September 19, 2020

How Biden’s Tax Plan Might Affect Five American Households

Democratic presidential candidate Joe Biden wants to raise taxes to pay for an agenda that includes fighting climate change and expanding child care, pushing federal revenue about 9% above what it would be without any policy changes in the next decade.

An analysis by The Wall Street Journal and Kyle Pomerleau of the right-of-center American Enterprise Institute looks more narrowly at how the Biden tax plan might affect five sample households. The rough estimates below include Mr. Biden’s higher taxes on wages, ordinary income, business income and capital gains for people at the top of the income spectrum. They also include the repeal of the cap on the state and local tax deduction, broader limits on deductions and a new tax credit for child care.

Mr. Biden, the former vice president, would target his tax increases on high-income households, which he defines as those making above $400,000 a year. He said recently that no one making under $400,000 would pay more.

The household types included here aren’t representative of the U.S. population and instead are constructed to show the impact of various Biden policies.

“No president can get all the policies passed that they want,” Mr. Pomerleau said. “People should focus a little more on the fact that he wants to raise taxes mostly on high-income households and the rough magnitudes of the tax increases, rather than, for example, the specific contours of his policy to tax capital gains.”

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Mr. Biden’s proposed corporate tax increases make up a significant piece of his $4 trillion tax plan. They aren’t part of this household analysis, and they would mostly hit high-income people that own stock, as well as foreigners, endowments and pension funds. But some of the burden would fall on the rest of the population, in the short term on those who own stock, and potentially in the longer term as companies respond to higher taxes by limiting wage increases.

On the other hand, a view of the Biden tax plan isn’t complete without looking at the other side of the ledger. It would finance programs designed to improve health care, education and infrastructure, as well as fight climate change, and many of those programs would have direct impacts on households.

Taxpayer One

This household would be affected by Mr. Biden’s expansion of the 12.4% payroll tax for Social Security, which now stops after $137,700 of wages. The proposal would expand that tax to wages of individuals making more than $400,000 and contribute to their 9% overall tax increase, according to American Enterprise Institute calculations.

Taxpayer Two

This household currently benefits from a key piece of the 2017 tax law—a 20% deduction for business income. It would lose that and see an increase in marginal tax rates, driving their tax burden up by about 13% overall.

Taxpayer Three

Investors like this one at the top of the income scale would see some of the sharpest tax increases. Mr. Biden would raise the top capital-gains tax rate from 23.8% to 39.6%, applying that only to households with income over $1 million. That raises this person’s taxes by about 21%, though some people in this category would try to defer income and wait for a possible tax cut later.

Taxpayer Four

Many middle-income households would see little if any change in their tax burdens. They would get to keep the tax cuts they got in the 2017 law signed by President Trump.

Taxpayer Five

In some cases, Mr. Biden has proposed targeted tax cuts that would help some but not all households. Those include a child-care tax credit of up to $8,000 for one child and $16,000 for two. That credit means that this household would get a larger net benefit from the income tax system than it does now.

Notes

These estimates don’t include some of Mr. Biden’s tax cuts for lower-income households, such as tax breaks for renters and first-time home buyers.

The campaign hasn’t specified particular tax brackets. The analysis assumes current-law tax brackets below $400,000 and pre-2017 tax brackets with inflation adjustments above that level.

Total taxes include the employee and employer sides of the payroll tax. Effective tax rates are measured as a share of income plus employer-side payroll taxes.

Write to Richard Rubin at richard.rubin@wsj.com

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