Democratic presidential nominee Joe Biden and running mate Kamala Harris have said that, if elected, their administration would not raise taxes on anyone who makes less than $400,000 annually. We and other analysts from across the political spectrum concluded that 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 proposed by the Biden-Harris campaign, which include higher corporate and 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. es, would to some extent fall on the middle class.
Here it is important to separate the legal or statutory incidence of a tax with the economic incidence. In short, this is the difference between who writes the check to the tax collector and who ultimately bears the economic burden of the tax. When Biden says he will raise taxes on only those earning over $400,000, he is saying his tax law will target only those high-income taxpayers. Economists, however, trace the economic impact of these taxes past the person writing the check.
As Doug Holtz-Eakin recently pointed out, “it simply is not economically possible to segregate the impacts on the high-income from everyone else.” The rich purchase items from others, some not as rich, and from businesses that employ workers across the income spectrum. The corporate tax falls partly on workers in the form of lower pay, acknowledged by the Congressional Budget Office, the U.S. Treasury, Likewise, the individual income tax that is paid by 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. es falls partly on employees of those businesses.
Furthermore, even in direct terms (without considering economic effects), two of the policies proposed by the Biden-Harris campaign could result in direct taxA direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax. increases on those earning less than $400,000. In this case, the legal incidence could fall on them directly.
First, as my colleague Garrett Watson has written about at length, the Biden-Harris campaign plans to eliminate deductible traditional contributions for 401(k)s, individual retirement accounts (IRAs), and other types of retirement vehicles and instead provide a 26 percent refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). for each dollar contributed. As a result, this plan as specified would reduce the tax benefit of traditional retirement accounts for those earning above $80,250 (the top of the 12 percent tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. ). The Biden-Harris campaign has recently stated that it will hold filers who make less than $400,000 harmless. Absent this clarification, the plan would reduce the tax benefit of traditional retirement accounts for certain earners making under $400,000.
Second, the Biden-Harris campaign proposes multiple reforms to firearm regulation, including an apparent expansion of the number of firearms subject to the National Firearms Act (NFA), which imposes a $200 tax on the registration of each NFA weapon. As a result, certain gun owners would see their tax liability rise, regardless of their income.
In sum, if we look at both the legal incidence of the Biden-Harris policy proposals and their economic incidence, we find both direct and indirect taxAn indirect tax is imposed on one person or group, like manufacturers, then shifted to a different payer, usually the consumer. Unlike direct taxes, indirect taxes are levied on goods and services, not individual payers, and collected by the retailer or manufacturer. Sales and Value-Added Taxes (VATs) are two examples of indirect taxes. increases on many taxpayers who earn less than $400,000.
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