By Alan D. Viard
During his successful presidential campaign last year, Joe Biden made a sweeping and misguided pledge about his tax plan: “Nobody making under 400,000 bucks would have their taxes raised, period, bingo.” The pledge’s flaws, which I have previously discussed, are on full display in the budget reconciliation bill recently assembled by the House Budget Committee. Some of the bill’s provisions depart from the principles of good tax policy to comply with the pledge, while others violate the pledge in an effort to follow tax policy principles.
The bill does not include a carbon tax, which is the most efficient way to address what President Biden calls the “existential threat” of climate change (although the addition of a carbon tax may now be under consideration). The bill does not even include an increase in the federal gasoline tax. These measures appear to have been excluded largely because they would affect households with incomes below $400,000 and thereby run afoul of the pledge.
In other cases, however, the bill violates the pledge by adopting excise taxes that will impose burdens on the broad public, including those making less than $400,000. The bill reinstates chemical feedstock taxes (section 136701), extends coal taxes (section 138502), and increases the federal cigarette tax and imposes a new tax on e-cigarettes (section 138504). The bill’s priorities are questionable — a carbon tax to combat climate change would have made more sense than an e-cigarette tax that will threaten public health by increasing smoking rates.
The pledge also receives uneven treatment in the provisions that curb individual income tax breaks. Special carveouts to shield taxpayers with incomes below $400,000 from tax increases are included in provisions pertaining to the small business stock exclusion (section 138150) and IRA contributions and distributions (section 138301 and 138302). However, the bill omits income-based carveouts from provisions pertaining to worthless securities (section 138142), carried interest (section 138149), wash sales (section 138153), IRA strategies (sections 138311, 138312, 138314, 138315, and 138503), and conservation easements (section 138403).
The income-based carveouts are misguided. In general, if curbing a tax break is good policy, the curb should apply at all income levels. The carveouts also add complexity and impose penalties on earning additional income. Some of them even feature notches in which one dollar of additional income can trigger thousands of dollars of additional tax liability.
Because some provisions of the bill violate the pledge, President Biden is incorrect when he claims that “no one making under $400,000 will pay a penny more in taxes” under the bill. Nevertheless, the real problem is not the relatively minor violations of the pledge, but the intermittent misguided efforts to comply with it.
The House reconciliation bill illustrates how Biden’s pledge impedes efforts to design an improved tax system. If the pledge is maintained, it will pose an even bigger impediment to addressing the long-term fiscal imbalance, an undertaking that will require tax increases on the broad middle class (perhaps a value added tax).
Although the $400,000 pledge may be a good sound bite, it is a flawed policy constraint. To facilitate tax reform and fiscal discipline, President Biden and congressional Democrats should abandon the pledge.
Alan D. Viard is a senior fellow at the American Enterprise Institute.