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Tax Hike Proposals Live on Despite Being Dropped in the Inflation Reduction Act

6 min readBy: Garrett Watson

Over the past two years, policymakers and taxpayers have grappled with proposals to increase taxes as ideas introduced in the 2020 presidential campaign were transformed into legislation. This effort culminated in August with the enactment of the Inflation Reduction Act. While many of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases considered over the last two years were eventually shelved, they will continue to be part of the ongoing debate about whether and how to tax high earners and how best to reform the tax code.

The tax proposals pitched by President Biden during the 2020 campaign would have been a historically large increase in taxes, totaling about $3.3 trillion in new revenue over 10 years ($3.8 trillion in gross tax increases offset by $481 billion in tax credits). Major individual tax increases included an increase in the top income tax rate to 39.6 percent, a major hike in capital gains taxes to 39.6 percent for those earning over $1 million, a repeal of step-up in basisThe step-up in basis provision adjusts the value, or “cost basis,” of an inherited asset (stocks, bonds, real estate, etc.) when it is passed on, after death. This often reduces the capital gains tax owed by the recipient. The cost basis receives a “step-up” to its fair market value, or the price at which the good would be sold or purchased in a fair market. This eliminates the capital gain that occurred between the original purchase of the asset and the heir’s acquisition, reducing the heir’s tax liability. , an increase in the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , and a large increase in payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es.

For businesses, Biden proposed a 7-point hike in the corporate tax rate to 28 percent, a new minimum book tax on corporate profits, and higher taxes on international activity. We estimated these proposals would reduce the size of the economy (GDP) by 1.6 percent over the long run and eliminate 542,000 jobs.

Campaign Proposals Become the Build Back Better Act

After President Biden was elected, the campaign tax proposals were refined through the White House budget process and influenced the Build Back Better Act that passed the House in November 2021. The Build Back Better Act tax hikes, while smaller than the campaign tax plan, would have raised about $1 trillion over 10 years ($1.7 trillion in gross tax increases offset by $658 billion in tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s).

The bill would have created a new surcharge on high-earner income over $10 million, increased taxes on pass-through businesses, raised the tax burden on corporations through a minimum book tax, increased international taxes, and imposed an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on stock buybacks. We estimated the Build Back Better Act would reduce long-run GDP by 0.5 percent and eliminate 125,000 jobs—a substantial improvement over earlier iterations of the bill as well as the President’s initial plans.

Between the 2020 campaign and the House passage of the Build Back Better Act, lawmakers set aside ideas to curtail or eliminate step-up in basis or raise capital gains taxes, both because of the complexity involved and the concern that this would harm small businesses and family farms. More general concerns about the economic effects of the proposals caused lawmakers to abandon several other major revenue raisers, including the higher corporate tax rate as well as the estate and payroll tax increases.

Build Back Better Morphs into the InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. Reduction Act

After the Build Back Better Act failed to gain enough support in the Senate, the legislative process was put on hold until the July introduction of the Inflation Reduction Act (IRA), which trimmed the list of tax hikes to include a minimum book tax on large corporations with exemptions for items such as accelerated depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , a 1 percent excise tax on stock buybacks, and pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. loss limitations. The international tax increases, individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. surcharge, and net investment income tax increase included in the Build Back Better Act were all dropped, as was the expanded Child Tax Credit.

We estimated the Inflation Reduction Act will increase revenue by about $324 billion on net over 10 years ($676 billion in gross tax increases offset by $352 billion in tax credits), reduce long-run GDP by 0.2 percent and eliminate 29,000 jobs. We and others concluded the bill will have a modest impact on deficits and little to no impact on inflation.

Tax Hike Proposals Live On

While most of the proposed tax increases were set aside by the time the Inflation Reduction Act was signed into law, advocates of raising taxes on higher earners and businesses will continue to make their case after the midterms and into the next presidential campaign season. Even larger tax hike proposals such as wealth taxes or taxing capital gains on a mark-to-market basis may continue to garner interest too.

Policymakers must understand the trade-offs and consequences of these ideas, including reduced economic growth, revenue volatility, and reduced innovation. Particularly in this time of economic uncertainty, policymakers should aim for constructive tax reform ideas that sustainably raise revenue while boosting economic growth and opportunity.

Tax Increases Steadily Shrunk as Campaign Proposals Matured into Final Legislation
Tax Type Biden Campaign, Fall 2020 House Build Back Better Act, Fall 2021 Inflation Reduction Act, Summer 2022
Individual income tax rate Raise top rate to 39.6% for income over $400,000 Impose a new 3% surcharge on income over $10 million and 5% over $25 million No change to top income tax rate
Long-term capital gains & dividends tax rate Raise tax rate to 39.6% for income over $1 million No capital gains tax rate change No capital gains tax rate change
Itemized deductions Cap itemized deductions at 28% of value and restore the Pease limitation for those earning over $400,000 No new limitation on itemized deductions No new limitation on itemized deductions
Step-up in basis Eliminate step-up in basis No change to step-up in basis No change to step-up in basis
Pass-through business taxes Phase out Sec. 199A pass-through deduction for those earning over $400,000 Expand 3.8% net investment income tax (NIIT) to active pass-through income; makes pass-through loss limitation permanent Extended pass-through loss limitation through 2028
Payroll taxes Impose 12.4% Social Security payroll tax on income over $400,000 No payroll tax changes No payroll tax changes
Estate tax Raise estate tax rate to 45% and lower the exemption to $3.5 million per estate No changes to estate tax rate or exemption amount No changes to estate tax rate or exemption amount
Corporate tax rate Raise corporate tax rate to 28% No corporate tax rate increase No corporate tax rate increase
Minimum corporate tax 15% minimum tax on book profits over $100 million 15% minimum tax on book profits over $1 billion 15% minimum tax on book profits over $1 billion with exemptions for accelerated depreciation and other items
International taxation Raise GILTI tax to 21% and assess on a country-by-country basis; eliminate the qualified business asset investment (QBAI) exemption; New 10% surtax on offshoring activity Raise GILTI tax to 15% and assess on a country-by-country basis; reduce QBAI exemption to 5% from 10% No international tax changes
Other corporate taxes Eliminate certain deductions for the fossil fuel industry New interest expense limitation; New 1% excise tax on net stock buybacks New 1% excise tax on net stock buybacks
IRS Proposals Unspecified increase in tax enforcement budget Increase IRS enforcement funding by $80 billion Increase IRS enforcement funding by $80 billion
Drug Pricing Allow Medicare to negotiate drug prices and impose price controls on certain drugs Allow Medicare to negotiate drug prices and impose price controls on certain drugs Allow Medicare to negotiate drug prices and impose price controls on certain drugs
Tax credits Expand Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit, Premium Tax Credit; Expand or create several green energy credits Expand Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit, Premium Tax Credit; Expand or create several green energy credits Expand Premium Tax Credit; Expand or create several green energy credits
Gross tax increase over 10 years (conventional) $3.8 trillion $1.7 trillion $676 billion
Net tax increase over 10 years (conventional) $3.3 trillion $1.0 trillion $324 billion
Long-Run GDP Impact -1.6% -0.5% -0.2%

Source: Author compilation, legislative text for Inflation Reduction Act and House Build Back Better Act.

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