Senate Majority Leader Chuck Schumer, DNY, and President Joe Biden arrive at the US Capitol for a Senate Democratic lunch on July 14, 2021.
Drew Angerer | Getty Images News | Getty Images
Senate Democrats aim to partly fund a $3.5 trillion budget measure against a backdrop of tax hikes on corporations and the wealthy, according to the budget framework released Wednesday.
Democrats may “block” tax increases for families with incomes less than $400,000, as well as other groups such as small businesses and family farms, as they seek to raise revenue for clean energy initiatives and expand the social safety net, according to the outlines.
The tax framework does not include details beyond these high-level points. Lawmakers will now work on drafting legislation that spells out the details.
If passed, the framework would mark a major shift in resources from the rich to the poor, according to some experts.
“It’s a very systematic top-down redistribution of income, there’s no doubt about it,” said William McBride, vice president for federal tax and economic policy at the Tax Foundation. “It’s very exciting – that’s the design.”
Lawmakers who support the plan have described it as a way to ensure a fairer US tax system.
“At a time of immense wealth and income inequality and when half of our employees are living paycheck to paycheck, what this bill of reconciliation will finally do is meet the needs of our working families by requiring wealthy and large corporations to pay their fair share of taxes,” said Senator Bernie Sanders, chair of the Budget Committee. in the Senate.”
The framework shares many elements of President Joe Biden’s tax agenda.
The after-tax income of the top 1% of Americans will fall 5% next year as a result of the White House budget released in May, the best current evidence for analyzing the impact of the Senate Democrats’ plan, the Tax Foundation estimates. .
Meanwhile, after-tax income is expected to inflate by 16% for the bottom quintile of earners in 2022, according to the analysis.
(The top 1% represents people who earn more than $413,000 a year, and the lowest fifth includes those who earn less than $20,000, McBride said.)
Biden’s tax plan calls for a higher tax rate of 39.6% for the wealthiest Americans, up from the current rate of 37%.
Biden also proposed doubling the roughly highest tax rate on long-term capital gains for those with an annual income of more than $1 million annually, and taxing assets over $1 million upon the owner’s death.
The top federal rate on capital gains will rise to 43.4% from the current 23.8%, after accounting for a 3.8% surcharge.
Meanwhile, the Biden administration — and Senate Democrats — will extend the recent expansion of the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Tax Credit.
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They will also fund two years of free comprehensive preschool, create a comprehensive paid national leave program and expand Medicare to cover dental, vision and hearing costs, among other measures.
The Senate plan also calls for stronger taxes. The Treasury estimates it could raise $700 billion over a decade, in part by cracking down on wealthy taxpayers who do not report income in opaque business structures.
Democrats have called for an increase in the corporate rate, from the current 21% set by the Tax Cuts and Jobs Act in 2017. The White House has proposed 28% and is working with other countries to create a lower global tax framework to avoid companies fleeing to tax havens.
It’s unclear whether all of these initiatives will end in the legislation that Senate Democrats are working on or change with the wording of the bill.
Some tax experts are skeptical that Senate Democrats can raise $3.5 trillion based on policy ideas laid out in their framework, especially without higher taxes for those earning less than $400,000. (In addition to taxes, Democrats can also increase revenue from measures such as renegotiating prescription drug prices.)
Doubling the capital gains tax rate for the richest Americans is likely to lead to tax relief strategies that reduce the amount of revenue flowing into the federal government, according to Jason Fichtner, vice president and chief economist at the Bipartisan Policy Center.
Rather than selling an assessed asset and incurring a tax, he said, the wealthy might often choose to borrow for its value, or use a strategy to offset the profit (and associated taxes) with portfolio losses.
While Senate Democrats will try to avoid imposing higher direct taxes on lower- and middle-class Americans, it may be difficult to avoid the so-called “indirect” taxes that would result from a higher corporate tax rate, Fichtner said.
The idea here is that companies may seek to offset a larger tax bill with lower wages for employees or higher prices for their goods and services, both of which are likely to affect some income earners under $400,000, according to Fichtner.
But companies can also offset those tax costs by cutting dividends to shareholders, which would hit the wealthy, who disproportionately own shares, drastically, he said.