Democrats’ $ 3.5 trillion plan: 90% of households won’t see a bigger tax bill

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The president has pledged to raise taxes only on those who earn more than $ 400,000 a year and on businesses, and Democrats in Congress have come up with a complicated proposal that does just that – although some Americans who earn less may still be indirectly affected by some of the changes.

Many economists assume, for example, that an increase in the corporate tax rate will lead to lower wages for workers. And other things, like a higher tax on cigarettes, would disproportionately affect low- and middle-income households.

House Democrats presented details of their plan earlier this month, though the proposal remains under negotiation in Congress.

“Overall, it’s fair to say that the proposal has done a very good job of ruling out those earning less than $ 400,000,” said Howard Gleckman, senior researcher at the Urban-Brookings Tax Policy Center.

The tax hikes are meant to fund a massive Democrat-backed spending plan to overhaul the country’s safety net, among other things, offering paid family time off, making community college tuition free, and creating a universal pre-K.
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Democratic leaders plan to push through the package using reconciliation, so it wouldn’t need any Republican support if the party remains unified. (Congress is also trying to pass a bipartisan infrastructure bill, which would be paid for without raising taxes but increasing the deficit.)

Here’s what we know about the tax front so far, according to details released by Democrats on the House Ways and Means Committee.

90% of households could have more money in their pockets

About 90% of households will not see a tax increase in the first year of the plan.

In fact, they will see their after-tax income increase, according to an analysis by the right-wing Tax Foundation. This does not mean that each of these households will benefit from a tax cut, but the average change should be positive.
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These Americans could end up with more money in their pockets in large part due to the expanded child tax credit and other tax credits included in the proposal, such as those for green energy.

Democrats want to keep congressional temporary changes to the child tax credit as a benefit related to the pandemic. The enhanced payments send households $ 3,600 for each child under age 6 and $ 3,000 for each under age 18 for 2021, compared to $ 2,000 per child under age 17.

But it’s worth noting that the House Democrats’ proposal would only extend larger payments until 2025. Additionally, West Virginia Senator Joe Manchin, a key moderate Democrat, is pushing for more credit. small.

The enhanced child tax credit is fully refundable, which makes it even more important for low-income parents. Those earning less than $ 19,500 a year would actually see a 14.5% increase in their after-tax income, according to the Tax Foundation.

Currently, heads of households earning up to $ 112,500 and joint filers earning up to $ 150,000 are eligible for the full enhanced credit.

Smokers could take a hit

The more than 30 million Americans who smoke could be affected by higher prices.

Biden did not call for this tax increase, but the House Ways and Means Committee’s proposal would increase excise taxes on cigars, cigarettes, smokeless tobacco and other nicotine products. , then link the rate to inflation in the future. It would also impose a new tax on vaping products. Excise taxes are imposed on businesses, but they generally result in higher prices for consumers.

In this case, low and middle income people would be disproportionately affected. According to the Centers for Disease Control and Prevention, about 21% of households earning less than $ 35,000 per year smoke, compared with just 7% of those earning more than $ 100,000 per year.
If the increase goes into effect, an average smoker per day who earns $ 35,000 per year will end up paying more than 5% of his income in federal and state tobacco taxes, up from 4% today, according to an analysis of the Tax Foundation.

The provision could generate $ 96 billion in tax revenue for the federal government over 10 years, according to the Joint Committee on Taxation, a non-partisan congressional group that produces official revenue estimates for all tax laws.

How taxes would rise for the rich

On average, the richest 10% of tax filers, or those earning more than $ 115,800, could see their after-tax income decline if the plan goes into effect, according to the Tax Foundation.

RELATED: Democrats Want to Tax the Very Rich. This is who they are

This would be a slight decrease for those earning less than $ 400,000, or about 0.2%. While these households don’t face a higher tax rate and won’t pay Uncle Sam more, their wages could suffer due to the higher corporate tax rate – which the Democrats’ plan calls for. to be increased to 26.5% from 21% on business income above $ 5 million per year.

There is a larger increase in taxes for people earning over $ 400,000 per year and joint tax filers earning over $ 450,000. The House plan would undo a key component of Republicans’ tax cuts in 2017 by reducing the top marginal tax rate to 39.6%, from 37%. The legislation goes even further and adds a new 3% surtax on a taxpayer’s adjusted adjusted gross income over $ 5 million.

The plan also provides for raising the capital gains tax, which is generally imposed on profit from the sale of a share or property, to 25% instead of 20%, reducing the exemption from inheritance tax, as well as limiting the maximum value of the deduction for passing businesses.

As a result, the richest 1% of tax filers would see roughly a 5% reduction in their after-tax income, according to the Tax Foundation’s analysis.

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