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Joe Biden Proposes Boosting Taxes on the Rich

Samuel Dupret delves into Joe Biden’s newest plans to ensure the rich in American make a bigger contribution to society.

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U.S. President Joe Biden has announced a three-part Build Back Better Plan to boost the economy, provide for families and children, create jobs and invest in infrastructure. Tax reforms are central to these plans, both to pay for the plans and as a policy to promote fairness in how taxation is distributed.


“For too long we’ve had an economy that gives every break in the world to the folks who need it the least. It is time to grow the economy from the bottom-up and the middle-out.”


The Plans


Biden’s vision is comprised of three separate legislative plans:

The American Rescue Plan (ARP) - signed into law on March 11, 2021 - is a temporary remedy against the coronavirus pandemic which provides direct cash payments, extended child tax credit, extended unemployment insurance and $360 billion in emergency funding for state, local, territorial, and Tribal governments. This plan benefits low and middle income households the most.

The American Jobs Plan (AJP) is a $2.3 trillion investment in U.S. infrastructure and jobs. Among other things, it aims to improve transport, ensure clean water, boost the energy grid and broadband, modernise buildings and create caregiving and manufacturing jobs. The plan comes with a proposed 28% corporate tax rate, more than Trump’s 21% rate, but less than the 35% rate before Trump’s 2017 cut.

The American Families Plan (AFP) is a $1.8 trillion investment in families, health and education. It will provide two years of free preschool, two years of free community college, paid family and medical leave, making childcare affordable and extending the tax cuts from the ARP. The plan would restore the 39.6% individual federal tax rate for earned income $400,000 and above per year; Trump had cut this rate to 37% in 2017. Wealthy individuals also make a lot of money with unearned income (e.g. selling shares), but the capital gains tax is only 20% for the highest gains. This plan will close that gap by increasing capital gains tax to 39.6% for those earning $1 million or more.


Why Target the Rich?

Biden’s proposed tax reforms are aimed at making the wealthiest “pay their fair share”. Indeed, individuals and corporations can only make so much money because people operate in a society where safety, energy, transport, education and the ability to work and consume are ensured by government.

These reforms are, in part, a rollback of Trump’s 2017 tax cuts that disproportionally benefited the rich, big corporations and Trump himself. According to Biden, tax cuts for the rich and ‘trickle-down economics’ do not work. Indeed, an LSE study has found that tax cuts for the rich increase income inequality without any significant effect on GDP per capita or unemployment. The companies that benefitted the most from the U.S. 2004 ‘tax holiday’ on overseas profits cut net jobs (more than 20,000) instead of creating them. Additionally, corporations have spent billions in stock buybacks - a practice where corporations artificially inflate the value of their shares by buying some of them back with their profits instead of reinvesting their profits in their workers and technologies - since Trump’s corporate tax cut.

Biden’s reforms aim to close loopholes that are exploited by the rich and corporations to avoid paying their fair share through tax evasion. Reports show that profitable corporations regularly paid much less than the corporate tax rate, with 91 Fortune 500 companies paying nothing in federal corporate taxes in 2018. A study estimated that individuals at the top of the income distribution have both the highest levels of unreported income and the highest use of evasion methods like offshoring income to tax havens.

Both the AJP and the AFP propose investing resources in the IRS so that it can better address tax evasion. AFP will also stop some loopholes for the rich by closing the carried interest loophole and repealing the ‘step-up in basis’ rule. The AJP has a series of measures to prevent corporate tax loopholes and shifting profits and jobs overseas, including a minimum 21% tax on U.S. multinational corporations. It will also eliminate tax preferences for fossil fuel corporations.

The Biden administration is pushing for a global minimum corporate tax to reduce offshoring profits and avoid multinational corporations forcing nations into a ‘race to the bottom’.



How Popular are these Plans?

Different polls suggest that Biden’s plans are popular. However, the AFP and AJP still need to pass Congress, which will be complicated considering the Democrats only have a slim majority in the House, the Senate is split 50/50 and Republicans oppose the plans. Democrats would need 10 Republicans to join them to pass the plans in the Senate, but they could get it through if they use budget reconciliation. Meanwhile, Biden has said that he is open to negotiations and he is willing to compromise on the corporate tax rate if it is between 25-28%.

Biden’s plans show a real and tangible commitment to assisting the disadvantaged members of U.S. society by ensuring the ultra-privileged play their part in social responsibility. We can only hope that the legislation will come into effect so the shocking distance between the economic strata can diminish, even if only ever so slightly.


 

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