— Biden, interview on CNBC’s “Squawk Box,” May 22
Biden has pledged to reverse much of President Trump’s tax cuts for the wealthy and corporations to fund, in part, ambitious climate, education and health-care plans. But he has drawn a firm line if he is elected president — no new taxes for anyone making less than $400,000.
So viewers of the Republican National Convention may have been confused when they saw repeated references to Biden planning to raise taxes on most Americans. For instance, Republican National Committee Chair Ronna McDaniel declared, “Raising taxes on 82 percent of Americans is not nice.”
Tax policy is complex, making it easy for politicians to manipulate statistics. A variety of think tanks have proprietary models that they use to measure the impact of changes in tax policies on Americans in different income levels. McDaniel’s statistic comes from those models, but it does not necessarily mean that Biden’s assertion is off-base either.
Among his key proposals, Biden says he would restore the top individual tax rate from 37 to 39.6 percent, raise the corporate tax rate from 21 to 28 percent, set minimum corporate taxes for domestic and foreign income, boost the tax on capital gains by labeling it as ordinary income and reintroduce limits on itemized deductions.
Biden would also make wages above $400,000 subject to the 12.4 percent Social Security payroll tax, which is split between employees and employers. Currently, everyone stops paying the Social Security payroll tax once wages reach $137,700, a level that increases each year with inflation. In effect, there would be a gap between about $140,000 and $400,000 in which people would stop paying the payroll tax, but that gap would narrow over time and eventually disappear because Biden would not make the $400,000 threshold subject to inflation.
Biden has also offered a variety of tax credits, such as first-time home buyer’s tax credit, a refundable renter’s credit and a tax credit for informal caregivers, as well as a significant increase in the child-care and dependent-care tax credit. (He also supports reinstating the individual mandate if people fail to purchase health insurance, but whether that is a tax or just a fine, as the Health and Human Services Department defines it, is open to debate.)
Five respected organizations have calculated the impact of Biden’s tax proposals: the Urban-Brookings Tax Policy Center (TPC), the Tax Foundation, the Committee for a Responsible Federal Budget (CRFB), the American Enterprise Institute (AEI) and the Penn Wharton Budget Model. They broadly agree that the Biden plan would raise between $3.5 trillion and $4 trillion over 10 years — and that such a tax increase would moderately reduce the anticipated size of the U.S. economy in the coming decade.
The tax analyses also broadly agree that virtually all of that revenue would be gathered from the very wealthy or from corporations, with about half of the money coming from the top 0.1 percent and three-quarters from the top 1 percent of households.
- TPC: “About half of the revenue gain would come from higher taxes on high-income households, and about half would come from higher taxes on businesses, especially corporations.”
- CRFB: “Major proposals by the Biden campaign would raise $1.6 to $1.9 trillion over a decade from corporations, $1.0 to $1.2 trillion from high earners through the income tax, and $800 billion to $1 trillion from Social Security payroll taxes on high-wage earners.”
- Penn Wharton: “We project that 54 percent of the tax change would fall on the top 0.1 percent of the income distribution, corresponding to an average tax increase of more than $1.3 million.”
- Tax Foundation: “Taxpayers in the top 1 percent would see their after-tax incomes reduced by around 13.0 percent due to higher taxes on income above $400,000.”
- AEI: “Biden’s tax plan would make the tax code more progressive. His tax increases would primarily fall on the top 1 percent of income earners.”
But when you dig into the distributional tables produced by these groups, you see they estimate some of the burden from the tax increases would fall on people making less than $400,000. The amounts are relatively small, according to Penn Wharton — an average of $15 for the bottom quintile, $90 for the second quintile, $180 for the middle quintile and $360 for the fourth quintile. But those numbers are in the tables, which is why McDaniel claims 82 percent of Americans would face higher taxes.
At this point, you might ask: If Biden supposedly isn’t raising taxes on people making less than $400,000, why do these calculations estimate someone making less than $50,000 a year will end up with a tax increase?
Biden’s proposed corporate tax increase is the reason. All of these groups, following the lead of the Joint Committee on Taxation, the Congressional Budget Office and the Treasury Department, assume corporations adjust to a higher tax by reducing investment returns or cutting workers’ wages.
TPC, for instance, assumes that over time, 60 percent of the corporate income tax is borne by shareholders, 20 percent is borne by capital owners and 20 percent is borne by labor. Those reductions are then reflected in the after-tax income distribution tables, even if none of those lower-wage workers are directly affected by the corporate tax. Still, workers making less than $400,000 might have equity investments in their 401(k) retirement plans negatively impacted by the corporate tax hike.
The Penn Wharton model has a handy feature that allows you to see the impact of the Biden tax plan without the corporate tax increase. When you click that option, the average tax change suddenly drops to zero for the bottom 90 percent of households. Even households between 90 and 95 percent would face only an average tax increase of $5. Nearly 97 percent of the tax increase would be paid by the top 1 percent.
How to address the impact of corporate tax increases (or reductions) on after-tax income has long been the subject of heated debate among economists beyond the scope of this fact check. When Trump cut the corporate income tax rate, the calculations worked in his favor because the models assumed corporations would raise workers’ wages and thus after-tax income — something that does not yet appear to have occurred. By reversing some of Trump’s tax cut for corporations, Biden gets dinged by the same tax models.
In interviews, economic advisers to the Biden campaign further argued that the models often do not take into account the impact of a variety of tax credits Biden has proposed — or spending programs aimed at the bottom half of the income spectrum — which might mitigate the theoretical impact of the corporate tax increase.
“This isn’t about whether middle-class people will have to pay more taxes. Clearly they won’t,” said Austan D. Goolsbee, chairman of the Council of Economic Advisers under Barack Obama. “This is an argument about whether making corporations pay more income taxes would trickle down into lower workers’ wages. Anyone who believes that there would be significant trickle down needs to explain why the massive corporate rate cut in 2017 was almost entirely kept by shareholders and why child-care credits, health-care credits or other items in the Biden plan wouldn’t generate the similar secondary benefits to workers.”
Gene Sperling, another Biden adviser who was director of the National Economic Council under Obama and Bill Clinton, argued: “If you raised taxes on those making millions or billions of dollars and used that money to help lower- and middle-income families pay for child care, virtually every economic model would tell you that was going to expand economic demand and economic growth.”
John Ricco, senior analyst at Penn Wharton, agreed that “the line between spending and taxes is blurry and not always meaningful. For example, the premium tax credit could easily have been structured as a direct outlay rather than being administered through the tax code. So for this analysis, we chose to focus on the revenue raisers only. It is true that lower income groups would almost certainly be net beneficiaries when considering the entire fiscal package.”
Sperling said the impact of the Biden tax plan should be measured on how it affects individuals when they have to calculate their taxes. “Even if you buy the very questionable idea that a corporate tax increase would negatively impact lower- and middle-income workers, it is just not correct to look at that as a tax increase,” he said. “Consider people filling out their 1040 — or any tax form. There will not be even one taxpayer making less than $400,000 who at the end of doing their taxes will be able to say, ‘I am now facing higher taxes,’ while millions and millions will be able to say they are paying less.”
Still, tax experts such as Garrett Watson of the Tax Foundation noted that some of Biden’s tax proposals could have the unintended effect of snaring some people making under $400,000. In response, the Biden campaign told The Fact Checker it was making “ironclad commitments” that any such issues would be addressed.
- A plan to curtail tax savings from itemized deductions for all taxpayers in tax brackets above 28 percent could affect some people making as little as $163,000. “We would only apply the 28 percent cap to those earning more than $400,000,” a Biden adviser said.
- A proposal to shift some of the benefits of tax deferral in traditional retirement accounts toward lower- and middle-income earners could reduce the benefits for people earning above $80,250, but under $400,000. “In our retirement proposal, we would hold harmless those below $400,000,” the Biden adviser said.
- The payroll tax hike could negatively affect some two-income households where one spouse (say, a doctor) makes $450,000, but another (a restaurant owner) suffers a $100,000 loss. Even though the family adjusted gross income would be below $400,000, they would face a tax increase. “We find that a small number (a fraction of a percentage point) of families below $400,000 would see their taxes go up due to the payroll tax provision,” Ricco said in an email. The Biden adviser responded: “The higher payroll tax levy will only be assessed on tax units with income over $400,000. In any circumstance in which someone might pay more, guardrails will be put in place to make them whole.”
“Joe Biden is proposing a dozen tax cuts that will benefit middle-class taxpayers,” said Biden campaign spokesman Andrew Bates. “These tax cuts, in conjunction with the full breadth of his proposals to create more jobs and raise wages for workers, will substantially boost middle-class incomes for families across the country.”
Eric Toder, co-director of the Tax Policy Center, said its analysts have begun to estimate the impact of additional tax benefits for low- and middle-income taxpayers announced by the Biden campaign since March. “Our updated analysis, which we plan to complete in September, may no longer show net tax increases in the bottom three quintiles,” he said. Ricco of Penn Wharton also said an analysis that includes the impact of Biden’s spending plans will be released in coming weeks.
“I am unaware of any provision in the updated Biden proposal that would raise taxes on individual taxpayers making less than $400,000,” Toder said. “I would add that suggestions that the Biden plan amounts to a massive increase in taxes on the middle class are a total misrepresentation of our findings and the findings of other think tanks.”
The Pinocchio Test
There is broad agreement among the five tax models that Biden’s tax increase would fall almost entirely on the very wealthy. For technical reasons, the corporate tax increase is deemed to filter through to almost all income groups, giving the Republicans an opening to misleadingly claim that Biden is raising taxes on most Americans. Those numbers may change in Biden’s favor as updated analyses are completed of all of Biden’s tax proposals.
Overall, Biden’s $400,000 pledge holds up well, especially when considering the impact on individual taxpayers. In the few instances where we identified a situation in which a taxpayer might inadvertently find themselves snared by a tax change despite not making $400,000, the Biden campaign said it would craft the tax bill to fix the problem.
We will leave this unrated. We are not in the habit of giving Geppetto check marks for campaign promises, but neither do we see how Biden’s statement, at this point, merits Pinocchios.
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