What Biden’s tax plans mean for capital gains, the child tax credit and SALT

1. The tax treatment of inherited capital gains is still unresolved.

A key element of President Biden’s tax proposal is to increase taxes on income from investments like stocks, bonds and real estate. Although the Ways and Means Committee agreed to increase the maximum tax rate on long-term capital gains from 23.8% to 31.8%, it did not include the president’s proposal of tax assets whose gains are passed on at death to more than $ 1 million. These capital gains are currently not subject to any capital gains tax.

The taxation of capital gains on death has gained some skepticism on fears that this could harm family businesses and farms who may not have the money to pay the tax immediately.

The compromise is drop in income: At the Tax Foundation, we find that Biden’s capital gains proposal raise $ 213 billion over 10 years, compared to 78 billion dollars as part of the Ways and Means proposal. While the taxation of capital gains on death seems unlikely now, it should not be entirely ruled out in the Senate, where it enjoys the support of key decision-makers, such as Finance Committee Chairman Ron Wyden (D., Oregon ).

1. Expanded tax credits for low-income households with children increase short-term income, but have long-term costs.

President Biden and Democrats in Congress propose an extension of several tax credits that have been expanded in the American Rescue Plan Act. This includes a strengthened child tax credit, which would provide up to $ 3,600 per child, eliminate phasing in of the credit to maximize value for low-income households, and advance the credit monthly, rather than annually. , during tax season.

Expanded CTC, along with other more substantial tax credits, would increase after-tax incomes of bottom 20% employees by 14.5% next year while costing around $ 1 trillion. Although this is an impressive number, the extension of the CTC would only last until 2025. A permanently enlarged CTC cost almost $ 1.6 trillion alone over the next 10 years, which can be a difficult gap to fill, even for supportive lawmakers. In the long term, it may be important to consider other ways of providing social support to low-income households outside the tax code, or consider alternative designs for CCT.

1. Corporate tax hikes increase about half of total revenue, but could hurt U.S. competitiveness.

About half of the Ways and Means Plan’s revenue sources come from increased corporate taxes, echoing President Biden’s argument that they must “pay their fair share.” In addition to a new top corporate tax rate of 26.5%, the proposal would increase taxes paid by multinational corporations with business abroad.

One of the concerns raised by some economists and congressional policymakers is how these tax hikes will impact the competitiveness of the United States. For example, under the Ways and Means Plan, the United States would have the third corporate tax rate among developed countries, with an average of 30.9% including state corporate taxes.

International tax increases may in fact encourage a greater amount of profits to leave the United States., contrary to the intentions of the designers of the proposal. This is because the increase in taxes on domestic income is even higher than international tax increases, which can also expose domestic companies to a greater risk of foreign takeovers.

1. Potential changes to the $ 10,000 state and local tax deduction cap, or SALT, remain a sticking point

A group of House policymakers are pushing for a complete repeal of the $ 10,000 SALT deduction cap originally created in the 2017 Tax Cuts and Jobs Act. Although it is not included in the ways and means proposals, it can be added later in the process. The total repeal would cost nearly $ 380 billion between 2022 and 2025, which would offset nearly 20% of the increases in income and erase almost half of tax increases on the top 1%.

Policymakers could consider ways to increase the generosity of the SALT cap before the full repeal, such as increasing it to $ 20,000. Either way, they will have to balance this additional aid with a tax advantage that goes to the richest 5%.

1. Concentrating tax increases on top incomes and businesses comes with its own risks.

The “Build Back Better” tax program squarely targets those earning more than $ 400,000 per year, which is part of a growing trend to raise ever greater revenues from an increasingly reduced tax base. This is a recipe for unstable revenue collection and potential economic harm.

At the Tax Foundation, we have valued that tax filers who are not in the lowest 20% earners (or those earning more than about $ 20,000 per year) would get lower after-tax income due to the economic impact of tax increases, i.e. an average decrease of about 1.7% (or around $ 970). This result is contrary to that of the president targeted objective to help the middle class.

In other words, the economy would produce about $ 1.8 trillion less in output over the next 10 years, a bigger impact than the $ 1.1 trillion in new revenue. This means that for every dollar raised by the plan, around $ 1.80 is lost due to lower economic growth.

While proposed social spending should be evaluated on its own merits, sustaining funding for such spending while minimizing economic damage should be a priority for Congress and the White House.

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