Why White House Democrats Use $ 400,000 As Threshold To Tax The Rich

President Joe Biden and House Democrats have unveiled plans to raise taxes for households with more than $ 400,000 in annual income, and lower or maintain taxes for those below the line.

But what is the significance of this North Star tax policy?

Basically, the policy is about raising more tax revenue from wealthier Americans. An income of at least $ 400,000 represents roughly the richest 1% to 2% of households, according to tax data and political experts.

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But the reasons for choosing $ 400,000 as the dividing line between the rich and the low and middle incomes aren’t entirely clear, as the number doesn’t exactly match household tax statistics, experts said.

“It’s an arbitrary threshold,” said Leonard Burman, who co-founded the Tax Policy Center, a joint project of the Brookings Institute and the Urban Institute. “There is no analytical justification for this.”

Spokesmen for the White House and the House Ways and Means Committee did not return requests for comment.

The IRS data is somewhat hazy on this. The agency reports tax data using a threshold of $ 500,000, not $ 400,000.

Americans with incomes of $ 500,000 or more were among the top 1.1% of tax filers in 2018, according to the most recent data from the IRS. (These data do not distinguish between tax status as single, married or head of household.)

By extrapolating, those with at least $ 400,000 in income would be closer to the richest 2%, according to Garrett Watson, senior policy analyst at the Tax Foundation.

However, these numbers do not represent all American households; they only include people who have filed an income tax return.

The data therefore omits millions of non-filers, who are largely low-income, and skews the percentage. (Almost 27 million people did not file a return in 2021, for example, according to estimates from the Tax Policy Center.)

Including this broad band of low-income people in the estimates means that an income of $ 400,000 most likely approaches the richest 1% of total US households, Watson said.

Tax promises tied to income levels are not new. For example, Democratic presidential candidates like John Kerry and Barack Obama used income of $ 200,000 and $ 250,000, respectively, for key elements of their tax plans during their campaigns, Watson said.

Biden’s higher baseline of $ 400,000 may reflect growing income and wealth inequality in the United States, Watson added.

There may also be a geographic justification – the recognition that an income of $ 400,000, while high by national standards, may not go as far in some large cities with high cost of living.

“It’s lower in Washington, New York, Los Angeles and San Francisco than across the rest of the country,” Burman said.

Earlier this year, the White House released a tax plan with the guiding principle of $ 400,000, aimed at using new tax revenues from the wealthy to fund an expansion of the U.S. safety net and investments to mitigate climate change.

House Democrats last week unveiled legislation adhering to this political goal. For example, single taxpayers with $ 400,000 or more in income (and married couples with $ 450,000 or more) would see their top marginal tax rate drop from 37% to 39.6%; their maximum tax rate on sales of appreciated stocks and other assets would be reduced from 20% to 25%.

The House bill would increase taxes by 1.6% in 2023 for those with incomes of $ 500,000 to $ 1 million, and by 10.6% for high incomes, according to estimates by the Joint Committee on Taxation, which is Congress’ non-partisan tax pointer. Low and middle incomes would benefit from a net tax cut or would see their taxes remain stable, according to the estimate.

Senate Democrats have yet to unveil a tax proposal.