Senate Democrats aim to fund a $3.5 trillion budget measure partly on the backs of higher taxes for corporations and the wealthy, according to a budget framework issued Wednesday.
Democrats would “prohibit” tax increases for households earning less than $400,000, as well as other groups like small businesses and family farms, as they seek to raise revenue for clean-energy initiatives and an expansion of the social safety net, according to the outline.
The tax framework doesn’t include detail beyond these high-level points. Lawmakers will now work to draft legislation hashing out specifics.
If passed, the framework would represent a significant shift in resources from the rich to the poor, according to some experts.
called it a way to ensure for a fairer U.S. tax system.
“At a time of massive wealth and income inequality and when half our people are living paycheck to paycheck, what this reconciliation bill will finally do is address the needs of our working families by asking the wealthy and large corporations to pay their fair share of taxes,” said Sen. Bernie Sanders, I-Vt., chairman of the Senate Budget Committee.
The framework shares many elements of President Joe Biden’s tax agenda.
After-tax income for the top 1% of Americans would fall by 5% next year as a result of a White House budget issued in May, the best current guide for analyzing the impact of Senate Democrats’ plan, according to a Tax Foundation estimate.
Meanwhile, after-tax income would swell 16% for the bottom fifth of earners in 2022, according to the analysis.
(The top 1% represent people making over $413,000 a year and the bottom fifth includes those making less than $20,000, McBride said.)
Biden’s tax plan calls for a 39.6% top tax rate for the wealthiest Americans, up from the current 37%.
Biden also proposed nearly doubling the top tax rate on long-term capital gains for those with annual income of more than $1 million a year, and taxing assets with more than $1 million in appreciation upon the owner’s death.
The top federal rate on capital gains would rise to 43.4% from the current 23.8%, after factoring in a 3.8% surtax.
Meanwhile, the Biden administration — and Senate Democrats — would extend a recent expansion of the child tax credit, earned income tax credit, and child and dependent care tax credit.
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They would also fund two years of free universal preschool, create a national comprehensive paid leave program and expand Medicare to cover dental, vision and hearing costs, among other measures.
The Senate plan also calls for stronger tax enforcement. The Treasury Department estimates it can raise $700 billion over a decade, partly by cracking down on wealthy taxpayers who underreport income in opaque business structures.
Democrats called for an increase in the corporate rate, from the current 21% established by the Tax Cuts and Jobs Act in 2017. The White House has proposed 28% and is working with other nations to establish a global minimum tax framework to avoid businesses fleeing to tax havens.
It’s unclear whether all these initiatives will wind up in the legislation Senate Democrats are working on or change as a bill is drafted.
Some tax experts are skeptical Senate Democrats can raise the $3.5 trillion based on policy ideas laid out in their framework, especially without higher taxes for those making less than $400,000. (Beyond taxes, Democrats would also raise revenue from measures like renegotiating Medicare prescription drug prices.)
Nearly doubling the capital-gains tax rate for the richest Americans would likely lead to tax-mitigation strategies that reduce the amount of revenue flowing to the federal government, according to Jason Fichtner, vice president and chief economist at the Bipartisan Policy Center.
Instead of selling an appreciated asset and incurring a tax, the wealthy may more frequently opt to borrow against its value, or employ a strategy to offset the gain (and associated tax) with portfolio losses, he said.
And while Senate Democrats will try to avoid imposing higher taxes directly on lower- and middle-class Americans, it could be hard to avoid so-called “indirect” taxes that may result from a higher corporate tax rate, Fichtner said.
The thinking here is that corporations may seek to offset a bigger tax bill with lower wages for employees or higher prices for their goods and services, both of which would likely impact some earners under $400,000, according to Fichtner.
But companies could also offset those tax costs by cutting dividends to shareholders, which would largely affect the wealthy, who disproportionately own stock, he said.