President Biden has repeatedly promised that no one making under $400,000 will face a tax increase — a level that would exclude all except the top 2 percent of taxpayers, who earn one-quarter of all adjusted gross income.
This was such an important pledge to Biden that when, during the 2020 campaign, The Fact Checker identified a few situations in which a taxpayer might inadvertently find themselves snared by a tax change despite not making $400,000, the Biden campaign insisted it would craft the tax bill in a way that addressed the problem.
But Republicans keep insisting that middle-class voters will face a tax increase. We were struck by McCarthy’s comment that “an average family who earns over $50,000 will see a tax increase” — and his use of the word “lie” to describe Biden’s promise. This is a claim that is being echoed by many House Republicans.
We often say the more complicated a subject is, the more likely a politician will mislead about it. Tax policy is especially complex, making it ripe for mischief. Let’s explain what’s going on here.
Republicans are hanging their hat on two technicalities. One relates to Biden’s proposed corporate tax increase and the other relates to the later part of the 10-year window for calculating the impact of the policies on revenue. The second technicality is rather ironic, but let’s first deal with the corporate tax issue.
Biden has proposed raising the corporate tax rate from 21 percent to 28 percent. The top rate had been 35 percent, a level Democrats and Republicans agreed was too high, until the GOP tax bill in 2017 slashed it — to a rate that Democrats at the time said was too low. So Biden’s proposal is a midpoint between the new and old rates.
During the campaign, five respected organizations calculated the impact of Biden’s tax proposals: the Urban Institute-Brookings Tax Policy Center (TPC), the Tax Foundation, the Committee for a Responsible Federal Budget, the American Enterprise Institute and the Penn Wharton Budget Model. They broadly agreed that virtually all of that revenue in Biden’s tax plan 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.
But when you dug into the distributional tables produced by these groups, they nevertheless estimated that 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.
So why is this the case? The corporate tax increase. All of these groups, following the lead of the Joint Committee on Taxation (JCT), 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 would notice a direct effect when filing their tax returns.
How to address the impact of corporate tax increases (or reductions) on after-tax income has long been the subject of debate among economists. When Donald Trump as president cut the corporate income tax rate, the calculations worked in his favor because the models assumed that corporations would raise workers’ wages and, thus, after-tax income — something that does not yet appear to have happened. By reversing some of Trump’s tax cut for corporations, Biden gets dinged by the same tax models.
During the campaign, the Biden team suggested the $400,000 pledge was tied to the actual tax returns filed by individuals — direct taxes, such as individual income, payroll or estate and gift — instead of indirect taxes churned out by a computer model. Campaign officials also said the models often do not take into account the effect 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.
In response, some organizations later tried to examine the effect of such proposals or presented that data with corporate taxes removed. TPC, for instance, had produced distributional analyses that both includes indirect taxes, such as the corporate tax, and excludes them.
Mark Bednar, a spokesman for McCarthy, said that people may debate what share of the corporate tax is borne by labor, consumers and capital but that, ultimately, someone pays the higher taxes. “In short, higher corporate taxes must result in either higher prices for consumers, lower returns on investment (like the 401ks of middle-class families), or lower wages for workers (and more poorly-funded pensions to boot),” he said in an email.
He attached the Joint Tax Committee estimates of the bill advanced by the House Ways and Means Committee — for the years 2027, 2029 and 2031: “The JCT tables (attached) clearly show that the average tax rates and gross amount of taxes rise for filers in income ranges well below $400,000- including those who make $50,000 a year.”
Why those years? This brings us to the second technicality. The JCT distribution tables for earlier years — 2023 and 2025 — actually show sharp decreases in taxes for taxpayers making $50,000. Taxes would fall almost 15 percent for people making $40,000 to $50,000, and about 6 percent for people making $50,000 to $75,000. Taxes would be cut more than 80 percent for people making $20,000 to $30,000.
That shows that the Democrats’ tax credits for lower-income Americans would easily outpace the modest impact of the corporate tax increase. We should note that the Ways and Means Committee bill differs in some ways from the Biden proposal, such as increasing the top corporate tax rate to only 26.5 percent. Moreover, small businesses making less than $400,000 would see their rates cut to 18 percent.
So what happens after 2025? That’s when Trump’s tax cuts start expiring — because of the way Republicans crafted the law.
In the Ways and Means bill, the impact on people making $50,000 to $70,000 after 2027 would be modest, basically a 1 percent increase, but it’s still an increase.
That’s because Republicans had decided to allow significant provisions of the 2017 bill, such as individual tax cuts, to expire early to make the broader tax plan fit within a prescribed budget box. But they always insisted it was wrong to look at the impact in later years because, without a doubt, Congress would not let the tax cuts lapse.
Using the 2027 calculations, after the tax cuts expired, Democrats often would say the 2017 tax bill gave the top 1 percent 83 percent of the benefits — a claim that earned Three Pinocchios. Now, ironically, Republicans are knocking the Democrats’ bill for not fixing a problem that Republicans created in the first place.
(House Democrats, for their part, extended only through 2025 an expanded child tax credit that was included in Biden’s coronavirus relief bill but is due to expire at the end of 2021. So that also affects the numbers.)
We pointed out to Bednar that he had sent slides of years affected by the GOP tax cut. He did not respond.
The Pinocchio Test
Reasonable people can argue about whether the impact of indirect taxes, such as corporate taxes, should be included in the distributional tables when assessing Biden’s pledge not to raise taxes on people making less than $400,000. But the amounts are relatively minor. Moreover, in the Ways and Means Committee bill, people making around $50,000 still have a tax cut in the years immediately after implementation.
McCarthy is able to claim that taxes will be increased for people at this income level in part only because of expiring tax provisions in the 2017 bill he helped craft. Republicans for years have cried foul when Democrats cited figures for 2027, after individual tax cuts lapsed, so turnabout is not fair play.
McCarthy and other GOP House members claiming, with vituperative language, that Biden has violated his $400,000 promise earn Three Pinocchios.
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