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Senate Democrats’ package on climate change, health care, drug prices and tax measures unveiled last week has supporters and opponents debating whether the legislation violates a promise by the president. Joe Biden has done since his presidential campaign, a not raise taxes in households with incomes below $400,000 a year.
The answer is not as simple as it seems.
“The fun part about this is that you can get a different answer depending on who you ask,” said John Buhl, an analyst at the Tax Policy Center.
The White House has used $400,000 as a rough dividing line for the wealthy relative to the middle and lower incomes. That income threshold equates to roughly the 1% to 2% higher of American taxpayers.
The new bill, the Inflation Reduction Law, 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 taxpayers’ annual tax returns if their income is less than $400,000, experts said.
But some aspects of the legislation may have adverse side effects, a kind of indirect taxation, experts said. This “indirect” element is where the opponents seem to have directed their anger.
The legislation, brokered by Senate Majority Leader Chuck Schumer, DN.Y., and Sen. Joe Manchin, DW.Va., who had been a key centrist holdout, would spend about $485 billion on climate and health care measures through 2031., according to a Congressional Budget Office analysis issued on Wednesday.
Generally speaking, that expense would be in the form of tax exemptions and refunds for households that buy electric vehicles and make their homes more energy efficient, and a three-year extension of current Affordable Care Act subsidies for health insurance.
The bill would also raise an estimated $790 billion through tax measures, reforms for prescription drug prices and a fee for methane emissions, according to the Congressional Budget Office. Taxes account for the largest share ($450 billion) of revenue.
Specifically, the legislation would provide more resources for the IRS to enforce tax fraud and modify the “earned interest” rules for taxpayers earning more than $400,000. However, the change to accrued interest rules, which allows certain private equity investors and others to pay a preferential tax rate on profits, is likely dead, after Democratic leaders agreed to scrap it to garner support from Sen. Kyrsten Sinema, D-AZ. .
Those items aren’t controversial relative to the tax promise: They don’t increase the annual tax bills owed by low- and middle-income people, experts said.
The Inflation Reduction Law would also implement a minimum corporate tax of 15%, paid on the income that large companies report to shareholders. This is where “indirect” taxes could come into play, experts said. For example, a corporation with a higher tax bill could pass on those additional costs to employees, perhaps in the form of a smaller raise, or the reduction in corporate profits may hurt the 401(k) and other investors who own a company. part of the company in an investment fund.
The current corporate tax rate is 21%, but some businesses may lower your effective tax rate, thereby lowering your bill.
As a result of the policy, those with incomes below $200,000 would pay almost $17 billion in combined additional taxes in 2023, according to a Joint Committee on Taxation. analysis published on July 29. That combined tax burden drops to about $2 billion by 2031, according to the JCT, an independent congressional scorer.
“The Democrats’ approach to tax reform means raising taxes on low- and middle-income Americans,” said Sen. Mike Crapo, R-Idaho, Ranking Member of the Finance Committee, said of the analysis
However, JCT analysis does not provide a complete picture, according to experts. That’s because it doesn’t take into account the benefits of consumer tax rebates, health premium subsidies and lower prescription drug costs, according to the Committee for a Responsible Federal Budget.
Observers considering indirect costs should also weigh these financial benefits, experts argue.
“The selective introduction of some of the distributional effects of this bill neglects the benefits to middle-class families of reduced deficits, lower prescription drug prices and more affordable energy,” said a group of five former Secretary of State Treasury of the Democratic and Republican administrations. wrote Wednesday.
The $64 billion in total Affordable Care Act subsidies alone “would be more than enough to offset net tax increases below $400,000 in the JCT study,” according to the Committee for a Responsible Federal Budget, which also estimates that Americans would save $300 billion in prescription drug costs and premiums.
The combined policies would deliver a net tax cut for Americans by 2027, the group said.
Furthermore, establishing a minimum corporate tax rate should not be seen as an “additional” tax, but rather as “recovery of revenue lost through tax evasion and provisions that benefit the wealthiest,” the former Treasury secretaries argued. 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 Buhl.
For example, to what extent do companies pass their tax bills on to workers versus shareholders? Economists differ on this point, Buhl said. And what about companies with a lot of excess cash on hand? Can that cushion of cash lead a company not to charge an indirect tax to its workers?
“You could end up falling down these rabbit holes forever,” Buhl said. “It’s just one of the fun parts of tax promises,” he added.