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As Congress is about to pass inflation reduction act, Washington is once again debating very little. It’s about whether Democrats are violating President Biden’s pledge not to raise taxes on families earning $400,000 or less annually. But here’s the secret: This is another ridiculous political argument.
The Tax Policy Center analyzed the larger climate, health and tax bill in three different ways. The bill is very progressive every time. On average, after-tax income for low- and middle-income households will either increase slightly or not change in any measurable way. The average post-tax income of high-income earners will decline. But on average, most households will hardly notice any tax changes in any way whatsoever.
effectively zero tax change
in a TPC analysisAverage taxes for middle-income households would drop by $100. in another, They’ll go up $20. But as part of after-tax income, the change is effectively zero. And, really, none of the analysis is accurate enough to make any meaningful difference between estimates for a $20 tax increase and a $100 tax cut.
Of course, this sign is all that matters to politicians. Tax increases, no matter how small, on those earning $400,000 or less Gives Republicans an opportunity to accuse Biden and Democrats of violating their pledge, And the tax cut, no matter how small, opens the door for Democrats to rejoice at how they have cut taxes for hard-working Americans.
Ignore them all.
To understand what’s really happening, think about what’s in the bill. With the exception of some pass-through business owners who claim a large loss on their Form 1040, no one will pay more in federal personal income tax, regardless of their income. And that provision won’t even take effect until 2027.
There is absolutely no other personal income tax increase. President Biden once proposed a group of them, but Congress isn’t approving any this week.
tax change
There have been two big tax increases on corporations. Some very large companies have a minimum tax on financial statement 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 about two dozen energy-related tax credits. And the bill temporarily provides a generous tax credit that subsidizes the premiums many low- and middle-income earners pay when they buy health insurance on the Affordable Care Act (ACA) exchanges.
Note that the distributional effects of the tax provisions of this bill are particularly difficult to measure because the tax changes are so specific.
Its highly targeted tax changes depend entirely on the behavior of the taxpayer. For example, if you buy an electric vehicle, you get a benefit of up to $7,500 from the tax credit of the bill. But if you don’t buy an EV, you don’t get any tax benefits from the credit.
Similarly, some low-income households will receive a large tax subsidy for purchasing private health insurance on the ACA exchange. Other people with similar incomes can get Medicaid or health insurance through their work. They will not benefit from the ACA premium subsidy at all.
Who Pays Corporate Tax?
With the corporate minimum tax, it’s the same story, though a little more complicated. The TPC, the Joint Committee on Taxation, and other modelers believe that corporate tax is ultimately paid by workers, shareholders, and other owners of capital. Workers do not directly pay higher corporate taxes, but receive less in compensation than they would otherwise. Shareholders will see the declining value of their investment if they hold stock in one of a few dozen companies subject to the book minimum tax. With exactly the same income and family size but investing in new tax-exempt companies, one may see no economic impact.
All this makes it impossible to calculate winners and losers within each income group. But the TPC can show the average tax change for different income groups. My colleague John Buhl describes them in detail Here,
But here are some examples: Including the effects of the premium tax credit, middle-income households — those making between about $60,000 and $106,000 — will get an average tax deduction of about $100 in 2023. Excluding the premium tax credit, they will receive an average tax increase of approximately $20.
The TPC does not split the income at $400,000, but does include a group making between about $280,000 and $409,000 (that’s 90 out of them).th to 95th income percentage). They’ll pay an average of about $180 more in tax, which is almost enough for the couple in that crowd to buy dinner at their favorite restaurant.
The next time you hear a politician gushing about a big tax hike—or a tax cut—in this bill, pay no attention. They hope you didn’t get the joke. But now you do.
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