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Senate Democrats’ package of climate change, health care, drug pricing and tax measures unveiled last week has caused supporters and opponents to debate whether the legislation violates a promise President Joe Biden has made since his presidential campaign. to not raise taxes for households with incomes less than $400,000 per year.
The answer is not as simple as it seems.
“The nice thing 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.
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The White House has used $400,000 as a rough dividing line for the rich versus middle and lower earners. That income threshold equates to roughly the top 1% to 2% of U.S. taxpayers.
According to tax experts, the new bill, the Inflation Reduction Act, does not directly increase taxes on households below that limit. In other words, the legislation wouldn’t increase taxpayers’ annual tax returns if their income is less than $400,000, experts said.
But some aspects of the legislation could have adverse downstream effects — a type of indirect tax, experts say. This “indirect” element is where opponents seem to have directed their anger.
What does the Inflation Reduction Act say?
The legislation — brokered by Senate Leader Chuck Schumer, DN.Y., and Senator Joe Manchin, DW.Va., who had been a major centrist holdout — would invest about $485 billion in climate and health care measures through 2031, according to an analysis by the Congressional Budget Office published Wednesday.
Broadly speaking, those expenses would come in the form of tax breaks and rebates for households buying electric vehicles and making their homes more energy efficient, and a three-year extension of the current Affordable Care Act health insurance subsidies.
The bill would also bring in an estimated $790 billion through tax measures, prescription drug pricing reforms, and compensation for methane emissions, according to the Congressional Budget Office. Taxes account for the bulk — $450 billion — of revenue.
Critics say business change could affect employees
In particular, the legislation would provide more resources for IRS tax fraud enforcement and modify carried interest rules for taxpayers earning more than $400,000. Carried interest rules allow certain private equity and other investors to pay a preferential tax rate on profits.
Those elements aren’t controversial over the tax pledge — they don’t increase the annual tax bills owed to middle and low earners, experts say.
The Inflation Reduction Act would also introduce a minimum corporate tax of 15%, which is paid on the income large companies report to shareholders. This is where “indirect” taxes can come into play, experts say. For example, a company with a higher tax bill could pass these additional costs on to employees, perhaps in the form of a lower pay raise, or lower corporate profits could hurt 401(k) and other investors who own a portion of the company in a mutual fund.
The current corporate tax rate is 21%, but some companies are able to reduce their effective tax rate and thereby reduce their bill.
As a result of the policy, people with incomes less than $200,000 would pay nearly $17 billion in combined additional taxes by 2023, according to an analysis by the Joint Committee on Taxation published July 29. That combined tax burden drops to about $2 billion by 2031, according to the JCT, an independent scorer for Congress.
“The Democrats’ approach to tax reform means raising taxes on low- and middle-income Americans,” Senator Mike Crapo, R-Idaho, a member of the finance committee, said of the analysis.
Others say the financial benefits outweigh the indirect costs
However, according to experts, the JCT analysis does not provide a complete picture. That’s because it doesn’t account for the benefits of consumer tax rebates, health premium subsidies and lower prescription drug costs, according to the Committee on a Responsible Federal Budget.
Observers who take indirect costs into account should also weigh these financial benefits, experts say.
“The selective presentation by some of the distributional effects of this bill neglects the benefits to middle-class families of reducing deficits, lowering the prices of prescription drugs and more affordable energy,” a group of five former finance ministers of both the Democratic and Republican governments. wrote on Wednesday.
The $64 billion in total Affordable Care Act grants alone would be “more than enough to counteract net tax increases of less than $400,000 in the JCT study,” according to the Committee for a Responsible Federal Budget, which also estimates that Americans $300 billion in prescription drug costs and premiums.
The combined policy would provide Americans with a net tax cut by 2027, the group said.
Furthermore, setting a minimum corporate tax rate should not be seen as an “additional” tax, but as a “recovery of income lost through tax avoidance and provisions benefiting the most affluent,” argued the former finance ministers. . They are Timothy Geithner, Jacob Lew, Henry Paulson Jr., Robert Rubin and Lawrence Summers.
However, there are even more wrinkles to consider, according to Buhl of the Tax Policy Center.
For example, to what extent do companies pass on their tax assessments to employees versus shareholders? Economists differ on this point, Buhl said. And what about companies with a lot of excess cash on hand? Could that cash buffer lead a company not to levy indirect taxes on its employees?
“You could go down these rabbit holes forever,” Buhl said. “It’s just one of the fun parts of tax commitments,” he added.