Health · August 5, 2022

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

Jim Watson | AFP | Getty Images

Senate Democrats’ package on climate change, healthcare, drug prices and tax measures unveiled last week has debated supporters and opponents over whether the legislation goes against a promise President Joe Biden has made since his presidential campaign do not levy taxes on households earning less than $400,000 per year.

The answer is not quite as simple as it seems.

“The funny thing is that depending on who you ask, you can get a different answer,” 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 relative to the middle- and low-income earners. This income threshold roughly corresponds to the top 1% to 2% of American taxpayers.

According to tax experts, the new bill, the Inflation Reduction Act, will not directly collect taxes on households below that limit. In other words, the legislation would not trigger an increase in taxpayers’ annual returns if their income is below $400,000, experts said.

However, some aspects of the legislation can have adverse downstream effects – a kind of indirect taxation, experts say. Opponents seem to have focused their anger on this “indirect” element.

What does the Inflation Reduction Act say?

The legislation — brokered by Senate Majority Leader Chuck Schumer, DN.Y., and Senator Joe Manchin, DW.Va., who had been a key centrist holdout — would invest about $485 billion in climate and health action by 2031 , according to an analysis by the Congressional Budget Office released Wednesday.

Broadly speaking, that spending would come in the form of tax breaks and rebates for households who buy electric vehicles and make their homes more energy efficient, and a three-year extension of current Affordable Care Act subsidies for health insurance.

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

Critics say company changes could impact workers

Specifically, the legislation would allocate more resources to IRS enforcement of tax evasion and streamline 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 in terms of the tax promise — they don’t add to the annual tax bills owed by middle- and low-income earners, experts said.

The Anti-Inflation Act would also introduce a minimum corporate tax of 15% paid on the income that large companies report to shareholders. This is where “indirect” taxes could come into play, experts said. For example, a company with a higher tax burden could pass these additional costs on to employees, perhaps in the form of a lower pay rise, or reduced company profits can hurt 401(k) and other investors who own an interest in the company in a mutual fund.

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

Senator Mike Crapo

Republicans of Idaho

The current corporate tax rate is 21%, but some companies can lower their effective tax rate and thereby cut their bills.

As a result of the policy, those with incomes under $200,000 would pay nearly $17 billion in combined additional taxes in 2023, according to an analysis by the Joint Committee on Taxation released 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 for low- and middle-income Americans,” Sen. Mike Crapo, R-Idaho, senior member of the Finance Committee, said of the analysis.

Others say the financial benefits outweigh the indirect costs

According to experts, however, the JCT analysis does not provide a complete picture. That’s because it doesn’t take into account the benefits of excise tax refunds, health premium subsidies and lower prescription drug costs, according to the Federal Budget Committee.

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

“The selective presentation of some of the distributional effects of this bill neglects the benefits to middle-class families from deficit reductions, prescription drug price reductions and more affordable energy,” a group of five former Treasury secretaries from both Democratic and Republican governments wrote Wednesday .

The $64 billion in subsidies from the Affordable Care Act alone would be “more than enough to offset net tax increases below $400,000 in the JCT study,” according to the Federal Budget Good Governance Committee, which also estimates that the Americans would save $300 billion on prescription drug costs and premiums.

The combined measures would offer Americans a net tax cut through 2027, the group said.

Furthermore, setting a minimum corporate tax rate should not be seen as an “additional” tax, but as “recovering revenue lost through tax avoidance and accruals in favor of the wealthiest,” the former finance ministers argued. They are Timothy Geithner, Jacob Lew, Henry Paulson Jr., Robert Rubin and Lawrence Summers.

According to Buhl from the Tax Policy Center, however, there are other weaknesses to consider.

For example, to what extent do companies shift their tax burden onto employees compared to shareholders? Economists disagree on this point, Buhl said. And what about companies with lots of excess cash? Could this liquidity buffer result in a company not collecting indirect taxes from its workers?

“You could end up going down those rabbit holes forever,” Buhl said. “That’s just one of the fun parts of tax promises,” he added.