Over the past two years, policymakers and taxpayers have grappled with proposals to increase taxes as ideas introduced in the 2020 presidential campaign were transformed into legislation. This effort culminated in August with the enactment of the Inflation Reduction Act. While many of the tax increases considered over the last two years were eventually shelved, they will continue to be part of the ongoing debate about whether and how to tax high earners and how best to reform the tax code.
The tax proposals pitched by President Biden during the 2020 campaign would have been a historically large increase in taxes, totaling about $3.3 trillion in new revenue over 10 years ($3.8 trillion in gross tax increases offset by $481 billion in tax credits). Major individual tax increases included an increase in the top income tax rate to 39.6 percent, a major hike in capital gains taxes to 39.6 percent for those earning over $1 million, a repeal of step-up in basis, an increase in the estate tax, and a large increase in payroll taxes.
For businesses, Biden proposed a 7-point hike in the corporate tax rate to 28 percent, a new minimum book tax on corporate profits, and higher taxes on international activity. We estimated these proposals would reduce the size of the economy (GDP) by 1.6 percent over the long run and eliminate 542,000 jobs.
Campaign Proposals Become the Build Back Better Act
After President Biden was elected, the campaign tax proposals were refined through the White House budget process and influenced the Build Back Better Act that passed the House in November 2021. The Build Back Better Act tax hikes, while smaller than the campaign tax plan, would have raised about $1 trillion over 10 years ($1.7 trillion in gross tax increases offset by $658 billion in tax credits).
The bill would have created a new surcharge on high-earner income over $10 million, increased taxes on pass-through businesses, raised the tax burden on corporations through a minimum book tax, increased international taxes, and imposed an excise tax on stock buybacks. We estimated the Build Back Better Act would reduce long-run GDP by 0.5 percent and eliminate 125,000 jobs—a substantial improvement over earlier iterations of the bill as well as the President’s initial plans.
Between the 2020 campaign and the House passage of the Build Back Better Act, lawmakers set aside ideas to curtail or eliminate step-up in basis or raise capital gains taxes, both because of the complexity involved and the concern that this would harm small businesses and family farms. More general concerns about the economic effects of the proposals caused lawmakers to abandon several other major revenue raisers, including the higher corporate tax rate as well as the estate and payroll tax increases.
Build Back Better Morphs into the Inflation Reduction Act
After the Build Back Better Act failed to gain enough support in the Senate, the legislative process was put on hold until the July introduction of the Inflation Reduction Act (IRA), which trimmed the list of tax hikes to include a minimum book tax on large corporations with exemptions for items such as accelerated depreciation, a 1 percent excise tax on stock buybacks, and pass-through business loss limitations. The international tax increases, individual income tax surcharge, and net investment income tax increase included in the Build Back Better Act were all dropped, as was the expanded Child Tax Credit.
We estimated the Inflation Reduction Act will increase revenue by about $324 billion on net over 10 years ($676 billion in gross tax increases offset by $352 billion in tax credits), reduce long-run GDP by 0.2 percent and eliminate 29,000 jobs. We and others concluded the bill will have a modest impact on deficits and little to no impact on inflation.
Tax Hike Proposals Live On
While most of the proposed tax increases were set aside by the time the Inflation Reduction Act was signed into law, advocates of raising taxes on higher earners and businesses will continue to make their case after the midterms and into the next presidential campaign season. Even larger tax hike proposals such as wealth taxes or taxing capital gains on a mark-to-market basis may continue to garner interest too.
Policymakers must understand the trade-offs and consequences of these ideas, including reduced economic growth, revenue volatility, and reduced innovation. Particularly in this time of economic uncertainty, policymakers should aim for constructive tax reform ideas that sustainably raise revenue while boosting economic growth and opportunity.
|Tax Type||Biden Campaign, Fall 2020||House Build Back Better Act, Fall 2021||Inflation Reduction Act, Summer 2022|
|Individual income tax rate||Raise top rate to 39.6% for income over $400,000||Impose a new 3% surcharge on income over $10 million and 5% over $25 million||No change to top income tax rate|
|Long-term capital gains & dividends tax rate||Raise tax rate to 39.6% for income over $1 million||No capital gains tax rate change||No capital gains tax rate change|
|Itemized deductions||Cap itemized deductions at 28% of value and restore the Pease limitation for those earning over $400,000||No new limitation on itemized deductions||No new limitation on itemized deductions|
|Step-up in basis||Eliminate step-up in basis||No change to step-up in basis||No change to step-up in basis|
|Pass-through business taxes||Phase out Sec. 199A pass-through deduction for those earning over $400,000||Expand 3.8% net investment income tax (NIIT) to active pass-through income; makes pass-through loss limitation permanent||Extended pass-through loss limitation through 2028|
|Payroll taxes||Impose 12.4% Social Security payroll tax on income over $400,000||No payroll tax changes||No payroll tax changes|
|Estate tax||Raise estate tax rate to 45% and lower the exemption to $3.5 million per estate||No changes to estate tax rate or exemption amount||No changes to estate tax rate or exemption amount|
|Corporate tax rate||Raise corporate tax rate to 28%||No corporate tax rate increase||No corporate tax rate increase|
|Minimum corporate tax||15% minimum tax on book profits over $100 million||15% minimum tax on book profits over $1 billion||15% minimum tax on book profits over $1 billion with exemptions for accelerated depreciation and other items|
|International taxation||Raise GILTI tax to 21% and assess on a country-by-country basis; eliminate the qualified business asset investment (QBAI) exemption; New 10% surtax on offshoring activity||Raise GILTI tax to 15% and assess on a country-by-country basis; reduce QBAI exemption to 5% from 10%||No international tax changes|
|Other corporate taxes||Eliminate certain deductions for the fossil fuel industry||New interest expense limitation; New 1% excise tax on net stock buybacks||New 1% excise tax on net stock buybacks|
|IRS Proposals||Unspecified increase in tax enforcement budget||Increase IRS enforcement funding by $80 billion||Increase IRS enforcement funding by $80 billion|
|Drug Pricing||Allow Medicare to negotiate drug prices and impose price controls on certain drugs||Allow Medicare to negotiate drug prices and impose price controls on certain drugs||Allow Medicare to negotiate drug prices and impose price controls on certain drugs|
|Tax credits||Expand Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit, Premium Tax Credit; Expand or create several green energy credits||Expand Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit, Premium Tax Credit; Expand or create several green energy credits||Expand Premium Tax Credit; Expand or create several green energy credits|
|Gross tax increase over 10 years (conventional)||$3.8 trillion||$1.7 trillion||$676 billion|
|Net tax increase over 10 years (conventional)||$3.3 trillion||$1.0 trillion||$324 billion|
|Long-Run GDP Impact||-1.6%||-0.5%||-0.2%|
Source: Author compilation, legislative text for Inflation Reduction Act and House Build Back Better Act.