The voices of Tax Policy Center's researchers and staff
Would Joe Biden Raise Taxes on Low- and Moderate-Income Families? It Depends on What You Mean by Taxes
Is Democratic presidential candidate Joe Biden proposing to raise taxes on low- and middle-income households? He emphatically says no. President Trump and his allies say yes, just as emphatically.
So which is it? Well, both Biden and Trump are right, though Biden is more right than Trump. In the end, it depends on what taxes you are talking about.
If you are asking only about individual income and payroll taxes, Biden is right. Nearly all his proposed individual tax increases would be paid by households making $400,000 or more, and many of his proposed tax cuts would benefit low- and moderate-income households. Biden insists that he would not raise taxes on anyone making below this threshold.
TPC has not yet modeled recent revisions in Biden’s plan, but on average, low- and middle-income households are unlikely to pay more in individual income taxes and payroll taxes under his proposals than under current law. And some would pay less.
Who pays corporate income taxes?
But if you are asking about all his tax proposals, including corporate income tax increases, the story may be somewhat different. When TPC modeled Biden’s tax proposals in March (before he added about 20 new ideas) it found that low- and moderate-income households would on average see some decline in their after-tax incomes—not from individual taxes but from their share of corporate tax increases.
TPC estimated that in 2021 three-quarters of all Biden’s tax increases would be borne by the highest-income one percent of households (those making $837,000 or more). But after-tax incomes of low-income households would fall by about $30 on average, about 0.2 percent. Middle-income households would see an average decline of about $260, or 0.4 percent.
But those low- and middle-income households would not be writing bigger checks to the IRS. Rather, their incomes would be cut through lower wages or smaller returns to their investments.
Economists believe that ultimately people pay corporate taxes. Corporations themselves are merely legal conveniences that make it easy for owners and workers to organize themselves. The taxes they remit to the government ultimately come from those owners or workers, either in the form of lower returns to their investments or lower wages.
Former GOP presidential candidate Mitt Romney described this, though rather inelegantly, in 2011 when he said, “Corporations are people.” Most normal people may not think of a corporation as a near-relative. But the ultimate beneficiaries of a firm’s operations are humans.
Less money to invest
Here’s a simplified example: Say a business makes an after-tax profit of $1 million. It has $1 million to invest, compensate its workers, or reward its shareholders (through stock price appreciation or dividends). But if Congress raises corporate income taxes by, say, 20 percent, the firm pays $200,000 more in taxes and has only $800,000 to work with. Shareholders suffer an immediate decline in after-tax incomes through lower returns to their investment in the firm. And because the business has less money to invest in new equipment or processes, workers may be less productive and over time earn less than if the firm had invested more.
And, by the way, it generally works in the opposite direction as well. If Congress cuts corporate income taxes, the ultimate beneficiaries also are shareholders and workers.
While economists agree that corporate taxes ultimately are passed on to workers and shareholders, they argue passionately about how they are divided. Some think shareholders pay nearly all the corporate income tax. Others insist that workers bear the entire burden.
TPC assumes that over the long run 80 percent is paid by investors and 20 percent by workers. The Joint Committee on Taxation, the Treasury’s Office of Tax Analysis, and the Congressional Budget Office use similar assumptions.
How do you count it?
Of course, the more you allocate corporate taxes to shareholders, the more high-income households benefit from business tax cuts—or are hurt by tax hikes. That’s because these taxpayers own the lion’s share of corporate assets in the US. About half of US families own no stock at all. And the wealthiest 1 percent own about half of all US equities held by households.
But wherever you sit in this contentious—and unresolved—debate over exactly how to distribute corporate income taxes, somehow the money comes out of the pockets of households.
And that’s where the debate over Joe Biden’s tax proposals gets muddled.
Some progressives argue that analysts should ignore the effects of corporate tax increases on households and focus on individual taxes only. But if you believe that people ultimately pay corporate taxes, you need to count it somehow.
Partisans will debate the incidence of corporate taxes long after the election. But if your focus is on the presidential campaign, the story is pretty clear: Low- and middle-income households will pay little if any new direct taxes under Biden’s tax plan. But some may face a small decline in their after-tax incomes as they bear a modest share of his proposed corporate tax hikes.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Carolyn Kaster/AP Photo