Jim Watson | Afp | Getty Images
Senate Democrats’ package of climate change, health care, drug pricing and tax measures unveiled last week has supporters and opponents debating whether the legislation violates President Joe Biden’s campaign promise not to raise taxes on households with incomes below $400,000 per year.
The answer is not as simple as it seems.
“The funny part about this is you can get a different answer depending on who you ask,” said John Bull, an analyst at the Tax Policy Center.
More from Personal Finance: Embryos Can Be Considered Dependent on Georgia State Tax Returns Would You Be Eligible for Student Loan Forgiveness? Telecommuting helps fight inflation
The White House has used $400,000 as a rough dividing line between the rich and the middle and lower income. This income threshold equates to the top 1% to 2% of American taxpayers.
The new bill, the Inflation Reduction Act, does not directly raise taxes on households below that line, according to tax experts. In other words, the legislation would not cause an increase in annual tax returns for taxpayers whose income is below $400,000, experts said.
But some aspects of the legislation could have adverse downstream effects — sort of like indirect taxation, experts said. This “indirect” element is where opponents seem to have directed their anger.
What’s in the Inflation Reduction Act
The legislation — brokered by Senate Majority Leader Chuck Schumer, DN.Y., and Sen. Joe Manchin, DW.Va., who was a key centrist opponent — would invest about $485 billion in climate and health measures through 2031. , according to a Congressional Budget Office analysis released Wednesday.
Broadly, that spending will come in the form of tax breaks and rebates for households that buy electric vehicles and make their homes more energy efficient, and a three-year extension of current health insurance subsidies under the Affordable Care Act.
The bill would also raise about $790 billion through tax measures, prescription drug price reforms and a tax on methane emissions, according to the Congressional Budget Office. Taxes account for the majority—$450 billion—of revenue.
Critics say the corporate changes could hurt workers
Specifically, the legislation would provide more IRS enforcement resources against tax fraud and change the “carried interest” rules for taxpayers who earn more than $400,000. The carried interest rules allow certain private equity and other investors to pay a preferential tax rate on profits.
Those items aren’t controversial on the tax bill — they don’t raise the annual tax bills that middle- and low-income earners owe, experts said.
The Inflation Reduction Act would also introduce a 15% minimum corporate tax paid on earnings that large companies report to shareholders. That’s where “indirect” taxes can come into play, experts said. For example, a corporation with a higher tax bill may pass these additional costs on to employees, perhaps in the form of a lower raise, or reduced corporate profits may hurt 401(k) and other investors who own part of the company in mutual fund.
The Democrats’ approach to tax reform means higher taxes on low- and middle-income Americans.
Senator Mike Crapo
Republican from Idaho
The current corporate tax rate is 21%, but some companies are able to reduce their effective tax rate and therefore reduce their bill.
As a result of this policy, people making less than $200,000 will pay almost $17 billion in combined additional tax in 2023, according to a Joint Committee on Taxation analysis released July 29. That combined tax burden falls to about $2 billion by 2031, according to JCT, an independent report for Congress.
“The Democrats’ approach to tax reform means higher taxes on low- and middle-income Americans,” Sen. Mike Crapo, R-Idaho, the ranking member of the Finance Committee, said of the analysis.
Others say the financial benefits outweigh the indirect costs
However, the JCT’s analysis does not give a complete picture, according to experts. That’s because it doesn’t account for the benefits of consumer tax credits, health care premium subsidies and lower prescription drug costs, according to the Committee for a Responsible Federal Budget.
Observers looking at indirect costs must also weigh those financial benefits, experts say.
“Selective performance through some of the distributional effects of this bill ignores the benefits to middle-class families from deficit reduction, from lower prescription drug prices, and from more affordable energy,” a group of five former Treasury secretaries from Democratic and Republican administrations wrote Wednesday.
Just $64 billion in total Affordable Care Act subsidies would be “more than enough to offset the net tax increases below $400,000 in the JCT study,” according to the Committee for a Responsible Federal Budget, which also estimates that Americans will save $300 billion in prescription drug costs and premiums.
The combined policies would offer a net tax cut for Americans through 2027, the group said.
Furthermore, setting a minimum corporate tax rate should not be seen as an “additional” tax, but as a “recovery of revenue lost due to tax avoidance and regulations favoring the wealthiest,” the former Treasury secretaries said. They are Timothy Geithner, Jacob Lew, Henry Paulson Jr., Robert Rubin, and Lawrence Summers.
However, there are additional wrinkles to consider, according to the Tax Policy Center’s Bull.
For example, to what extent do companies shift their tax bills to workers versus shareholders? Economists differ on this point, Bull said. And what about companies with lots of excess cash on hand? Could this cash buffer cause a company not to impose indirect taxes on its workers?
“You could end up down these rabbit holes forever,” Bull said. “That’s just one of the fun parts of tax promises,” he added.
Add Comment