Does Inflation Reduction Act Violate Biden’s $ 400,000 Tax Commitment?

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The Senate Democratic package on climate change, health care, drug pricing and tax measures, unveiled last week, has supporters and opponents debating whether the legislation violates a promise President Joe Biden has made. from his presidential campaign, a do not raise taxes on households with incomes of less than $ 400,000 per year.

The answer is not as simple as it sounds.

“The fun part of this is that you can get a different answer depending on who you ask,” said John Buhl, an analyst at the Urban-Brookings Tax Policy Center.

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The White House used $ 400,000 as a rough dividing line for the rich versus low and middle incomes. That income threshold equates to roughly 1% to the richest 2% of American taxpayers.

The new bill, the Inflation Reduction Act, doesn’t directly raise household taxes below that line, according to tax experts. In other words, the legislation would not trigger an increase in taxpayers’ annual tax returns if their income is less than $ 400,000, experts said.

But some aspects of the legislation could have negative downstream effects, a kind of indirect taxation, experts said. This “indirect” element is where the naysayers seem to have directed their anger.

What’s in the law on reducing inflation

The legislation – mediated by Senate Majority Leader Chuck Schumer, DN.Y., and Senator Joe Manchin, DW.Va., who had been a key centrist benchmark – would invest approximately $ 485 billion in climate measures. and health care through 2031, according to an analysis by the Congressional Budget Office released Wednesday.

In general, that spending would be in the form of tax breaks and discounts for families who buy electric vehicles and make their homes more energy efficient and a three-year extension of the current Affordable Care Act subsidies for health insurance. .

The bill would also raise about $ 790 billion through tax measures, prescription drug pricing reforms and a methane emissions tax, according to the Congressional Budget Office. Taxes account for the bulk – $ 450 billion – of revenue.

Critics say corporate changes could affect workers

In particular, the legislation would provide more resources for the IRS to enforce tax fraud and change the “interest carried” rules for taxpayers earning more than $ 400,000. However, the change to the interest-bearing rules – which allow some private equity and other investors to pay a preferential tax rate on profits – is likely dead, after Democratic leaders agreed to eliminate it to win Senator Kyrsten’s support. Sinema, D-AZ.

These elements are not controversial with respect to the fiscal commitment: they do not increase the annual taxes due to middle and low incomes, the experts said.

The law on reducing inflation would also implement a minimum corporation tax of 15%, paid on the income that large corporations report to shareholders. This is where “indirect” taxes could come into play, experts said. For example, a company with a higher tax could pass those additional costs on to employees, perhaps in the form of a lower increase, or the reduction in corporate profits could harm 401 (k) and other investors who own a portion of the company in a mutual fund.

The Democrats’ approach to tax reform means raising taxes on low- and middle-income Americans.

Senator Mike Crapo

Republican of Idaho

The current corporate tax rate is 21%, but some companies are able to reduce the effective tax rate and thereby reduce the bill.

As a result of the policy, those with incomes below $ 200,000 would pay nearly $ 17 billion in additional combined taxes in 2023, according to an analysis by the Joint Taxation Committee published on 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 senior finance committee member, said of the analysis.

Others argue that 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 take into account the benefits of consumer tax breaks, health premium subsidies, and reduced prescription drug costs, according to the Federal Budget Responsible Committee.

Observers considering indirect costs should also weigh these financial benefits, experts argue.

“The selective presentation of some of the distributive effects of this bill overlooks the benefits to middle-class families of reducing deficits, lowering the prices of prescription drugs and more accessible energy,” a group of five former treasury secretaries from both Democratic and Republican administrations wrote Wednesday.

The Affordable Care Act’s $ 64 billion total subsidy alone would be “more than enough to counter net tax increases of less than $ 400,000 in the JCT study,” according to the Committee for a Responsible Federal Budget, which also estimates Americans would save. $ 300 billion in costs and premiums for prescription drugs.

The combined policies would offer a clean tax cut for Americans by 2027, the group said.

Furthermore, setting a minimum corporate tax rate should not be seen as an “extra” tax, but a “recovery of revenue lost due to tax avoidance and pro-wealthy provisions”, said the former secretaries of the Treasury. They are Timothy Geithner, Jacob Lew, Henry Paulson Jr., Robert Rubin and Lawrence Summers.

There are additional wrinkles to consider, however, according to Buhl of the Tax Policy Center.

For example, to what extent do companies pass on their tax on workers relative to shareholders? Economists differ on this point, Buhl said. And what about companies with a lot of excess liquidity on hand? Could this cash reserve cause a company not to impose indirect tax on its employees?

“You could end up going to these rabbit holes forever,” Buhl said. “It’s just one of the fun parts of tax commitments,” she added.

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