MENLO, Iowa – APRIL 12: President Joe Biden addresses guests during his visit to POET Bioprocessing. , [+] (Photo by Scott Olson/Getty Images)
With Congress poised to pass the Inflation Reduction Act, Washington again engaged in a heated debate about not enough. The issue is whether Democrats are violating President Biden’s promise not to tax families earning $400,000 a year or less. But here’s the secret: This is another overblown political argument.
The Tax Policy Center analyzed the broader climate, health and tax bill in three different ways. The bill is very progressive every time. On average, the after-tax income of low- and middle-income households will either increase slightly or not change measurably. The average after-tax income of high earners will fall. But on average, most households will hardly notice a tax change of any kind.
effectively no tax change
In a TPC analysis, average taxes for middle-income households would decrease by $100. In another, they will go up $20. But as part of after-tax income, the change is effectively zero. And really, neither analysis is accurate enough to make a significant difference between estimates for a $20 tax increase and a $100 tax cut.
The Inflation Reduction Act will make some changes to most people’s tax returns
Tax Policy Center
Of course, only this sign counts for politicians. The tax hike for those earning $400,000 or less, no matter how small, gives Republicans a chance to blame Biden and Democrats for going against their promise. And the tax cut, no matter how small, opens the door for Democrats to revel in how they cut taxes for hard-working Americans.
ignore them all
To understand what’s really happening, think about what’s on the bill. With the exception of some pass-through business owners who claim a large loss on their 1040 form, no one pays more in federal income tax regardless of their income. And that provision won’t even come into effect until 2027.
There is absolutely no other personal income tax increase. President Biden once proposed a group of them, but Congress is not approving any this week.
There have been two major corporate tax hikes. Some very large corporations have a minimum tax on year-end income that currently pays little or no corporate income tax. The second is a tax on companies that buy back stock from their shareholders.
There are also around two dozen energy-related tax credits. And the bill temporarily provides a generous tax credit that subsidizes the premiums paid by many low- and middle-income earners when they take out health insurance on Affordable Care Act (ACA) exchanges.
Note that the distributional effects of this bill’s tax provisions are particularly difficult to measure because the tax changes are so specific.
His very targeted tax changes depend entirely on taxpayer behavior. For example, if you buy an electric vehicle, you’ll receive a benefit of up to $7,500 from the bill’s tax credit. But if you don’t buy an electric vehicle, you don’t get tax benefits from the loan.
Similarly, some low-income households receive a large tax credit for purchasing private health insurance on the ACA exchange. Other people with similar incomes can get Medicaid or health insurance through their jobs. You do not benefit from the ACA award promotion at all.
Who pays corporate tax?
The corporate minimum tax is the same story, albeit a little more complicated. The TPC, Joint Committee on Taxation, and other modelers believe that corporate income tax is ultimately paid by employees, shareholders, and other owners of capital. Workers do not directly pay higher corporate taxes, but receive less compensation than they would otherwise have received. Shareholders will see the value of their investment fall if they hold shares in any of the few dozen companies that are subject to the book minimum tax. With exactly the same income and family size, but investing in new tax-exempt businesses, you may not see an economic impact.
All of this makes it impossible to calculate winners and losers within each income bracket. However, the TPC can show the average tax change for different income brackets. My colleague John Buhl describes them in detail here.
But here are some examples: Including the impact of the premium tax credit, middle-income households — those who earn between about $60,000 and $106,000 — receive an average tax. cut of about $100 in 2023. You get an average tax with no premium tax credit growth About $20.
TPC does not split income at $400,000, but includes a group that makes up between approximately $280,000 and $409,000 (in the 90th to 95th income percentile). They pay an average of about $180 more in taxes, which is enough for the couple at that amount to buy dinner at their favorite restaurant.
Next time you hear a politician rave about a big tax hike — or tax cut — in this bill, ignore it. You hope you didn’t get the joke. But now you do.