Biden’s Tax Hikes May Be A Tough Sell In 2021. What If He Paired Them With Big Refundable Tax Credits?

Democratic presidential nominee Joe Biden would raise taxes by about $4 trillion over the next decade, nearly all on businesses and high-income households. While Biden has tweaked his plan somewhat in recent months, it still looks much like the proposal analyzed by the Tax Policy Center in March.

The real question for Biden is how much of his ambitious tax plan could Congress realistically pass next year. Straight-up tax increases may be a tough sell, but combining them with low- and middle-income tax cuts could make the job easier.

In a story earlier this week (paywall), Wall Street Journal tax reporter Richard Rubin raised the electoral uncertainties: Unless Democrats win control of the Senate, Biden’s tax agenda may be DOA.  

But a President Biden may face an even bigger stumbling block in 2021—the COVID-19 economy. The realities of an ongoing slump may interfere with his tax hikes in two ways. First, would any tax increase make sense if the economy remains in the doldrums? Such a step seems ill-timed.

A long to-do list

Just as challenging will be Biden’s historically long to-do list. Addressing public health concerns about the pandemic itself will inevitably sit at the top. Convincing many Americans to social distance and wear a mask; expanding testing; and developing, distributing, and administering a vaccine will take an enormous amount of Biden’s time and energy.

But covid-19 won’t be Biden’s only challenge. He must rebuild our tattered relationships with allies around the world, and he’ll be under enormous pressure from Democratic activists to address racial inequities, broader health care reform, climate change, and immigration.

It is axiomatic that at best a new president gets one major first-year initiative. In the likely 2021 environment, it is hard to imagine that Biden will choose tax increases.

An opportunity

Yet, Biden may have an opportunity. While he may not be able to raise taxes until the economy recovers, the new president may have more success with a revenue-neutral reform that shifts more of the tax burden from low- and middle-income households to those with high incomes.

To see the opportunity, think about what Biden is proposing:

About half of his proposed tax hikes are aimed at high-income households and the other half at business.

For households making $400,000 or more annually, he’d raise individual income tax rates, impose the Social Security payroll tax, limit the benefit of itemized deductions to 28 percent, and phase out the special income tax deduction for pass-through businesses such as partnerships. He’d tax capital gains and dividends at ordinary income tax rates for those making $1 million or more, and tax unrealized capital gains at death.

At the same time, he’d raise the corporate income tax rate from 21 percent to 28 percent, increase taxes on US-based multinationals, and eliminate many tax preferences for the real estate industry.

Who’d pay more?

TPC estimates that the highest-income 20 percent of households (who will make about $170,000 or more) would bear nearly 93 percent of the burden of Biden’s proposed tax increases, and the top 1 percent nearly three-quarters.  

In 2021, Biden’s tax changes would reduce after-tax incomes of the highest-income 1 percent of households (those making about $837,000 or more) by an average of about $300,000, or 17 percent, Tax burdens on the top 0.1 percent (who will make $3.7 million or more) would increase by an average of about $1.8 million annually, nearly one-quarter of their after-tax incomes.

The tax changes would reduce the 2021 after-tax incomes of middle-income people by about 0.4 percent, or $260, and reduce incomes for those at the bottom of the income distribution by about 0.2 percent, or $30. Nearly all of those increases represent the share of business tax increases that would be borne by workers and shareholders. Low- and moderate-income households would pay roughly the same amount of individual income tax as under current law.

Refundable tax credits

Here is the opportunity. Biden isn’t only proposing tax increases. He’s also suggested a modest expansion of the earned income tax credit (EITC) for childless workers. And his running mate, Sen. Kamala Harris (D-CA) has proposed an ambitious $2.7 trillion tax credit for low- and moderate-income working families, called the LIFT the Middle Class Act. Act. Biden may not be able to sell even a Democratic Congress on a huge increase in taxes during a still-wobbly economy, but by embracing a more ambitious package of refundable tax credits, he might convince lawmakers to shift the burden of taxes up the economic food chain.

It still won’t be an easy sell. After all, even if Democrats control the Senate, it likely will be by only a few votes—and several of those Democrats may be reluctant tax-raisers. But pairing his proposed tax hikes with tax cuts for low- and middle-income households may be one way Biden can raise taxes on the rich, at least in 2021.