Biden does not promise new taxes for someone who earns less than $ 400,000. Experts doubt that he can keep this promise
President Joe Biden speaks at the Eisenhower Executive Office Building in Washington, DC on Wednesday, April 7, 2021.
Leigh Vogel | Bloomberg | Getty Images
President Joe Biden will officially unveil his new tax plan during his first presidential address on Wednesday, which includes an important election promise – no one earning $ 400,000 or less should see higher taxes.
Some experts wonder if his comprehensive plan can deliver on that promise.
“I urge you to find an economist who says this is even possible,” said William McBride, vice president of federal tax and economic policy at the Tax Foundation.
The reason, according to McBride, is that everyone in business is interconnected.
“If you levy taxes on this taxpayer here, you’re very lucky to limit that effect to just that taxpayer,” said McBride. “It’s actually not possible.”
More from Personal Finance:
Workers could get 12 weeks of paid vacation under Biden’s plan
Selling Assets to Avoid Higher Capital Gains Tax? You can trigger another tax
The Fed keeps rates close to zero – this is how you can take advantage of it
Biden’s income goal of $ 400,000 was the subject of heated debate when the details of his tax plan emerged.
Some discussions centered around where that threshold would come in. In March, White House press secretary Jen Psaki said this would apply to families, sparking speculation that those earning less than $ 400,000 could receive higher royalties.
The White House did not immediately respond to a request for comment.
“For the most part, I think he can design something … where the tax increases will actually target people making $ 400,000 or more,” said Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center.
However, some people on an income below $ 400,000 may inadvertently experience some effects.
“I think it’s impossible to design something that doesn’t catch anyone in a given situation,” said Gleckman.
For example, former President Barack Obama set a cap of $ 250,000 on tax proposals that he made under his leadership. A spike to $ 400,000 coupled with low inflation in recent years would mean fewer households would be affected by the policy, Gleckman said.
Much of what Biden plans to do is focus on high earners.
The plan would raise the top tax rate for the richest Americans from 37 percent to 39.6 percent.
A tax rate of 39.6% would also apply to capital gains and dividends for households making more than $ 1 million.
I think he can design something … where the tax hikes are actually aimed at people making $ 400,000 or more.
Senior Fellow at the Urban-Brookings Tax Policy Center
With the existing net capital gains tax of 3.8%, that would bring the highest capital gains rate to 43.4%, McBride said.
Low- and middle-income people already don’t pay much in capital gains taxes, so the changes are unlikely to have any impact on people earning less than $ 400,000, Gleckman said.
One important thing to keep in mind with any new capital gains rate is the date it will take effect, whether immediately or later this year or next, Gleckman said. News that Biden was planning to hike capital gains taxes fueled higher volatility in stock markets last week.
“That could have some impact on short-term trading, although it doesn’t make any difference in the long run,” Gleckman said.
The President’s plan also includes limiting a strategy known as “step-up-in-base,” whereby wealthy individuals can avoid paying taxes on profits by giving those assets to their heirs. Under Biden’s plan, the strategy would be truncated for profits above $ 1 million, or $ 2.5 million per couple, factoring in existing real estate exemptions.
“It’s essentially an additional estate tax because it applies to death,” said McBride.
McBride predicted that the topping up of the base proposal on Capitol Hill would be extremely controversial. However, the entire proposal is unlikely to have Republican support, he said.
For Biden’s tax changes to become law, they would have to be passed later this year through a so-called reconciliation law that would allow Democrats to approve the changes on a party-political basis.
“The only hope for these things is reconciliation on a purely partisan basis and the fact that every single Democrat in the Senate agrees,” McBride said. “This is a one-time shot.”