Biden unveils reversal of Trump's tax cuts for the most wealthy

Mr Joe Biden will use his speech to a joint session of Congress to unveil the US$1.8 trillion (S$2.3 trillion) American Families Plan.
Mr Joe Biden will use his speech to a joint session of Congress to unveil the US$1.8 trillion (S$2.3 trillion) American Families Plan.PHOTO: NYTIMES

WASHINGTON (BLOOMBERG) - United States President Joe Biden’s administration on Wednesday (April 28) unveiled a US$1.8 trillion (S$2.3 trillion), 10-year plan to ramp up federal support for American families, with a major expansion in spending on childcare, paid leave and education.

The “American Families Plan”, which Mr Biden will tout in a joint address to Congress on Wednesday night, is funded in part by US$1.5 trillion of tax hikes on the wealthiest Americans. The proposals still face major changes in Congress, with Republicans set against higher taxes and Democrats having their own priorities.

Ambitious as it is, Mr Biden’s programme omits some of his campaign-trail agenda items and lacks any move to address a cap on state and local tax deductions that Democrats from high-tax states want removed.

The following are key elements to the plan:

Income taxes

Mr Biden is calling to raise the top personal income tax rate to 39.6 per cent for those among the highest 1 per cent of earners.

“No one making $400,000 per year or less will see their taxes go up,” the White House said in a fact sheet on the plan. Still, the document did not specify whether that threshold applies to both single earners as well as married couples.

Capital gains

Mr Biden would increase the capital gains rate to 39.6 per cent from 20 per cent for those earning US$1 million or more – 0.3 per cent of taxpayers or roughly half a million households – equalising that rate with the top marginal income tax rate.

A 3.8 per cent Obamacare tax on investment would then be added on top, meaning the richest would pay a 43.4 per cent federal rate on realised investment returns. State taxes could put the combined tax bill north of 50 per cent.

The plan would also end a longstanding capital gains tax break on inheritances known as “step-up in basis”, which allows heirs to use the market value of assets at the time of inheritance rather than the actual purchase price as the cost basis for capital gains when the holdings are sold.

The proposal exempts the first US$1 million of gains from the end of stepped-up basis, while there is no tax if the gains are used for charitable donations. There will also be “protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business”.

Carried interest, real estate

The carried interest tax break used by private equity and hedge fund managers to lower their tax bills would be eliminated under Mr Biden’s plan. In what critics call a loophole, that allowed for a share of income being classed as a capital gain, with an associated lower tax rate.

The administration also would eliminate a real estate tax break for when property investors sell one holding for a more expensive one.

IRS audits

The plan calls for increased audits on high-earners that could collect an additional US$700 billion in tax revenue, with funding increases for the Internal Revenue Service. Mr Biden is also proposing to require banks to report information on account flows, so that earnings from investments and business profits are reported to the IRS like wages are.

Child tax credit

Mr Biden is proposing to extend through 2025 an enhanced version of the child tax credit. The credit, increased for 2021 in the March pandemic-relief package, provides a US$3,600 credit for children under six and $3,000 for those six and older.

The IRS is slated to send the payments regularly, which amounts to US$250 or US$300 per child per month, depending on their age. Congressional Democrats are pushing Mr Biden to make this change permanent.

Childcare

The plan includes US$225 billion to help low-income families pay for childcare, provide funding to childcare providers and boost wages for childcare workers to US$15 an hour.

Mr Biden is also proposing to make permanent a tax credit for childcare costs that would reimburse families for care of children 12 and under with a credit worth up to US$4,000 for one child or US$8,000 for multiple children.

Paid leave

Mr Biden would create a US$225 billion national paid family and medical leave programme.

It would provide partial wage replacement for workers who take time off to care for a newborn or an ill family member, recover from a health issue, deal with a family member’s military deployment, address domestic violence issues or deal with the death of a loved one.

The plan guarantees 12 weeks of paid parental, family, and personal leave by year 10 of the programme. It provides workers with two-thirds of average wage replacement per month, up to US$4,000. Lowest-wage workers will get pay replaced at 80 per cent.

Health tax credits

The plan would pump US$200 billion into an expansion of tax credits for households that buy health insurance on their own, saving families an average of US$50 per person per month.

Mr Biden’s outline said nine million people would save hundreds of dollars per year on their premiums, and four million uninsured people will gain coverage.

Low-income tax credits

An expansion of the earned-income tax credit for childless workers who earn wages below the poverty line would be made permanent under Mr Biden’s proposal. The expansion roughly triples the value of the benefit for those individuals, the fact sheet said.

Pre-school

The plan includes US$200 billion for free universal pre-school for all three- and four-year-olds. Pre-kindergarten teachers will earn at least US$15 per hour, and those with academic qualifications will receive pay comparable to that of kindergarten teachers.

College tuition

The plan would provide US$109 billion to cover two years of tuition-free community college for students and an US$85 billion investment in Pell Grants, to aid students pursuing up to a four-year degree.

The plan also includes US$62 billion to improve college retention rates for disadvantaged students and pump US$46 billion into historically black universities, tribal colleges and other institutions that serve minorities.

Nutrition assistance

There is US$45 billion to improve the health of school meal programmes and provide food for K-12 students during summer breaks in Mr Biden’s proposal.

Unemployment systems

The proposal also earmarks US$2 billion to modernise the unemployment insurance system, which has been subjected to fraud and technical challenges during the spike in unemployment caused by the pandemic.

Mr Biden did not call for an automatic extension of jobless benefits as some Democrats had requested, but he pledged to work with Congress automatically extend benefits based on economic conditions.

Notably omitted

The plan did not include any references to expanding the US$10,000 state and local tax deduction. More than 20 House Democrats have said that tax break must be boosted to support Mr Biden’s economic agenda.

The proposal also did not include an expansion of the estate tax – a longstanding Democratic priority that Mr Biden campaigned on. Nor was there an enlargement of Medicare or the drug-price reduction measures that many congressional Democrats have pushed for – though Mr Biden’s outline said both issues were priorities for him.