November 1, 2021

How Biden’s Build Back Better Plan Would Tax the Rich

Key Points:

  • President Joe Biden issued a $1.75 trillion social and climate spending plan on Thursday. About $1 trillion would be financed by higher taxes on wealthy Americans.

  • The Build Back Better proposal would levy a tax surcharge on Americans who earn more than $10 million, invest in more IRS enforcement and raise taxes for some business owners.

  • It’s unclear whether the plan has the full backing of Democrats in the House and Senate.

Thursdays big news was the release of a $1.75 trillion social and climate spending bill. More than half of the bill would be financed by tax reform aimed at wealthy Americans.

Millionaire and billionaire surtax

A 5% surtax rate on income more than $10 million and and additional 3% surtax rate on income above $25 million would be in effect. This surtax is estimated to raise $230 billion over the next 10 years and would go into effect for tax years beginning January 1, 2022. As of 2018, there were 22,112 tax returns reporting income of more than $10 million.

“I don’t want to punish anyone’s success; I’m a capitalist,” President Biden said in a speech Thursday. “All I’m asking is, pay your fair share.” He also reiterated that households earning less than $400,000 per year wouldn’t “have to pay a penny more” in federal taxes, and would likely get a tax cut from the proposal via the enhanced child tax credit. The top 1% evade more than $160 billion per year in taxes, according to the White House.

Although specifics are omitted, the bill seems to have abandoned many of the tax proposals made last month by the House Ways and Means Committee. For example, the framework doesn’t raise the top income tax rate or top rate on investment income (with exception to those subject to the proposed surtax). It also doesn’t impose required distributions from large retirement account or alter rules around estate and trust taxes.

Business income

There are two provisions in the Build Back Better framework related to business income.

One would apply a 3.8% Medicare surtax to all income from pass-through businesses and another would limit a tax break on business losses for the wealthy.

The reforms would raise $250 billion and $170 billion, respectively, over a decade, according to estimates.

Currently, the owners of most pass-through businesses are subject to a 3.8% self-employment tax or net investment income tax. (Such businesses, like sole proprietorships and partnerships, pass their earnings to owners’ individual tax returns.)

However, some profits (namely, those of S corporations) aren’t subject to the 3.8% net investment income tax, which was created by the Affordable Care Act to fund Medicare expansion. The proposal would close this loophole for wealthy business owners.

It would apply to single taxpayers with more than $400,000 in taxable income or married couples filing a joint return with more than $500,000 in taxable income.

The second proposal is also somewhat vague on business losses. But the House tax proposal last month, which contained a similar measure, may offer a clue; it would permanently disallow excess business losses (meaning, net tax deductions that exceed their business income).

This applies to businesses that aren’t structured as a corporation.

Both provisions would kick in after Dec. 31.

IRS enforcement

Democrats’ plan would give $79 billion in new funding to the IRS to help close the so-called tax gap.

Relative to other taxpayers, they get a bigger share of income from opaque sources, such as certain business arrangements that aren’t as readily subject to tax reporting or withholding, according to Watson.

The IRS would hire enforcement agents trained to pursue wealthy tax evaders, overhaul 1960s-era technology and invest in taxpayer services to help ordinary Americans, according to the White House.

It estimates these measures would raise $400 billion over 10 years — the single-biggest revenue raiser in the proposal.

However, some question how lawmakers arrived at that revenue figure. The Treasury Department estimated last month that an $80 billion IRS investment would generate $320 billion in revenue over a decade.