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.
A version of the American Jobs Plan has already passed the Senate with bipartisan support. However, this infrastructure bill has been scaled down quite a bit from the president’s initial vision. More changes to the bill may occur as it makes its way through the House of Representatives.
The Senate version of the bill includes investments in:
- Transportation. The plan provides $110 billion to build, repair, and improve America’s roads and bridges. It also allocates $66 billion for rail projects, $42 billion for ports and airports, and $11 billion for making roads safer. And $1 billion would go to redesigning highways that have divided neighborhoods, mostly in Black communities,
- Utilities. The plan commits $55 billion to clean up America’s water supply, eliminating lead pipes and lines like the ones that led to a public health crisis in Flint, Michigan. It provides $28 billion to improve the electric grid with new transmission lines that can expand the reach of clean energy. And another $65 billion goes toward providing high-speed Internet access for all Americans.
- Environmental Cleanup. The bill includes $21 billion for cleaning up polluted sites such as abandoned mines, oil and gas wells, and brownfields (old industrial sites). Another $46 billion goes toward mitigating the effects of climate change, such as floods, droughts, and wildfires.
- Electric Vehicles. The plan allocates a total of $15 billion for expanding the use of electric vehicles (EVs). Half of this goes toward building a new network of EV chargers across the country. The other half is for electrifying fleets of buses and ferries.
The total cost for this bill is $1 trillion, including $550 billion in new spending. Yet even this massive bill represents only a fraction of Biden’s original plan, which the Committee for a Responsible Federal Budget estimated at $2.65 trillion.
That plan included funding for energy-efficient buildings, workforce development, and the care economy (services that provide care for children, older adults, and people with disabilities). It also put major investments into restoring American manufacturing.
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 health care tax credits in the Affordable Care Act. 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 initially came with its own funding plan. The president’s original plan was to fund the American Jobs Plan primarily through corporate taxes and the American Families Plan with tax hikes on high-income earners. But the planned corporate tax increases got cut from the Senate’s version of the infrastructure bill.
Instead, the funding for the American Jobs Plan — or what’s left of it — will come from various sources. These include unused funds from the economic relief package and unemployment benefits. The Congressional Budget Office says the deal will also add $256 billion to the budget deficit. But it won’t require any new taxes.
Paying for the American Families Plan is a different story. In August 2021, Senate Democrats unveiled a budget plan that includes most of Biden’s suggested programs, including some of the ones that were cut from the infrastructure bill. And while it’s short on specifics, the plan calls for “Ensuring that the wealthy and large corporations pay their fair share of taxes.”
Thus, the two groups most likely to see their taxes rise if the budget bill passes are large businesses and wealthy individuals. Any of the president’s proposed new taxes for corporations and high earners could end up in the final bill. But at this point, it’s not clear which ones will make the cut.
Taxes on Corporations
To pay for the American Jobs Plan, Biden proposed a Made in America Tax Plan. Many of its provisions encouraged companies to keep jobs and profits in the U.S. by ending some tax credits and loopholes. But it also included other corporate tax increases. Among other things, it would have reversed part of former President Donald Trump’s 2017 corporate tax cut.
The proposed tax changes included:
- A Higher Corporate Tax Rate. The plan would have increased the flat rate established in 2017’s Tax Cuts and Jobs Act (TCJA) from 21% to 28%. That would still have been 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 have imposed a 15% minimum tax on corporate “book income,” the income companies publicly report.
- A Higher Global Minimum Tax. Biden’s plan would also have raised 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 have risen to 21%, the same as the U.S. tax rate.
- Changes in GILTI Tax Calculation. The plan would also have changed how the GILTI tax is calculated. It would have stopped companies from deducting payments to related foreign corporations in countries without a strong minimum tax. That would have made 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 would have ended this exemption. That would have reduced the incentive for companies to move jobs and profits overseas.
- Changes to Energy Subsidies. The Biden plan would have ended long-standing federal subsidies for fossil fuel companies. In their place, it would have created 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. Biden’s plan would have reversed that trend. It would have given the IRS more resources to pursue corporate tax cheats, helping it recover more revenue.
Although these changes didn’t make it into the Senate’s version of the infrastructure bill, some could still appear in the upcoming budget bill.
If that happens, it will be a big blow to multinational corporations. Fossil fuel companies will also pay more, as will large companies that currently use loopholes to lower taxable income.
The effect on smaller businesses will be mixed. According to CNBC, a majority of corporations are technically small businesses with less than $1 million in income. These companies will be subject to the higher corporate tax rate — though, again, it will still be 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. Thus, the majority of small-business owners would see no effect on their business income. However, they could still face higher taxes on their personal income if they’re wealthy.
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.” If these changes make it into the final budget bill, high earners and investors will see their taxes rise. But working families will benefit from tax credits.
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 Biden’s proposals. 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.
Will the Tax Plan Become Law?
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, there’s a big gap between a proposal and an enacted law. The infrastructure bill passed by the Senate already looks very different from the original blueprint for the American Jobs Plan. And before it gets through the House, it could change even more.
The final version of the American Families Plan is even more up in the air. Republicans in Congress are firmly opposed to this plan. If it came before the Senate as a stand-alone tax bill, they would surely kill it by using the filibuster.
That’s why Democrats are proposing to enact most of the plan’s provisions in their budget bill. That allows them to use budget reconciliation and pass the bill with a simple majority in both houses. That’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. Moderates like Joe Manchin of West Virginia and Kyrsten Sinema of Arizona say they want a smaller bill that’s fully funded by taxes. Winning their votes is likely to involve cuts to the size and scope of the plan.
On the other hand, scaling back the budget bill too much could mean losing votes from progressives. And to complicate matters further, some more liberal Democrats in the House have indicated they won’t vote for the infrastructure bill until after the budget bill has passed. Thus, losing their votes on the budget bill could derail both bills.
In short, it will require a careful balancing act to get the provisions of both of Biden’s proposals through Congress. It will require cutting enough to please moderates but not so much they lose progressives. By the time it’s done, the legislation could end up looking very different from the president’s original vision.
Biden’s tax plan may never make it through Congress in its entirety. However, the Biden administration is continuing to work on advancing its goals through other means.
For instance, Treasury Secretary Janet Yellen announced on July 1 that a group of 130 nations had agreed to a global minimum tax on corporate income. They haven’t set an actual tax rate, but the Biden administration is pushing for at least 15%. If it succeeds, this new policy will do a lot to stop U.S. companies from hiding income overseas.
In short, at least some part of Biden’s vision for a restructured economy will come to pass. But it’s unclear how much or what the final cost will be. Until the bill has either passed or died in Congress, the impact on U.S. taxpayers remains uncertain.