When President Joe Biden assumed office in the middle of the coronavirus pandemic, his stated agenda was to “Build Back Better.” He didn’t just want America to get back to normal. He wanted it to be better than ever. That included a stronger economy, lower income inequality, and a restored middle class.
To bring about these goals, Biden introduced three proposals. The first, the American Rescue Plan, was a stimulus package to provide relief for those affected by COVID-19. The Biden administration funded this plan with debt. But the other two proposals, which focus on jobs, infrastructure, and help for families, will require changes to the tax code to pay for them.
Like any new tax plan, Biden’s proposal would have both losers and winners. Wealthy Americans and corporations would face tax increases. But working people and small businesses would benefit from the policies Biden’s tax plan would fund, such as job creation and tax credits. Figuring out how the plan would affect you requires a closer look at the details.
What Will the Taxes Pay For?
Joe Biden’s tax plan is actually two separate plans, each with its own purpose and funding. The first, the American Jobs Plan, has two primary goals. It creates jobs and builds the nation’s infrastructure. The second, the American Families Plan, supports families through child care, education, and child tax credits.
American Jobs Plan
Infrastructure is all the internal structures that support a society. Many people think of the term as referring to roads and bridges, but infrastructure is much more than that. It includes all the systems our society depends on, such as water systems, the electric grid, and the Internet.
The American Jobs Plan proposes to build all of these systems in ways that create new jobs and protect the environment. The administration says it can help America meet the threat of climate change and compete better with other nations, especially China. It’s also designed to address inequality by steering benefits toward low-income communities.
The plan will invest in:
- Physical Infrastructure. Many of America’s roads and bridges are badly in need of repair. The plan funds these repairs along with upgrades to ports, airports, and transit systems. It also expands transit into underserved communities. The plan requires all the parts used for this new construction to be made in the United States.
- Utilities. The plan cleans up America’s water supply by eliminating lead pipes and lines like the ones that led to a public health crisis in Flint, Michigan. It improves the electric grid with thousands of miles of new transmission lines. It supports clean energy production while capping unused oil and gas wells to fight climate change. And it provides high-speed Internet access for all Americans.
- Buildings. Energy-efficient construction is a big part of the plan. It creates over 2 million efficient homes and commercial buildings through new construction and renovation. It also improves and modernizes public buildings like schools, child care centers, veterans hospitals, and federal buildings.
- The Care Economy. The term “care economy” refers to all the services that provide care for children, older adults, and people with disabilities. This plan improves the care economy by expanding Medicaid payments for home- and community-based care. That could reduce wait times for long-term care and create more jobs and better wages for caregivers.
- Manufacturing. Many things once made in the USA are now mostly imported. This plan aims to reverse that trend. It invests in research and development and improved supply chains for manufactured goods, with a particular focus on goods needed to protect the U.S. from future pandemics. It also creates a network of small-business incubators — programs that support small businesses early in their development.
- Workforce Development. Along with reviving old industries, Biden’s plan helps workers prepare for “the jobs of the future.” To do so, it invests in worker training, especially in minority communities.
The Committee for a Responsible Federal Budget estimates the entire plan would cost $2.65 trillion over eight years. That includes both new spending and tax credits for clean energy. Biden plans to fund this spending through corporate tax increases.
American Families Plan
According to a 2017 report by the U.S. Department of Agriculture (USDA), the most recent report available, it costs an average of $233,610 to raise a child from birth to age 18. That doesn’t even include the cost of college, which the USDA puts at around $20,000 per year for a public university and $45,000 for a private one.
While there are ways to reduce this cost, it’s still a heavy burden for low-income families. Biden’s second plan aims to help. It provides funding for child care and education and provides tax benefits for working families. The Biden administration stresses that it especially benefits people in rural communities.
Its provisions include:
- Universal Preschool. The American Families Plan makes preschool free for all children ages 3 and 4. Families would be able to choose among different preschool types, including public schools, day care centers, and Head Start.
- College Funding. The plan covers two years of community college for all students, including older students seeking new training. It also funds grants for students pursuing four-year college degrees. And it provides funding to support schools that primarily serve Black students and other minority groups.
- Teacher Education. Biden’s plan funds scholarships for new teachers and teachers earning new certifications. It provides mentoring programs for existing teachers. And it invests in training for special education teachers, a field that’s been in decline over the past 10 years.
- Child Care. Under this plan, low-income families receive subsidies for child care costs. The plan also aims to improve the quality of child care. It provides more funding for providers and a higher minimum wage for workers.
- Paid Parental Leave. Out of 41 developed nations, the U.S. is the only one that does not guarantee any paid leave for new parents. The Family and Medical Leave Act only grants workers the right to take unpaid leave for a birth or a family medical emergency. Biden’s plan creates a new federal program to provide up to 12 weeks of paid leave.
- Child Nutrition. Over 30 million children receive free or reduced-cost meals through the National School Lunch Program. But many of them don’t have access to affordable meals during the summer. Biden’s plan expands the program to more schools, improves nutrition standards, and provides summer meals to all children in the program.
- Health Care. Biden’s plan expands the tax credits the Affordable Care Act provides to cover health care premiums. It also extends a benefit from the American Rescue Plan that lowers premiums for those who buy coverage on their own. It provides a public option for health insurance and gives people a chance to buy into Medicare at age 60. And it closes a coverage gap in Medicaid that leaves millions without affordable care.
- Tax Breaks for Working Families. The American Families Plan also expands other tax credits that help working families. These include the child tax credits and the earned income tax credit. The American Rescue Plan expanded these credits on a short-term basis, but this plan would make the changes permanent.
The Biden administration puts the cost of this plan at $1.8 trillion over 10 years. Biden plans to cover this cost through new taxes on the richest Americans. But “richest” is a vague term, leaving many Americans wondering whether their taxes will rise under the new plan.
Who Will Pay Higher Taxes?
Each of Biden’s proposals includes its own funding plan. The American Jobs Plan is funded primarily through corporate taxes. The American Families Plan relies on increased taxes on high-income earners for its funding. Thus, the two groups who would see their taxes rise if these bills pass are large businesses and wealthy individuals.
Taxes on Corporations
To pay for the American Jobs Plan, Biden has proposed a Made in America Tax Plan. Many of its provisions encourage companies to keep jobs and profits in the U.S. by ending some tax credits and loopholes. But it also includes other corporate tax increases. Among other things, it reverses part of former President Donald Trump’s 2017 corporate tax cut.
The tax changes include:
- A Higher Corporate Tax Rate. The plan increases the flat rate established in 2017’s Tax Cuts and Jobs Act (TCJA) from 21% to 28%. That would still be lower than the 35% rate that existed before the TCJA tax cuts, according to The Hill.
- A Minimum Tax on Book Income. Some companies report high profits on their statements to shareholders yet have low taxable income. Biden’s plan would impose a 15% minimum tax on corporate “book income,” the income companies publicly report.
- A Higher Global Minimum Tax. Biden’s plan increases the tax rate for multinational corporations on “global international low-taxed income,” or GILTI. This term refers to income earned overseas that’s currently taxed at a special low rate of 10.5%. Under Biden’s plan, the GILTI rate would rise to 21%, the same as the U.S. tax rate.
- Changes in GILTI Tax Calculation. The plan also changes how the GILTI tax is calculated. It disallows companies deducting payments to related foreign corporations in countries without a strong minimum tax. That makes it harder for companies to shield income in tax havens (low-tax foreign countries).
- Ending Offshoring Incentives. Current tax law grants companies a tax exemption on their first 10% return on foreign assets. Biden’s proposal ends this exemption. That reduces the incentive for companies to move jobs and profits overseas.
- Changes to Energy Subsidies. The Biden plan ends long-standing federal subsidies for fossil fuel companies. In their place, it creates new tax incentives for electric vehicles and renewable energy sources, such as wind and solar power.
- More Corporate Tax Audits. Over the past 10 years, cuts in funding for the IRS have cut the number of corporate tax audits by more than half. This plan would reverse that trend. It gives the IRS more resources to pursue corporate tax cheats, helping it recover more revenue.
A few types of businesses would take a heavy hit from these changes. These include multinational corporations, fossil fuel companies, and large companies that currently use loopholes to lower taxable income.
The effect on smaller businesses would be mixed. According to CNBC, a majority of corporations are technically small businesses with less than $1 million in income. These companies would be subject to the higher corporate tax rate — though, again, it’s still lower than it was before 2017.
However, most small businesses are not corporations. According to the U.S. Small Business Administration, they’re primarily sole proprietorships and S-corporations, which do not pay corporate tax. Biden appears to have dropped some of his earlier proposals that could have hurt these small businesses, such as raising the Social Security payroll tax.
The Committee for a Responsible Federal Budget says these tax increases would only raise $1.75 trillion over the first 10 years. That’s not enough to cover the entire cost of the American Jobs Plan. However, over 15 years, they would raise $2.75 trillion, more than enough to pay for the plan.
Taxes on Individuals
As part of the American Families plan, Biden has proposed a series of tax reforms. He claims these tax changes will create a system that “rewards work — not wealth.” While working families will benefit from tax credits, high earners and investors will see their taxes rise.
The new tax increases include:
- A Higher Top Income Tax Rate. Under the plan, the federal tax rate for the highest tax bracket goes back up from 37% to its pre-TCJA rate of 39.6%. This top tax bracket also applies to more people. According to Politico, under the plan, individuals making at least $452,700 per year and couples earning a combined $509,300 would pay the top rate. Currently, the 37% rate starts at $523,600 for individuals and $628,300 for couples.
- Higher Capital Gains Taxes. Currently, capital gains and stock dividends are taxed at a lower rate than regular income. The top tax rate for these gains is just 20%. Under the Biden plan, all earnings exceeding $1 million are taxed at the same rate, whether they come from wages or investments.
- Capital Gains Taxed Upon Inheritance. Under current law, people who inherit assets such as real estate do not pay capital gains tax on their value. The new law taxes any unrealized (noncash) gains over $1 million ($2 million for couples). However, it includes exceptions for family farms and other family-owned businesses. The existing exemption of $250,000 ($500,000 for couples) on a primary residence also stays untouched.
- Limited Real Estate Tax Break. Currently, real estate investors do not have to pay taxes when they trade one property for another rather than selling one and buying the other. The president’s proposal requires investors to pay taxes on trades like this when they result in a gain of over $500,000.
- Equal Taxes on Carried Interest Income. Under current law, hedge fund managers can report carried interest income — the money they earn for managing other people’s investments — as capital gains. This loophole will matter less if Congress passes Biden’s proposal to tax capital gains as ordinary income. However, the president is also encouraging Congress to close the loophole entirely.
- Limits on Pass-Through Business Losses. One change from the 2017 tax bill that Biden plans to keep is a limit on “pass-through” business losses. This rule lets business owners use business losses to offset no more than $250,000 in nonbusiness income ($500,000 for couples). Biden’s plan makes this change permanent.
- Consistent Medicare Taxes. Under current law, business owners can treat some of their business profits as individual income without paying the 3.8% Medicare tax on them. Biden’s plan closes this loophole for taxpayers who make more than $400,000 per year.
The Tax Foundation says all these taxes together would only raise $661 billion in revenue. That’s not nearly enough to pay for the American Families Plan. But that calculation fails to factor in any increases in tax revenue from higher funding for the IRS.
According to the Tax Policy Center, Biden claims the added IRS funding could raise another $300 billion in revenue over 10 years. But that’s an optimistic estimate. And even if it’s right, it still leaves a shortfall of over $839 billion.
As a candidate, Biden promised not to raise taxes on anyone earning less than $400,000 per year. According to Politico, Biden’s tax proposal doesn’t exactly keep this promise. The higher income tax rate affects couples making $509,300 combined, even if neither partner earns an individual income over $400,000.
However, the White House says this is still consistent with Biden’s promise. It notes that “an American individual or family earning less than $400,000” will not see a rise in taxes. In other words, it claims Biden’s pledge referred to household income, not individual income.
In any case, an analysis by the Institute on Taxation and Economic Policy finds that only 1% of taxpayers would pay more as a result of this bill. Taxpayers in Massachusetts and New Jersey would be the most likely to pay higher taxes under Biden’s plan. However, even in these states, less than 2% of taxpayers would be affected.
Biden’s proposals are in line with the campaign promises the president made as a candidate in 2020. They focus on green energy, rebuilding the economy, and job creation. They also avoid adding to the national debt. Instead, they put most of the burden on high-income taxpayers and large businesses, who have fared better than most Americans during the pandemic.
However, none of these proposals is set in stone until a bill containing them becomes law. Congressional Republicans and a few Democrats have expressed opposition to the new taxes Biden has proposed. That could make it difficult to pass the bill without significant changes.
According to Fox Business, Biden is negotiating with Republicans in Congress on the size of his plan. He has offered to cut it down to $1.7 trillion, but that’s over $1 trillion more than Republicans want to spend. If Republicans remain opposed to the tax plan, they can kill any stand-alone tax bill in the Senate by using the filibuster.
Thus, the best chance to pass the bill might be to use a process called budget reconciliation. This tool allows any bill that affects taxes or spending to pass with a simple majority in both houses. That would enable Democrats to pass the bill without Republican support. It’s the same way Republicans passed the TCJA in 2017.
However, with the Senate split 50-50 between Democrats and Republicans, Biden can’t afford to lose even a single Democratic vote. To woo moderates, he may need to make more concessions on the size and scope of the plan. If Biden’s tax plan passes at all, it could end up looking very different from the president’s original vision.