Critics of President Joe Biden are saying that his proposal to increase corporate tax rates could break one of the highest-profile promises of his 2020 presidential campaign — that “if you make less than $400,000, you won’t pay a single penny more in taxes.”
For instance, recent posts shared by several websites affiliated with the conservative-leaning Western Journal said, “Analysis: 60% of Americans Will Be Forced to Pay More in Taxes Under Biden’s Plan.”
Since only about 4 percent of U.S. households earn $400,000 or more, that would mean a lot of people under that threshold would pay more under Biden’s proposals.
The article from the Western Journal that accompanied the post said that the analysis — conducted by the nonpartisan Urban Institute-Brookings Institution Tax Policy Center — “contradict(s) Biden’s false narrative that his tax hikes would only affect corporations and households earning more than $400,000 a year.”
Strictly speaking, the analysis by the Tax Policy Center does support the notion that about 60% of taxpayers will be seeing less income in their pockets if Biden’s tax changes are enacted.
But that’s not the end of the story. In fact, the Tax Policy Center’s overall analysis is more sanguine about the impact for typical taxpayers under Biden’s plan than a reader might take away from the social media talking point alone.
In all, it’s a bit of a glass-half-full, glass-half-empty scenario. Let’s take a closer look. (Neither the White House nor Western Journal got back to us for this article.)
How many Americans would see their income decline?
Americans pay all sorts of taxes, some levied by states or localities, and some by the federal government. On the federal level, Americans are taxed directly on their incomes, as well as in deductions from their pay stubs for Social Security and Medicare.
Meanwhile, using a separate tax code, corporations are taxed as well — and the impact of these corporate taxes lies at the heart of the divergent interpretations of how Biden’s tax proposals will affect ordinary Americans.
A centerpiece of Biden’s tax plan is to raise the corporate tax rate from 21 percent to 28 percent. That increase would leave the rate lower than 35 percent it was before President Donald Trump signed a tax law in 2017. Republicans argue that an increase to 28 percent would leave the United States at a competitive disadvantage, and some Senate Democrats, such as Joe Manchin of West Virginia, have said they oppose any increase beyond 25 percent.
Wherever the number ends up if a deal is struck with Congress, the White House’s argument has been that taxes on corporations are not taxes on individuals. So, as long as Biden avoids any other types of taxes on households earning less than $400,000, he and his allies argue that will have stuck to his pledge even if he raises corporate taxes.
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But would higher corporate tax rates ultimately affect individuals earning less than $400,000? That’s a point of contention, with credible arguments made on both sides.
“It comes down to how the pledge is interpreted,” said Garrett Watson, a senior policy analyst at the Tax Foundation.
The Tax Policy Center and other groups that study tax policy use mathematical models to project how changes in the tax code would affect taxpayers of varying income levels, and these models factor in an indirect impact from corporate tax increases on individuals. The idea is that corporations will pass along the cost of these tax increases to regular people, mainly through lower returns for investors and lower wages for workers.
The Tax Policy Center model measures the overall impact of tax changes on taxpayers in each of five income tiers, or quintiles. In addition, the model seeks to capture the impact on especially high-earning households by studying what would happen to subgroups within the highest tier: the 80th to 90th percentiles in income, the 90th to 95th percentiles, the 95th to 99th percentiles, the top 1 percent, and the top 0.1 percent. (A separate analysis by another group, the Tax Foundation, has produced broadly similar projections.)
In its analysis, the Tax Policy Center sought to separate out the “winners” from the “losers” of Biden’s tax proposals. It did this by breaking down the percentage of taxpayers within each of these income groups that could expect to see a decline in their after-tax earnings, along with the percentage that could expect an increase in their after-tax earnings. The analysis also provided the average amount of income gained or lost for members of each of these groups.
The analysis found that for the lowest one-fifth of earners, only about 30 percent would see a tax hike if Biden’s proposals are enacted. But for households between the 20th percentile and the 90th percentile — an income range that runs from about $25,700 to $243,000 a year — between 63 percent and 74 percent would experience a tax hike. In the 90th to 95th percentile for earnings, which would still be below the $400,000 threshold, about 90 percent of households would see a decline in after-tax earnings due to Biden’s proposals.
So by focusing narrowly on this statistic, the social media posts cast Biden’s tax plans as a broken promise.
However, supporters of Biden — and the Tax Policy Center analysis itself — suggest that this talking point distorts the impact on taxpayers by obscuring the tax benefits that many stand to receive.
Indeed, in announcing the analysis, the Tax Policy Center headlined its findings by saying that “nearly all of President Biden’s proposed tax increases would be borne by the highest income 1 percent of households — those making about $800,000 or more” and that “Biden would cut taxes for many low- and moderate-income households and reduce them substantially for those with children.”
These cuts would stem from such Biden proposals as temporary increases in the child tax credit, the child and dependent care tax credit, and the Earned Income Tax Credit.
How corporate taxes work
So the analysis concludes that many moderate-income taxpayers will see lower after-tax incomes, but also that they’ll have lower tax bills.
How could these both be true?
The Tax Policy Center notes that except for the very richest taxpayers, the reductions in after-tax income would stem almost exclusively from Biden’s proposed tax hikes on corporations, including the higher rates.
Other experts agreed with this analysis. “The corporate tax increases are the reason” for the projected declines in after-tax income, said Kyle Pomerleau, a resident fellow at the American Enterprise Institute. “The individual income tax increases are targeted very narrowly on very high-income households.”
Corporate taxes are not directly paid by taxpayers. And while ordinary taxpayers may indirectly shoulder some of the cost of corporate taxes, measuring exactly how much is tricky and subject to academic debate.
In its model, the Tax Policy Center estimated that 80% of the corporate tax increase would be borne by corporate shareholders, said Thornton Matheson, a senior fellow with the group. The remaining 20% would be borne by workers through reduced wages. Matheson said this breakdown is similar to those used by the Treasury Department and Congress’ Joint Committee on Taxation.
Some households could be hit by both impacts. For instance, members of a household might see lower returns on the stock investments in their 401(k) as well as experiencing lower wages.
The lower wages are largely where Biden’s plan would hit ordinary taxpayers. And there’s some important context to know about how this would play out.
First, the burdens to individuals from raising the corporate tax, while widespread, would be modest. For instance, among the taxpayers in the second-lowest income quintile who will be seeing a decline in after-tax income, the average loss would be $170. For the middle quintile, it would be $330. Either one would represent a decline of than 1 percent of income for households in those groups.
By comparison, the taxpayers in these categories who end up better off due to Biden’s changes will see more substantial gains. For the gainers in the second-lowest quintile, the average increase would be $2,460. For the middle quintile, it would be $2,370. That’s a gain of about 2% to 4% of income.
Second, the burden of higher corporate taxes borne by middle-income taxpayers would be spread out over a long time and across the family budget. The wage stagnation can play out over years, and households typically cannot touch 401(k) assets until retirement.
This lost income would not be a line item on an individual’s tax returns, or show up separately on a receipt, as a gasoline or sales tax would. So to some tax experts, the possibility of lower wages or investment returns in future years does not come across as a “tax hike.”
To Matheson, Biden was “talking about the taxes on your tax return, in which case his pledge does by and large hold true” despite the impact of the corporate tax.
But Watson said that this can be a tricky distinction, “because both effects end up with the same result: lower net incomes for American households.”