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The Senate bill and Biden’s pledge to not raise taxes on people making less than $400,000

Sen. Mike Crapo (Idaho), the senior Republican on the Senate Finance Committee, speaks about taxes at a news conference on Aug. 3. (Anna Moneymaker/Getty Images)

“The mislabeled ‘Inflation Reduction Act’ will do nothing to bring the economy out of stagnation and recession, but it will raise billions of dollars in taxes on Americans making less than $400,000.”

— Sen. Mike Crapo (Idaho), senior Republican on the Senate Finance Committee, in a news release, July 30

We have long found that complex tax and budget issues are ripe for spin that confuses ordinary readers. Crapo’s comment above is illustrative of a GOP onslaught against the massive bill that was approved in the Senate over the weekend and is up for a vote in the House this week.

At issue is whether President Biden violated his 2020 campaign pledge not to raise taxes on people earning less than $400,000 a year. Whether this is good tax policy is open to debate, but it was smart politics. During the election campaign, President Donald Trump claimed some 80 times that Joe Biden was going to raise taxes on all or most Americans. Biden had a consistent refrain — that was false, no one making less than $400,000 a year would face higher taxes.

Of course, this kind of memorable pledge is bound to face constant scrutiny from one’s political opponents. Every time various versions of the president’s tax bills were drafted, the administration insisted he was sticking to his pledge.

But Crapo, citing official scorekeeping from the nonpartisan Joint Committee on Taxation (JCT), says Biden broke his pledge.

What’s going on?

The Facts

The bill — which according to our former colleague Steven Pearlstein would do virtually nothing to tame inflation — is a catchall package that includes clean-energy incentives, health-care policies such as an extension of Affordable Care Act subsidies, additional hiring for the Internal Revenue Service and new corporate taxes. There’s little in the bill that would directly affect people’s tax returns, except for things such as tax credits to buy electric cars or add solar power to homes.

But the corporate tax increases offer some political gold for Republicans. The JCT assumes corporations adjust to a higher tax by reducing investment returns or cutting workers’ wages; it allocates the corporate tax 25 percent to labor and 75 percent to capital. Many other groups that analyze the impact of new tax policies take a similar stance.

The Tax Policy Center, a nonpartisan group, 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.

There may be indirect effects, however. For instance, workers making less than $400,000 might have equity investments in their 401(k) retirement plans negatively affected by the corporate tax hike.

In any case, for many Americans, even the estimated impact of these “tax increases” is rather small — less than $100 a year — but these tables give Republicans a hook to claim that taxes will rise for just about every income group.

Economists have long debated the impact of corporate taxes on employment. It’s worth noting that because Republicans prefer to cut corporate taxes, these models work in their favor, as the models assume that corporations would raise workers’ wages and thus after-tax income.

Amanda Critchfield, a spokeswoman for the Finance Committee’s GOP staff, acknowledged that the bill would not be felt on people’s tax returns. But she argued that the impact was real.

“If you’re referencing the individual tax rate in the tax code changing, i.e., a change on your tax form, then no — that doesn’t change,” she said in an email. “If you’re talking about people paying more in taxes via tax incidence, then yes — JCT estimates that people will pay more in taxes.”

Critchfield pointed to a working paper published in 2020 by the Bureau of Economic Research that studied the impact of corporate taxes on product prices. It concluded that existing models “significantly underestimate the incidence of corporate taxes on consumers.” The study said that 31 percent of a tax hike is borne by consumers via higher prices, 38 percent is borne by workers via lower wages and 31 percent is borne by owners.

Crapo, at an Aug. 3 news conference, said it was a “technical argument” as to whether Biden’s pledge involved just tax rates. “Technically [the bill is] not raising [middle-class Americans’] tax rates,” he said. “It is raising taxes, and they are paying them — they will be the ones who incur the burden of these taxes.”

In 2020, when this same issue of distributional models emerged, Biden campaign officials said the test was how any tax plan signed into law by Biden would affect individuals when they had to calculate their taxes. They also argued that the models often failed to account for tax proposals that would mitigate the presumed impact of corporate taxes.

The JCT, for instance, initially did not calculate the benefits of consumer tax rebates, health premium subsidies and lower prescription drug costs that the bill hopes to deliver.

“A complete distributional analysis of the full bill would show lower costs or taxes for all but the highest-wealth individuals,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget. A memo issued by the CRFB says that “the $64 billion on ACA subsidies alone would be more than enough to counter net tax increases below $400,000 in the JCT study,” while the bill also reduces “prescription drug costs for individuals (premiums and out of pocket) by roughly $300 billion.”

Various think tanks are still crunching the numbers on the final version of the bill that emerged from the Senate over the weekend. Critchfield said Republicans asked the JCT to run an analysis that included the ACA subsidies and many energy credits. That analysis still found a net tax increase, though the ACA subsidies are extended only three years, so when they run out, it looks like a tax increase in the later years covered by the bill.

There’s another wrinkle. Bill Gale and John Buhl of the Tax Policy Center have noted that the JCT, in its analysis, does not make a distinction between “normal” and “supernormal” returns on investment. Normal is what is needed to be a successful business, while supernormal means excess profits, earned through “patents, special expertise, outsized influence in product or labor markets, or just simple luck.” The bill would impose a corporate minimum tax on companies with $1 billion or more in profits — which are more likely to have supernormal returns. That might mean the tax would be less likely to affect investment or hiring than the JCT estimate assumes.

The Bottom Line

There is no easy way to adjudicate this debate. By the standards set by the Biden campaign in 2020, the president appears to have kept his promise not to raise taxes on people making less than $400,000 a year. Even Republicans concede that tax rates have not changed.

But the JCT is also the gold standard for analyzing the impact of tax policies — and few economists would dispute that higher corporate taxes work their way into the economy and eventually may affect hiring and investment.

What’s also difficult to measure is the combined impact of the various incentives contained in the bill and whether they basically wipe out the estimated impact of the corporate tax increases — which for most income groups is not very large.

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