served under both President Obama and President Trump, told the New York Times that ramping up spending at the IRS as quickly as the Biden administration wants to would be a logistical challenge.
Make wealthy people pay higher taxes on investment gains
What: Double the capital gains tax
Who pays: Households making more than $1 million a year
How much more the rich would pay: $400 billion over 10 years
Right now, Americans pay a different tax rate on income they earn from a job, or wages, and income they earn on their investments, which are called "capital gains." For wealthy Americans, the difference is even larger. The top wage income tax rate is 37%. Capital gains income is taxed at only 20%.
Mr. Biden's proposal is to eliminate the difference between the tax paid on wages and the tax paid on investment gains for those earning more than $1 million a year. His administration says it will exempt one-time gains, such as the sale of a family farm. Experts say profits from home sales will be largely excluded as long as it is your primary residence.
Another proposed change: Under current rules, there is no capital gains on inherited income. That means the tax is basically wiped out when someone dies. Mr. Biden calls that a loophole and wants it closed.
"We're going to get rid of the loopholes that allow Americans who make more than a million dollars a year and pay a lower tax rate on their capital gains than Americans who receive a paycheck," Biden said in his speech on Wednesday.
The Biden administration has not put an estimate on how much it thinks it could raise from increasing taxes on capital gains for millionaires. But the Committee for a Responsible Federal Budget says taxing capital gains at the same level as income for top earners would generate $400 billion in additional revenue over 10 years.
Researchers at Wharton, though, said effective tax planning and savvy selling strategies would allow the wealthy to pay much less than predicted. Wharton's estimate: $113 billion over the decade.
"There are plenty of reasons why you would want to have capital gains taxed at the same rate of income, but raising revenue is not one of them," said John Ricco, director of policy analysis at the Penn Wharton Budget Model, a nonpartisan fiscal policy research group at the business school.
Expand the Medicare tax surcharge
What: Close loopholes in the Medicare surcharge tax that benefit the wealthy
Who pays: Individuals making $400,000 or more. White House has yet to set an income level for couples
How much more the rich would pay: $200 billion over 10 years
The law that instituted Obamacare also imposed a 3.8% tax on investment income for individuals making more than $200,000 and couples making more than $250,000. But there are many exceptions as to what income counts as taxable or is not subject to the tax. Stock market gains? Yes. Income from an investment in a private company? No. Capital gains from the sale of a private company? Yes. That's created wiggle room for accountants to get their clients around the tax.
Mr. Biden's plan is to expand the 3.8% tax to all income over $400,000, effectively closing the loopholes that exist today. That change could generate a surprising amount of money. The White House hasn't made an estimate. But the Committee for a Responsible Federal Budget estimates that expanding the Medicare Surtax would raise taxes on the rich by another $200 billion.
