Once again, Americans didn’t get much clarity about the future of their taxes during the final 2020 presidential debate. Former Vice President Joe Biden has stated that he will only increase taxes on people making more than $400,000 a year, and President Donald Trump wants to cut taxes further. Americans should evaluate these claims in light of the facts regarding taxes and spending.
The Pledge to Limit Increased Taxes to Wealthy Americans?
The former vice president has explicitly outlined significant direct tax increases on high-income and high-wealth Americans. But lurking under the surface is a half-truth that neglects the automatic tax increases baked into law that will impact every American household in 2026 and other less talked about tax increases on middle-class Americans.
When the 2017 tax cut expires at the end of 2025, almost every rate reduction, increased credit, and expanded deduction will go away under current law. The 2017 law cut taxes by $1,400 for the typical taxpayer. When the law expires, taxes will increase on most every American taxpayer, no matter who is President.
Biden and Sen. Kamala Harris, D-Calif., have now called for the full repeal of the 2017 Tax Cuts and Jobs Act more than 22 times, according to Americans for Tax Reform.
At the very least, American taxpayers should expect the law to be allowed to expire. With it will expire the many benefits to middle- and lower-income taxpayers, including tens of thousands of dollars in higher take-home pay. These represent real tax increases for Americans making under $400,000.
The third-party analyses of the tax plan also often leave out numerous other real tax increases in other parts of Biden’s plans. These analyses should take into account his pledge to reimpose the individual mandate tax on people who choose to not buy health insurance. The tax was previously paid overwhelmingly by lower-income Americans and was zeroed out in the 2017 tax cut bill.
Also, the former vice president has, at times, also signaled support for a carbon tax, as well as taxing the capital gains of “every single solitary person” at much higher income tax rates, which would likely add to the tax burden.
The tax proposal also expands the number of guns subject to a $200 tax, takes away the popular deductions for retirement accounts, and over time, removes the earnings cap for the Social Security payroll tax. Each of these changes would raise taxes on people earning less than $400,000.
Business Tax Hikes Hurt Average Americans
Most Americans are employed by businesses, and when businesses do well, workers do well, too.
It is true that businesses—and all the people they employ—have benefited greatly from lower business tax rates and the ability to fully deduct new investments included in the 2017 tax cuts.
Despite the name, the burden of the corporate income tax falls almost entirely on workers in the form of lower wages. Americans are undoubtedly skeptical about this claim, but the realities on the ground are actually quite simple.
Businesses invest money in their workplace so that their employees can provide better goods and services to consumers. Part of this involves paying higher wages to employees who become more productive and are in higher demand from other firms who make similar investments.
Economic analysts from across the political spectrum universally agree that Biden’s proposal to increase the corporate tax rate will be partially paid by lower-income wage earners. Similarly, keeping corporate taxes law will benefit American workers.
In fact, most of the cost of corporate tax—between 75% and 100%—is passed on to workers in the form of lower wages. Corporate tax increases will be primarily paid by people making less than $400,000 a year.
The old U.S. tax code pushed businesses overseas and put Americans at a disadvantage by decreasing overall levels of investment. After the 2017 reforms, internationally competitive U.S. business taxes reversed these trends, and the benefits accrued mostly to workers. One way they benefited was through impressive wage gains in the following years.
Biden’s tax increases would make U.S. workers less internationally competitive than they were prior to the 2017 tax reform—pushing the U.S. down to 30th place out of 36 scored countries, according to the Tax Foundation.
Current Spending Is the Real Tax Rate
The free-spending consensus in Washington makes it all but assured that taxes will have to increase without significant spending reforms. The true rate of taxation is the current rate of government spending and currently Congress is on track to spend about $2 trillion more each year than it collects in taxes. That’s about $16,000 in unfunded spending per household per year.
The president’s agenda outlines new tax cuts but offers few specifics. Without significant spending reforms, budget pressures will make large new tax cuts a challenging proposition.
Even Biden’s proposal to raise taxes by about 8% over the next decade would not come close to stabilizing debt as a percentage of the economy. And that was before the pandemic response added trillions in new spending.
Without spending reform in Washington, businesses, families, and investors alike can expect painful tax hikes in the future. And not just tax increases on the “rich.”
Across Europe, funding big government means high taxes on everyone. In fact, it is mathematically impossible to pay for significantly larger government with only tax increases on high-income earners. That is why a lower-income European earning $40,000 pays $6,000 more in taxes—an extra 15% of their income—than they would in America.
Expiring tax cuts, confusing rhetoric about business taxes, and simple budget math create an uncertain future for American taxes, irrespective of any pledges to not raise taxes or to cut taxes further.