Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.
Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.
Caps the tax benefit of itemized deductions to 28 percent of value, which means that taxpayers in the brackets with tax rates higher than 28 percent will face limited itemized deductions.
The first item is something I’ve long favored—higher wage taxes on the rich. In the long run, a progressive wage tax is identical to a progressive consumption tax, although due to tax avoidance they might not be identical in practice. This tax will raise a great deal of revenue, and more revenue will certainly be needed due to the recklessly large budget deficits in recent years.
The second item is a mistake, in two ways. First, it’s simply not true that the top rate on federal personal income taxes is currently 37%; it’s over 40%. The US has two personal income tax systems (itself a really foolish idea) and we should count both systems when computing the top rate of federal income taxes. It’s also a mistake in the sense that raising the top rate also raises taxes on capital income—a bad idea.
The third item is really stupid idea. And I don’t mean “stupid” in the sense of “I strongly disagree”. I mean stupid in the sense that it implies a lack of understanding of basic public finance concepts. Capital income has already been taxed once as wage income, and is thus being double taxed by capital income taxes. In addition, we tax nominal capital income. Even if I am wrong and there is some “second best” argument for taxing capital income, you certainly don’t want to tax it at exactly the same rate as labor income. Setting both rates at precisely 39.6% (actually even higher), would like saying that since apples and oranges are both fruit, there should be a law requiring stores to sell apples and oranges at exactly the same price. Even in the unlikely event that there is an argument for price controls on fruit, it’s almost inconceivable that the optimal price ceiling is identical for all types of fruit.
We need to transition from an income tax to a consumption tax. One way of doing so is by removing all limits on 401k plans. Allow unlimited contributions and allow withdrawals at any time, which would effectively eliminate taxes on capital income. This approach may not be the most efficient, but it at least makes it obvious to voters that this money has been taxed once, and doesn’t need to be double taxed. Once you do that, you can make the overall system more progressive than today, without killing off capital formation.
It’s a good idea to cap the deductions at 28%, but an even better idea would be to cap them at zero percent. In other words, move toward a system with only a standard deduction. The tax reform of 2017 moved us a good distance toward eliminating deductions, but many in Congress want to bring them back. To his credit, Biden doesn’t propose doing so, but I fear he’ll be pressured by Congress to undo the tax simplification of 2017, which caused the vast majority of people to shift to the (simpler) standard deduction.
Increases the corporate income tax rate from 21 percent to 28 percent.
This is a bad idea, but it does tend to confirm a point I’ve been making for years. Back in 2017, I claimed that Hillary Clinton would have reduced the corporate rate to 28%, and this seems to confirm that 28% is the preferred rate of the Democratic Party.
There are lots of other minor suggestions, of which this seems to be the best:
Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+
There are also lots of missed opportunities, such as a carbon tax. Overall, I’m not a fan of Biden’s plan, and hope the Senate can block the more counterproductive changes. But I fear the opposite—the worst aspects of the plan might be adopted, without the better suggestions. Pray for gridlock.