The biggest set of U.S. tax increases in a generation took a major step forward on Wednesday with approval by the House Ways and Means Committee of $2.1 trillion in new levies mostly focused on corporations and the wealthy.
Stefani Reynolds/Bloomberg
About the author: Garrett Watson is a senior policy analyst at the Tax Foundation, a tax-policy research organization in Washington, D.C.
Over the past week, tax wonks in Washington, D.C. have been hard at work poring over the more than 800 pages of tax legislation produced by the House Ways and Means Committee. While there remains a long and potentially winding road ahead to pass the proposals, here are five key points that summarize the state of play as Congress weighs its options to fund President Biden’s “Build Back Better” agenda.
- The tax treatment of inherited capital gains remains unresolved.
A key component of President Biden’s tax proposal is to increase taxes on income earned from investments like stocks, bonds and real estate. While the Way and Means committee agreed to raise the top tax rate on long-term capital gains from 23.8% to 31.8%, it did not include the president’s proposal to tax assets with gains that are passed along at death over $1 million. These gains are not subject to any capital-gains tax currently.
Taxing capital gains at death has earned some skepticism over worries that it may harm family-owned businesses and farms that may not have the money needed to pay the tax right away.
The trade-off is lower revenue: at the Tax Foundation, we find that Biden’s capital gains proposal would raise $213 billion over 10 years, compared to $78 billion under the Ways and Means proposal. While taxing capital gains at death looks unlikely now, it should not be entirely counted out in the Senate, where it enjoys support from key decision-makers, like Finance Committee Chair Ron Wyden (D., Ore.).
- Expanded tax credits for low-income households with children increase short-term incomes, but have long-run costs.
President Biden and Democrats in Congress are proposing an extension of several tax credits that were expanded in the American Rescue Plan Act. This includes a beefed-up child tax credit, which would provide up to $3,600 per child, eliminate the credit’s phase-in to maximize the value for low-income households and advance the credit monthly, rather than annually, during tax season.
The expanded CTC, along with other more substantial tax credits, would increase after-tax incomes for the bottom 20% of earners by 14.5% next year while costing about $1 trillion. While this is an eye-popping number, the CTC extension would last only until 2025. A permanently expanded CTC would cost nearly $1.6 trillion on its own over the next 10 years, which may be a challenging gap to fill even for supportive lawmakers. In the long run, it may be important to consider alternative ways to provide social support to low-income households outside of the tax code, or consider alternative designs for the CTC.
- Corporate tax hikes raise about half of total revenue, but could undermine American competitiveness.
About half of the revenue raisers in the Ways and Means plan comes from raising taxes on corporations, echoing President Biden’s argument that they must “pay their fair share.” Along with a new top corporate tax rate of 26.5%, the proposal would increase taxes paid by multinational corporations with business abroad.
One worry that some economists and policymakers in Congress have raised is how these tax hikes will impact U.S. competitiveness. For example, under the Ways and Means plan, the U.S. would have the third-highest corporate tax rate among developed countries, averaging 30.9% when including state corporate taxes.
The international tax hikes may actually encourage a greater amount of profits to shift out of the U.S., contrary to the intentions of the proposal’s designers. This is because the tax hike on domestic income is even higher than the international tax increases, which may also put domestic firms at greater risk of foreign takeovers.
- Potential changes to the $10,000 state and local tax, or SALT, deduction cap remain a sticking point
A group of House policymakers is pushing for a full repeal to the $10,000 SALT deduction cap originally created in the 2017 Tax Cuts and Jobs Act. While not included in the Ways and Means proposals, it may be added in later in the process. Full repeal would cost nearly $380 billion between 2022 and 2025, which would offset nearly 20% of the revenue raisers and erase nearly half of the tax hikes on the top 1%.
Policymakers could consider ways to increase the generosity of the SALT cap short of full repeal, such as raising the cap to $20,000. Either way, they will have to balance this added assistance with a tax benefit that mostly goes to the top 5% of income earners.
- Concentrating tax increases on higher earners and corporations comes with its own risks.
The “Build Back Better” tax agenda is aimed squarely at those earning over $400,000 per year, which is part of a growing trend towards raising ever-larger amounts of revenue from an ever-shrinking tax base. This is a recipe for unstable revenue collection and potential economic harm.
At the Tax Foundation, we have estimated that filers outside of the bottom 20% of earners (or those earning more than roughly $20,000 a year) would experience lower after-tax incomes due to the economic impact of the tax increases, averaging a decline of about 1.7% (or about $970). This result runs contrary to the president’s intended goal of helping the middle class.
To put it another way, the economy would produce about $1.8 trillion less output over the next 10 years, a greater impact than the $1.1 trillion in new revenue. That means for every $1 the plan raises, about $1.80 is lost through lower economic growth.
While the proposed social spending should be evaluated on its own merits, sustainably financing this spending while minimizing economic harm should be a next-step priority for Congress and the White House.
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to [email protected].
