Why Biden would start tax increases at $400,000 a year
October 3, 2020 The Wall Street Journal
Households earning less than that in adjusted gross income won’t pay a nickel more in direct taxes, the Democratic presidential nominee promises. Higher-earning households will pay more—in some cases, much more.
The dividing line is no accident: It was intentionally set to far exceed any definition of the middle class. And it spares much of the coastal professional class that is an important part of the Democratic coalition.
“Anyone making over $400,000 can comfortably be classified as a group that can afford to pay a bit more,” said Ben Harris, a campaign economic adviser.
The promise attempts to emphasize that the party’s tax-increase plans are focused so squarely at the top of the income distribution that the U.S. can expand government programs without imposing a burden on most voters. Republicans counter that Mr. Biden’s plan to raise taxes on companies would also harm many middle-income households and question whether he would really keep this pledge.
The $400,000 threshold spares all but 1.8% of households, a group projected to earn 24.8% of adjusted gross income in 2021, according to the Penn Wharton Budget Model. Above that line, tax increases would begin to bite. The top 0.1% of households would see their personal effective tax rates jump to 38.4% from 27.8%.
The Biden promise helps set the tax-policy parameters of the presidential election, with one party saying 100% of households shouldn’t have a tax increase and the other arguing 98.2% of households shouldn’t have one.
In the long run, adhering to such political limits on U.S. taxing capacity might prove challenging as the country faces persistent budget shortfalls. But in the short term, in a weak economy with low interest rates, deficit financing for stimulus efforts is widely supported by lawmakers in both parties.
Looking further out, there are trillions of dollars in potential tax revenue from companies and high-income households. That room for tax increases at the top—created in part by the 2017 tax law passed by Republicans—leaves Democrats defending direct tax increases only on a small share of the population.
“A bright line is nice because it makes it easier to understand,” said Lanhee Chen, who was policy director for Mitt Romney’s presidential campaign in 2012. “The danger is that it’s easier to hold them accountable.”
Mr. Biden has been running ahead of Mr. Trump in national polls, but their ratings on economic issues have been closer, thanks in part to pre-pandemic wage growth and gains in stock prices.
The former vice president is proposing between $3 trillion and $4 trillion in tax increases over a decade, aiming to generate enough money to cover the cost of his permanent policy initiatives in areas such as education and climate change. Much of his agenda won’t happen unless Democrats also retake the Senate.
Mr. Biden’s proposals include raising the top individual tax rate to 39.6% from 37%, limiting deductions, raising the top capital-gains tax rate and imposing the 12.4% Social Security payroll tax on wages above $400,000.
Those policies—which Mr. Biden sometimes describes imprecisely—include repealing the 2017 Republican tax cuts only for top earners.
Mr. Biden also wants to raise the corporate tax rate from 21% to 28% and impose other new levies on companies. And he favors one policy that would cut taxes for some high-income households—repeal of the $10,000 cap on deductions of state and local taxes that has disproportionate effects on people in states including New York and California.
The campaign hasn’t specified all the details, so both single and married households could face the same $400,000 threshold. The campaign is also leaving open the question of whether the threshold will be indexed for inflation or frozen in place at $400,000 so it gradually captures more people over time.
Holding that line can require contorting some of the Biden policies—like a proposal to change the tax treatment of 401(k)s and other retirement plans—to keep the promise, and it could constrain his ability to pay for expanded programs.
The $400,000 threshold would impose a limit tighter than some Democrats want. The party’s leading proposals for paid family leave and Social Security expansion both feature broad payroll-tax increases that would affect people below that level and would have to be reworked to meet the test.
“I would probably draw the line lower than where [former] Vice President Biden has drawn it,” said Michael Linden, executive director of the Groundwork Collaborative, a progressive economic think tank. “There’s been a lot of income growth for people in the top 1, 2, 3 percent.”
In addition, the Biden campaign talks only about “direct taxes,” which exclude the corporate tax increases that generate more than 40% of the revenue in the Democratic presidential nominee’s plan. Tax economists estimate that corporate tax increases affect people across the income spectrum—in the short run, people who own corporate stock and, potentially, over a longer period, workers as companies limit wage growth.
That is why the Trump campaign argues that households earning less than $400,000 would be harmed by the Biden tax proposals.
“You want to raise taxes?” President Trump said hyperbolically in July. “Your 401(k)s will drop down to nothing, and your stock market will drop down to nothing.”
The Biden campaign also proposes tax cuts for some households below $400,000. These include incentives for first-time home buyers and family caregivers, an expansion of the child tax credit to $3,000 from $2,000, at least for 2021, larger credits for young children and changes that make more of that break available to low-income families.
Democrats have found this line-drawing politically useful before. In the 2008 primaries, the candidates coalesced around $250,000 in income for married couples as the cutoff, then used that threshold in the Affordable Care Act. In 2009, 1.8% of households and 21.4% of adjusted gross income were above the $250,000 line, strikingly similar to what the $400,000 threshold yields now.
Former President Obama signed several middle-income tax cuts, too. But he also signed laws that imposed taxes on middle-income households, including higher cigarette taxes, limits on health-care flexible-spending accounts and a penalty for failing to buy health insurance.
Republicans point to those increases, as well as to Mr. Biden’s support for reinstating the individual health-insurance mandate, as evidence that the $400,000 promise is meaningless.
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