On Wednesday, President Joe Biden announced details of his latest domestic spending proposal called The American Families Plan, and confirmed he plans to pay for the $1.8 trillion program to expand access to education, reduce the cost of childcare and support women in the workforce with tax increases and stricter tax collection enforcement aimed directly at wealthy Americans.
Wednesday’s announcement was the third massive domestic spending proposal of the barely 100-day-old Biden Presidency, released just hours before his first speech before a joint session of Congress Wednesday evening.
First came The American Rescue Plan, the $1.9 trillion coronavirus relief bill, which made it through Congress without Republican support via the reconciliation process and was signed into law by President Biden on March 11. It is essentially a sequel to the $2.2 trillion pandemic relief stimulus bill enacted during the Trump administration a year earlier.
Next came The American Jobs Plan, Biden’s $2.3 trillion infrastructure plan unveiled on March 31, followed by today’s $1.8 trillion The American Families Plan.
Together, the three proposals total about $6 trillion in spending. While the Treasury is on the hook for the already-passed stimulus package, the Biden Administration is squarely targeting corporations and the rich to pay for the bulk of these two latest domestic spending proposals.
A White House fact sheet released April 28 for The American Families Plan said the tax reforms focused on the highest income Americans would raise about $1.5 trillion across the decade. “In combination with The American Jobs Plan, which produces long-term deficit reduction through corporate tax reform, all of the investments would be fully paid for over the next 15 years,” the fact sheet states.
While Democrats say there is substantial tax revenue to mine simply by targeting the wealthiest 1% due to a long-growing wealth gap, Republicans say things like higher corporate tax rates get passed down to employees in the form of reduced wages and benefits that could hurt 401k contributions.
What follows are details about the major proposed tax increases targeting corporations and very wealthy Americans.
Corporate tax increase
To cover the $1.9 trillion tab of The American Jobs Plan, Biden wants to raise the corporate tax rate from 21% to 28% and force multinational corporations to pay significantly more in taxes. The Biden Administration says this could generate an increase of up to $2 trillion in corporate tax revenues over a period of 15 years.
It would essentially repeal some key changes to the corporate tax made by the Tax Cuts and Jobs Act (TCJA) in late 2017. As a result of the TCJA, the top federal corporate income tax rate fell from 35% to 21% beginning in 2018. While Biden isn’t seeking a return to 35%, he has signaled he is open to negotiating the increase to 28%.
“I’m wide open, but we’ve got to pay for this,” Biden said recently, adding, “I’m willing to negotiate that.”
During Wednesday night’s speech to the joint session of Congress, Biden cited a recent study showing that 55 of the nation’s biggest corporations—including Nike and FedEx—paid zero federal tax last year.
“Those 55 corporations made in excess of $40 billion in profit. A lot of companies also evade taxes through tax havens in Switzerland and Bermuda and the Cayman Islands. And they benefit from tax loopholes and deductions for offshoring jobs and shifting profits overseas. It’s not right,” Biden said. “We’re going to reform corporate taxes so they pay their fair share and help pay for the public investments their businesses will benefit from as well.”
The proposed corporate tax hike has been greeted with a backlash among business interest groups like the U.S. Chamber of Commerce, which applauded Biden for making infrastructure a top priority but said raising the corporate tax is “dangerously misguided when it comes to how to pay for infrastructure.”
Raise the top income tax bracket
One of the ways Biden plans to pay for The American Families Plan is by raising the top income tax bracket from 37% (where the TCJA set it in 2017) back to 39.6% for households making $400,000 or more in income.
“We’re going to reward work, not just wealth,” Biden said Wednesday. “We take the top tax bracket for the wealthiest 1% of Americans, those making over $400,000 or more, back up to where it was when George W. Bush was president.”
While modest compared to the other proposals, a recent brief from investment banking advisory firm Evercore ISI said reverting the top rate back to 39.6% could produce an additional $100 billion in new tax revenue.
One potential sticking point? Biden’s repeated claims that no one making less than $400,000 will see their federal taxes go up.
A White House official told Axios that people in married couples earning less than $400,000, filing jointly, may have to pay higher taxes. Here’s how: Biden plans to increase the income tax rate from 37% to 39.6% for families earning more than $509,300, and for individuals above $452,700, the official said. This means that a married couple each earning more than $255,000 would have to pay the higher tax rate on part of their income, because their combined income exceeds $509,300.
Unless Biden finds a work-around, his claim of not raising federal taxes on those making under $400,000 will ring hollow.
Capital gains tax increase
In another pay-for of The American Families Act, President Biden on Wednesday proposed nearly doubling the tax rate—from 20% to 39.6%—that the highest-earning Americans pay on profits made from stocks and other investments. It would force millionaires to pay similar tax rates on their investment gains as upper-middle class households pay on their salaries, after years of much lower rates.
“We’re going to get rid of the loopholes that allow Americans to make more than $1 million a year and pay a lower tax rate on their capital gains than Americans who receive a paycheck,” Biden said Wednesday. “We’re only going to affect three-tenths of 1% of all Americans [about 500,000 households] by that action.”
Still, some economists and tax analysts believe such a move would dissuade private investment, which in turn could harm growth. Another issue could be a wave of stock and asset selling just before the higher rate kicks in.
With the additional 3.8% tax on investments for high earners that’s been around since 2013 to help pay for the Affordable Care Act, the highest-earning Americans could be paying a total tax rate of 43.4% on profits from long-term investments.
There could be plenty of debate and negotiation surrounding this rate, which the Tax Foundation said would be the highest since the 1920s. Many expect Republicans and Democrats could compromise on a rate that will end up lower than 43.4%.
Another issue? A top capital gains rate of 43.3% is actually far above the rate at which the most tax revenue could be raised, according to the Tax Policy Center and Congress’s Joint Committee on Taxation, which claim the optimal revenue-maximizing capital gains tax rate is closer to 28%.
Increased IRS enforcement
A third prong of how the Biden Administration intends to pay for The American Families Act is providing the Internal Revenue Service with an extra $80 billion and more authority over the next 10 years to crack down on tax evasion by high-earners and large corporations.
The additional resources would be earmarked specifically to go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000, and large corporations and estates. Altogether, the $80 billion investment in the IRS would raise $700 billion in additional tax revenues over 10 years, according to the Biden Administration.
Wednesday’s White House fact sheet cites a recent study found that the top 1% failed to report 20% of their income and failed to pay over $175 billion in taxes owed. “But today, the IRS does not even have the resources to fully investigate this evasion. As a result of budget cuts, audit rates on those making over $1 million per year fell by 80% between 2011-2018,” the fact sheet states.
SEE ALSO:
- Biden’s ‘Historic’ Spending Plans Could Spur Rush to Roths
- Biden Ponders Major Tax Hikes for Corporations, Wealthy
- Biden’s Tax Plan: The $400,000 Question
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.
