President Joe Biden’s promise to not raise taxes on people making under $400,000 is a central feature of his Build Back Better agenda. It is a promise soon to be broken.
Compromise isn’t what will break the promise, as in the days of “Read my lips: No new taxes.” Rather, it will be broken by the president’s own policy design.
Biden has proposed paying for new investments in infrastructure, families, and education with tax hikes aimed at the rich and businesses that, according to him, won’t affect the rest of us. Middle-class families in places like Georgia, Florida, and Alabama need not worry, according to the White House.
While that may pass politically, you would be hard-pressed to find an economist who agrees. Policymakers can certainly assign the burden of a tax to the rich or to businesses, but they don’t have the power to isolate the burden there.
Credit: contributed
Credit: contributed
Think of it like this: when a schoolteacher assigns a science project to a grade schooler, who bears that burden? If you insist it’s the student, the parents would like a word.
So too with taxes.
The Joint Committee on Taxation (JCT) — the official tax scorekeeper for Congress — recently analyzed three ranges of corporate tax increases to see who would bear the burden. The analysis was released the same day that U.S. Sen. Bernie Sanders, I-Vt., introduced the legislative vehicle for Biden’s Build Back Better agenda with this promise: “Under this budget, however, no family making under $400,000 a year will pay a penny more in taxes.”
It’s hard to square that promise with the JCT’s analysis.
According to the JCT, the burden of a higher corporate income tax falls on people with capital income — this includes things like income from owning corporate stocks, which most Americans do in their pension and retirement accounts. Over time, the burden also falls on people receiving regular paychecks at work because higher corporate tax reduces wages.
The JCT finds that even a small increase of 3 percentage points, which would raise the corporate tax rate from 21 percent to 24 percent, would burden households making under $400,000. In 2022, households making under $200,000 would bear nearly 31 percent of the tax burden.
That would add up to more than $5.9 billion — significantly more than the “not one penny” promise.
And that is the estimate for a small rate increase. President Biden has proposed raising the rate to 28 percent, and Sen. Sanders’ instructions call for the Senate Finance Committee to offset the spending with “corporate tax reform.”
JCT finds that, at a 28 percent corporate tax rate, households making under $200,000 would bear nearly 40 percent of the burden by the end of the decade, adding up to more than $27 billion in 2031 alone.
Biden has also made promises of renewed investment in American workers. But here too, the corporate income tax works in opposition because corporate tax hikes hurt workers. Tax Foundation analysis has shown that raising the rate to 28 percent would lose 138,000 jobs and dent wages by 0.6 percent in the long run. These are jobs and paychecks that workers in the South simply cannot afford to lose as we rebuild from the pandemic.
It’s not just the JCT saying this. Analyses from the Tax Policy Center, Penn Wharton, and Tax Foundation all show President Biden’s plan would hurt pocketbooks at every income level.
There is a better way to fund new investments. Instead of taking the “Don’t Tax Me; Don’t Tax Thee; Tax the Fellow Behind the Tree” approach, it would require recognizing trade-offs of higher taxes, minimizing those, and making the case that the proposed investments are worth it.
It used to be the standard approach. The U.S. has long utilized user fees to fund infrastructure, such as gas taxes, with spending and revenue organized into distinct infrastructure trust funds. Funding new investments with the least harmful tax increases — like user fees and consumption taxes — would aid the economic recovery and be an efficient source of revenue for public investments, something the president should consider.
That might be a tough sell in today’s environment, but a tough sell is certainly better than unkeepable promises and counterproductive tax increases.
Seventeenth-century French finance minister Jean-Baptiste Colbert once said, “Taxation is the art of plucking the goose as to obtain the maximum number of feathers, with the smallest possible amount of hissing.” Unfortunately, the tax increases proposed by President Biden will result in such excessive hissing — in the form of reduced investment, lost jobs, and lower wages — that they will drown out the positive benefits of increased infrastructure spending.
Instead of mastering the art of taxation, President Biden is making a promise he can’t keep.
Erica D. York is an economist at the Tax Foundation, a nonprofit research organization in Washington, D.C.
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