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The Senate Democrats’ package on climate change, health care, drug pricing and tax measures unveiled last week has supporters and opponents questioning whether the legislation violates a pledge President Joe Biden made since his presidential campaign, not raise taxes for households with incomes below $400,000 a year.
The answer is not as simple as it seems.
“The funny thing is, you can get a different answer depending on who you ask,” said Tax Policy Center analyst John Buhl.
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The White House used $400,000 as a rough dividing line between the rich and the middle and low income. This income threshold equates to about 1-2% of the wealthiest US taxpayers.
The new bill, the Reducing Inflation Act, does not directly raise household taxes below that threshold, tax experts say. In other words, the legislation would not result in an increase in taxpayers’ annual tax returns if their income is less than $400,000, experts said.
But some aspects of the legislation can have negative downstream effects – a kind of indirect taxation, experts say. This “indirect” element is where opponents seem to have directed their anger.
What does the Inflation Reduction Act contain?
The legislation — brokered by Senate Majority Leader Chuck Schumer, DN.Y., and Sen. Joe Manchin, DW.Va., who had been a key centrist — would invest an estimated $485 billion in climate action and health care through 2031, according to a Congressional Budget Office analysis released Wednesday.
Overall, that spending would take 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 grants for the Health Insurance.
The bill would also raise about $790 billion through tax measures, prescription drug price reforms and a levy on methane emissions, according to the Congressional Budget Office. Taxes make up the bulk — $450 billion — of revenue.
Critics say corporate changes could affect workers
Specifically, the legislation would provide more resources for IRS tax evasion enforcement and change the “deferred interest” rules for taxpayers who earn more than $400,000. The carry rules allow certain private investors and other investors to pay a preferential tax rate on profits.
These items are uncontroversial in relation to tax liability — they do not increase the annual tax bills middle and low income earners have to pay, experts said.
The Cut Inflation Act would also introduce a minimum corporate tax of 15%, paid on the income that large corporations return to shareholders. This is where “indirect” taxes could come into play, experts say. For example, a company with a higher tax bill may pass these additional costs on to employees, perhaps in the form of a lesser raise, or the reduction in company profits may hurt 401(k) and to other investors who own part of the business in a mutual fund.
The current corporate tax rate is 21% but some companies are able to reduce their effective tax rate and therefore reduce their bill.
As a result of the policy, those with incomes below $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 marker for Congress.
“The Democrats’ approach to tax reform means raising taxes on low- and middle-income Americans,” Sen. Mike Crapo, R-Idaho, senior member of the Finance Committee, said of the to analyse.
Others say the financial benefits outweigh the indirect costs
However, the JCT’s analysis does not provide the full picture, experts say. That’s because it doesn’t take into account the benefits of consumer tax refunds, health premium subsidies and lower prescription drug costs, according to the Committee for a Responsible Federal Budget.
Observers who factor in indirect costs should also weigh these financial benefits, experts say.
“The selective portrayal by some of the distributional effects of this bill overlooks the benefits to middle-class families of reduced deficits, lower prescription drug prices and more affordable energy,” said a group of five former treasury secretaries from the Democratic and Republican administrations. written on Wednesday.
The $64 billion in total grants from the Affordable Care Act alone would be “more than enough to offset net tax increases of less than $400,000 in the JCT study,” according to the Budget Committee. federal official, who also estimates that Americans would save $300 billion in prescription drug costs and premiums.
The combined policies would deliver a net tax reduction to Americans by 2027, the group said.
Furthermore, setting a minimum corporate tax rate should not be seen as an “additional” tax, but as a “recapture of lost revenue due to tax evasion and provisions benefiting the wealthy”. , argued the former secretaries to 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 their taxes on to workers rather than to shareholders? Economists differ on this point, Buhl said. And what about companies that have a lot of excess cash? Could this cash reserve lead a company not to levy indirect taxes on its workers?
“You could end up going down those rabbit holes forever,” Buhl said. “That’s just one of the fun parts of tax engagements,” he added.