You’ve likely heard the competing TV ads lately, where the Trump campaign says Biden will raise taxes if elected and the Biden campaign ad saying he will indeed raise taxes, but only on those making more than $400,000 per year.
This week CNBC’s Squawk Box broke down how a person making at least $400,000 could see their combined state and federal tax rate exceed 62% if Biden’s tax plan were to happen, in combination with existing state income taxes.
Biden proposes raising the top federal income tax rate from 37% to 39.6%, and removing the payroll tax ceiling so the 12.4% payroll tax would apply to income earned over $400,000, half of which (6.2%) is paid by the individual (and the other half by the employer).
That gets you to a top individual federal rate of 45.8%. Add a net investment income tax of 3.8% and you have a total top federal rate of 49.6%.
Squawk Box then added in taxes from a handful of states, showing how in California, high earners would face an additional 13%, bringing the total top tax rate to 62.6%. In New York City, it would be 62% while New York state tops out at 58% and neighboring New Jersey at 60%.
California, which already has the highest-in-the-nation top state tax income tax rate of 13.3%, is currently considering a bill that would raise it to 16.8%. The Golden State is also considering a .4% wealth tax. These potential increases have many fearing an exodus of wealthy residents for nearby states with no state income tax like Nevada, Washington or Texas.
There are similar worries in New Jersey, which is currently considering a wealth tax of its own. Under the plan, the Garden State tax rate would increase from the current 8.97% to 10.75% for every dollar earned between $1 million and $5 million annually.
Biden proposals could raise $2.4 trillion
A recent updated analysis of Biden’s tax proposals by the nonpartisan Tax Policy Center finds that on net, his proposals would increase federal revenues by $2.4 trillion over the next decade. This would be accomplished by increasing income and payroll taxes on high-income individuals and raising income taxes on corporations (increasing the top corporate income tax rate from 21% to 28%).
About 40% of the revenue gains would come from the higher taxes on high-income households and high-value estates, and about 60% would come from higher taxes on businesses, especially corporations.
He would expand tax credits for middle- and lower-income individuals and for new investments in domestic manufacturing. Under his plan, the Tax Policy Center says the highest-income households would see substantial tax increases while tax burdens would fall for households in the bottom two income quintiles.
The analysis says Biden’s plan would give an average tax cut of $620 (or 1% of after-tax income) to middle-income earners (those with income between about $50,000 and $89,000), with the bottom 80% of taxpayers seeing tax cuts on average, mainly due to a package of tax credits and deductions aimed at the middle class.
Taxpayers in the bottom quintile (those with income less than about $25,000) would receive an average tax cut of $750, or 5.2% of after-tax income.
By contrast, the plan would raise tax burdens on households among the top 1% of earners (those with income more than $788,000) by an average of about $266,000, or 15.9% of current-law after-tax income. The “super earners”—those in the top 0.1%—would see an average tax hike of $1.6 million.
The Tax Policy Center analysis outlines how high-income taxpayers would face increased income and payroll taxes. Biden’s plan would roll back income tax reductions from Trump’s Tax Cuts and Jobs Act of 2017 (TCJA) for taxpayers with incomes above $400,000.
It would also limit the value of itemized deductions to 28% for taxpayers with incomes above $400,000. Biden’s plan would tax capital gains and dividends at the same rate as ordinary income for taxpayers with incomes above $1 million and tax unrealized capital gains at death. Further, his plan would lower the estate tax exemption to $3.5 million ($7 million for married couples) and increase the estate tax rate to 45%.
The analysis assumes that the effective date for most provisions in the Biden tax plan would be January 1, 2022, one year later than the Tax Policy Center assumed in March, with the delay reflecting the uncertain legislative environment caused by the ongoing COVID-19 pandemic and related economic disruptions.
While President Trump has promised to eliminate the Social Security Payroll tax if reelected by making his Executive Order payroll tax holiday permanent, Biden wants to keep it and raise additional revenue by applying Social Security payroll taxes to earnings above $400,000. The Tax Policy Center analysis says that would raise an additional $740 billion over a 10-year period.
Largest Biden policy revenue raisers
Per the Tax Policy Center analysis, the largest revenue raisers over the 10-year budget window are his following policies:
- Apply Social Security payroll taxes to earnings above $400,000 (raising $740 billion)
- Increase the corporate income tax rate from 21% to 28% percent ($730 billion)
- Increase minimum taxes on foreign-source income of US multinational corporations ($710 billion)
- Increase taxes on capital gains and dividends for taxpayers with incomes above $1 million ($370 billion)
- Repeal TCJA individual income tax cuts for taxpayers with incomes above $400,000 ($310 billion)
- Limit the value of itemized deductions for taxpayers with incomes above $400,000 ($220 billion)
- Increase the estate tax ($220 billion)
Largest Biden tax credit provisions
The additional revenue would be partially offset over the 10-year budget window by approximately $1.2 trillion in additional tax credits. The largest tax credit provisions are the following:
- Temporarily expand and make fully refundable the child tax credit (losing $240 billion)
- Provide credits for new investments in domestic manufacturing ($230 billion)
- Provide a refundable first-time home buyer’s credit ($210 billion)
- Replace deductions (or income exemptions) for retirement contributions with a refundable credit ($150 billion)
- Expand and make fully refundable the child and dependent care tax credit ($110 billion)
SEE ALSO:
- ‘Millionaire Tax’ Coming to N.J.—Will Other States Follow Suit?
- Trump or Biden: What History Predicts for Stock Market
- Biden to Swap 401k Tax Breaks for Credits
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
