The Tax Increase Joe Biden’s Tax Plan “Forgot” to Mention Affects His Pocketbook

The details of Joe Biden’s tax plan emerged on Thursday—“emerged” because the campaign has yet to release a plan on its website. Instead, Bloomberg News obtained and published details of the tax proposal.

Most news coverage of the plan has to date focused on two issues. First, Biden’s plan proposes raising a relatively modest amount of revenue—“only” $3.2 trillion over a decade, compared to $20-30 trillion for the likes of Sens. Elizabeth Warren (D-MA) and Bernie Sanders (I-VT). As an additional point of comparison, the 2017 tax cut, which Biden called “the dumbest thing in the world,” reduced revenues by $1.46 trillion over 10 years—less than half the fiscal impact of Biden’s tax increase. (Biden has said he wants to repeal those tax cuts, most of which are not included in his $3.2 trillion tax increase proposal.)

Second, stories have centered around the fact that Biden’s proposed revenue raisers would hit corporations and the affluent, while sparing the middle class. But few if any stories on Biden’s tax plan have mentioned one tax he has not proposed increasing—the one he failed to pay himself.

The List of Tax Increases

The Bloomberg story listed ten tax increases included in Biden’s $3.2 trillion plan:

  1. Taxing capital gains as ordinary income for individuals making more than $1 million ($800 billion revenue increase over ten years);
  2. Increasing the corporate income tax rate back up to 28% ($730 billion);
  3. Ending the “stepped-up basis” of taxation, under which the cost basis of inherited property (e.g., stocks, real estate, etc.) for determining capital gains tax liability is the value of the property at the time of the inheritance, rather than the value of the property when the deceased individual purchased the asset ($440 billion);
  4. Imposing a 15% minimum tax on all corporations with net income over $100 million, but who paid no federal income taxes ($400 billion);
  5. Doubling the rate of tax on profits generated overseas to 21% ($340 billion);
  6. Limiting the value of deductions for the wealthy to 28%, a proposal included in several Obama administration budgets ($310 billion);
  7. Raising the top rate of tax back up to 39.6% ($90 billion);
  8. Imposing sanctions on countries that “facilitate illegal corporate tax avoidance” ($200 billion);
  9. Eliminating real estate tax loopholes ($70 billion); and
  10. Ending fossil fuel subsidies ($40 billion).

Among that list of revenue raises, Biden did not incorporate a proposal submitted by the Obama administration in its budgets. That proposal, which would have raised taxes by an estimated $271.7 billion as of February 2016, attempted to end the practice of individuals funneling their profits through S corporations, to avoid paying self-employment taxes on their earnings.

The omission might come because, as previously reported, Biden and his wife used this loophole Obama wanted to close. In taking more than $13 million in book and speech earnings as income from their corporation, rather than wages, Joe and Jill Biden avoided paying as much as $500,000 in taxes—taxes used to fund Obamacare and Medicare. Experts interviewed by the Wall Street Journal over the summer called the maneuver “pretty aggressive” and a “pretty cut and dried” abuse of the system, because the Bidens’ speech and book income clearly came from their own intellectual property, rather than as a result of a corporate creation (e.g., profits from a restaurant, a car business, etc.).

Colluding Reporters?

As noted above, Bloomberg News broke the story of Biden’s tax plan. Its story mentioned not a word about how Biden’s plan omitted the Obama proposal on self-employment taxes, or Biden’s history of questionable tax maneuvers. The silence comes as Bloomberg said it would not conduct investigative reporting into declared candidate, and Bloomberg News owner, Michael Bloomberg’s rivals for the Democratic presidential nomination—but would continue to investigate President Trump.

At some point, reporters should stop colluding with each other to avoid investigations into Joe Biden’s sordid tax history. And they should start asking why a candidate who has campaigned on preserving and building upon Obamacare didn’t want to pay the taxes that fund it.

This post was originally published at The Federalist.

Analyzing the Gimmicks in Warren’s Health Care Plan

Six weeks ago, this publication published “Elizabeth Warren Has a Plan…For Avoiding Your Health Care Questions.” That plan came to fruition last Friday, when Warren released a paper (and two accompanying analyses) claiming that she can fund her single-payer health care program without raising taxes on the middle class.

Both her opponents in the Democratic presidential primary and conservative commentators immediately criticized Warren’s plan for the gimmicks and assumptions used to arrive at her estimate. Her paper claims she can reduce the 10-year cost of single payer—the amount of new federal revenues needed to fund the program, over and above the dollars already spent on health care (e.g., existing federal spending on Medicare, Medicaid, etc.)—from $34 trillion in an October Urban Institute estimate to only $20.5 trillion. On top of this 40 percent reduction in the cost of single payer, Warren claims she can raise the $20.5 trillion without a middle-class tax increase.

Brownback Amendment (#3697) Indexing Investment Tax for Inflation

Below please find a summary from my colleague Jon Lieber regarding the Brownback amendment (#3697) indexing the investment tax to inflation…

 

Senator Brownback is expected to offer this morning an amendment #3697 to index the new investment tax for inflation.  Please note this is subject to change.

Background

  • Section 1402 of the reconciliation legislation adds a new 3.8 percent tax on investment income for Americans whose AGI is above $200,000 if single and $250,000 if married.
    • Investment income is defined as interest income, dividends, annuities, royalties, or rents, business income derived from a passive activity, and net capital gain unless derived from disposition of property held in the ordinary course of business.
  • This tax is not indexed for inflation, so more and more Americans will become subject to the tax on their investment income over time, just like the Alternative Minimum Tax.
  • This tax raises $123 billion over ten years, and was included to fill the revenue hole left when Democrats scaled back the high-cost plans tax at the behest of unions.
  • Brownback #3697 would index these thresholds for the cost-of-living-adjustment that applies to all other income tax bracket thresholds, CPI inflation.

Considerations

Without an inflation adjustment, Democrats have created in this bill another Alternative Minimum Tax (AMT).  The AMT was originally created in the late 1960s to apply to a very small group of wealthy taxpayers who were believed to not pay any income tax.  Since it was not indexed for inflation, as incomes grew the AMT became a burden on more and more middle class families.  Because of this, Congress now has to act every year to “patch” the AMT so it doesn’t hit the middle class – when Congress is forced to do the same with this new investment tax in 20 or so years, this budget gimmick will expose that the health reform bill is significantly worse for the deficit than Democrats claim it is.

Brownback #3697 gives Congress an opportunity to prevent the same mistake it made in the 1960s.

The investment tax is a permanent new tax on capital gains and investment income – along with taxes on income, taxes on savings are among the most damaging taxes for long-run economic growth.

Brownback #3697 would help to mitigate the harmful economic and social impact of what the Wall Street Journal called “ObamaCare’s Worst Tax Hike.”

Cornyn Motion to Commit to Strike the Investment Tax

Below please find my colleague Jon Lieber’s analysis of Senator Cornyn’s motion to commit the health care bill to the Senate Finance Committee with instructions to strip out the 3.8 percent investment tax…

 

Summary

The reconciliation bill includes a brand new investment tax of 3.8 percent on investments for Americans whose AGI is above $200,000 if single and $250,000 if married.

Investment income is defined as interest income, dividends, annuities, royalties, or rents, business income derived from a passive activity, and net capital gain unless derived from disposition of property held in the ordinary course of business.

This tax is not indexed for inflation, so more and more Americans will become subject to the tax on their investment income over time, just like the Alternative Minimum Tax.

This tax raises $123 billion over ten years, and was included to fill the revenue hole left when Democrats scaled back the high-cost plans tax at the behest of unions.

Considerations

A tax on investment is a tax on savings that will discourage long-term economic growth.

Investment and savings are two of the key determinants of long-term prosperity.  The Institute for Research on the Economics of Taxation estimates that a 2.9 percent investment tax would depress economic growth by 1.3 percent and reduce capital formation, a key contributor to long-run economic growth, by 3.4 percent.

Lower economic growth and less capital formation in the long run means fewer jobs, lower wages, slower growth, and fewer opportunities for future generations of Americans.

This tax will break two of the President’s tax pledges – first, as the tax is not indexed for inflation, it will ensnare millions of Americans who earn less than $200,000 or $250,000, which President Obama delivered a “firm pledge” not to do; second, President Obama pledged that “everyone in America – everyone – will pay lower taxes than they would under the rates Bill Clinton had in the 1990s.”  This additional 3.8 percent tax combined with the proposal in President Obama’s budget to raise capital gains rates back to 20 percent will raise the top capital gains rate to 23.8 percent, above the level they were at in the 1990s.

The Wall Street Journal accurately called this “ObamaCare’s Worst Tax Hike.”  With the replacement of the high-cost plans tax, which would have slightly encouraged more responsible shopping for affordable health plans, for this investment tax, Democrats have dropped all pretense that their bill is designed to “bend the cost curve” and instead are just turning to the old model of pure income redistribution to fund a new entitlement that will bankrupt future generations.

Crapo Motion to Commit on President’s Promises on Middle Class Taxes

Below is my colleague Jon Lieber’s analysis of the Crapo motion to commit regarding the President’s promise not to increase taxes on individuals making less than $250,000…
Senator Crapo just spoke on a motion to commit he is planning to offer.  This motion will commit the health care bill to the Finance Committee with instructions to ensure that the bill will result in no tax increase for anyone earning under $200,000/$250,000 a year.
Considerations
• President Obama made a “firm pledge” on the campaign trail that single Americans earning less than $200,000 a year and families earning less than $250,000 wouldn’t see their taxes increase “a single dime.”  He promised this for all taxes, saying, “not your income taxes, not your payroll taxes, not your capital gains taxes.”
o “I can make a firm pledge.  Under my plan, no family making less than $250,000 a year will see any form of tax increase.  Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.” – Candidate Barack Obama, Dover, New Hampshire, September 12, 2008
• Joint Committee on Taxation data show that more than 73 million American households with income of less than $200,000 will face a tax increase under this bill.  These taxes include:
o A new tax on medical devices that will be passed on to consumers,
o An un-indexed Medicare payroll tax and a new tax on investments that will be paid by more and more Americans under the original income threshold, just like the Alternative Minimum Tax,
o A new tax on health insurers that will result in rising premiums for businesses and individuals,
o A new tax on pharmaceuticals that will raise drug prices for everyone,
o New limitations on flexible spending arrangements, and
o An increase in the AGI floor for the medical expense deduction to 10 percent.
• All Republicans and five Democrats voted for such a motion during original consideration of the Senate health reform bill.
• During consideration of the Senate bill, Senator Baucus didn’t argue against this motion because the Senate health bill didn’t raise middle class taxes, but he claimed “The Crapo motion to commit is really an attempt to kill health care reform,” precisely because it relies on middle class tax increases to pay for it.
• According to the Joint Committee on Taxation, ONLY about 7% of Americans would actually receive the government subsidy for health insurance under the Senate-passed health care reform bill.
• The remaining 93% of Americans would receive NO tax benefit under the bill.
• Another way of looking at this is that for every 1 middle class family who would benefit from the subsidy for health insurance, 5 middle class families would pay more in taxes.

Can Democrats Pass a Health Care Reconciliation Bill?

If you were reading the New York Times’ story this morning closely, you might be skeptical.  The piece notes that Democrats want to use the reconciliation process to increase health insurance subsidies, and then quotes Budget Committee Chairman Conrad that the bill “would have to reduce the deficit over the next five years, taken together, and must not increase the deficit in any year thereafter.”  CBO has already analyzed the subsidies in the Senate bill, and found that they would be growing at “about 8 percent per year” at the end of the budgetary window.

However, the White House’s proposal called for this new spending to be paid for largely through an expansion of Medicare taxes to include dividends and capital gains, as well as other taxes on “black liquor” and higher “fees” (i.e. taxes) on various companies.  CBO has previously analyzed proposals to tax the wealthy through the House bill’s “surcharge” and found that they would grow about 5 percent a year.  Although not certain, it’s highly likely that any wage-based tax would grow at roughly the same 5 percent level, based on general economic and wage growth as opposed to growth within the health care sector.

This “fuzzy math” raises numerous questions:

  • How can a reconciliation bill with spending (i.e. health insurance subsidies) growing at 8 percent per year and offsetting tax increases growing at 5 percent per year not increase the deficit in any future year, as required under the Senate’s “Byrd rule?”
  • If the subsidies become subject to the “Byrd rule” for increasing deficits in future years, would proposals to expand the “union deal” on the Senate’s Cadillac tax or increase Medicaid physician reimbursements – the latter of which the President endorsed yesterday – also be stricken from a reconciliation bill for the same reason?
  • If even Democrats agree that reconciliation can’t be used to tackle abortion or immigration-related language, and if one or more budgetary components can’t be included in a reconciliation package because they would increase the deficit, what’s the point of a reconciliation bill anyway?

Keeping apart the very separate question of whether the majority should even attempt to embark on this route, a reconciliation strategy may appear to some as a fool’s errand on policy as well as politics – because it remains unclear at best how Democrats can enact any of their preferred changes to the Senate-passed legislation through this controversial procedure.