Financial advisors’ antennae are up on news this week that President Joe Biden may be planning the first major federal tax hike since 1993 as part of the next economic recovery package, now that the American Rescue Plan Act has been signed into law.
But unlike the $1.9 trillion pandemic relief bill, work on the next major package, as reported March 15 by Bloomberg, won’t just rely on government debt as a funding source for what is expected to include components from Biden’s “Build Back Better” recovery plan, which he touted during the campaign.
The next bill is widely expected to include some “pay-fors” in the form of tax hikes on corporations and high-earners to fund programs the Biden Administration says are intended to broaden participation in American prosperity.
Bloomberg reported that Biden is considering raising the corporate tax rate from 21% to 28%, and is also thinking about increasing income taxes for individuals who earn over $400,000 a year—a carefully chosen amount so as not to infringe on another Biden campaign promise of not raising taxes on anyone making less than that.
“The President remains committed to his pledge from the campaign that nobody making under $400,000 a year will have their taxes increased,” White House press secretary Jen Psaki said this week, but also clarified that the $400,000 threshold applies to families, not individuals. Consequently, individuals who make $200,000 could be impacted if they are married to someone who earns that same amount, for example.
The “Build Back Better” plan outlined on Biden’s campaign website stated, “Biden will ensure that corporate America finally pays their fair share in taxes,” and followed that up with: “He will pay for the ongoing costs of the plan by reversing some of Trump’s tax cuts for corporations and imposing common-sense tax reforms that finally make sure the wealthiest Americans pay their fair share.”
Psaki reiterated that during the Monday White House press briefing, but pointed out that conversations are ongoing, and President Biden will have more to say about what he wants to pursue next as part of his Build Back Better agenda.
“That remains his overarching approach, but there isn’t a package yet where we’re talking about payfors yet, so I expect we can have more conversations about that down the road,” Psaki said.
Wealth tax on or off table?
To date, the White House has rejected calls for an extreme “wealth tax” such as the one proposed by progressive Senator Elizabeth Warren (D-MA), which seeks to impose a two-cent tax on every dollar of individual wealth over $50 million, with an additional surtax on every dollar of wealth over $1 billion. But on ABC’s “This Week,” Sunday, Treasury Secretary Janet Yellen indicated that Biden is indeed open to pursuing a wealth tax. “That’s something that we haven’t decided yet and can look at,” Yellen told ABC’s George Stephanopoulos.
Warren estimates her “Ultra-Millionaire Tax Act” would affect about 100,000 U.S. households, or roughly 0.05% of the population, and would generate about $3 trillion in revenue over the next decade based on a 2021 analysis from economists Emmanuel Saez and Gabriel Zucman from the University of California-Berkeley.
Financial transaction tax?
House Financial Services Committee Chair Maxine Waters (D-CA) earlier this year said she would like to consider a financial transaction tax, an idea supported by some high-profile progressives like Warren and Sens. Warren and Bernie Sanders (I-VT), as well as Reps. Alexandria Ocasio-Cortez (D-NY) and Ilhan Omar (D-MN).
Republican opposition to that idea quickly spurred the reintroduction of proposed legislation from North Carolina Rep. Patrick McHenry and Michigan Rep. Bill Huizenga intent on preventing states and municipalities from enacting a FTT.
Many 401k advocates (including the American Retirement Association) also oppose the idea of a financial transaction tax, arguing that Main Street retirement savers would be hurt more than wealthy Wall Street investors.
‘Suite’ of tax increases expected to be proposed
Warren’s “Ultra-Millionaire Tax” and a financial transaction tax seem unlikely to be part of Biden’s next economic bill. But, per the Bloomberg article citing unnamed sources “familiar with the discussions,” Biden is expected to propose a suite of tax increases, mostly mirroring his campaign proposals.
In addition to raising the corporate tax rate and personal income tax on those earning over $400,000, here are some other proposals reportedly under consideration:
- Paring back tax preferences for so-called pass-through businesses, such as limited-liability companies or partnerships
- Expanding the estate tax’s reach
- A higher capital gains tax rate for individuals earning at least $1 million annually
While not mentioned recently as options being considered, Biden, during his campaign, also floated the idea of swapping 401k tax breaks for credits and imposing a 12.4% Social Security payroll tax on earnings above $400,000 (there’s that magic number again).
While the timeline for unveiling the new package is unclear, the Bloomberg article says analysts are penciling it in at a range of $2 trillion to $4 trillion, and it is also unclear at this point how much of the tab would be offset by the tax hikes.
The new infrastructure proposal is expected to face stiff opposition from Republicans, with Senate Minority Leader Mitch McConnell this week signaling there will be no GOP interest in tax changes and Sen. Joe Manchin (D-WV), a centrist Democrat, pledging to block the bill if it does not garner support from any Republicans in a recent Axios interview.
Manchin said he’ll insist GOP lawmakers have more of a voice on Biden’s next package than they did on the $1.9 trillion relief and stimulus package Democrats passed via budget reconciliation, which requires only a simple majority.
If the next big bill were to somehow win approval in Congress this year, any tax changes included in it would likely take effect in 2022.
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