President Biden released his fiscal year (FY) 2024 budget request on Thursday.
Arguably the most notable feature of Biden’s budget request is the revival of trillions of dollars of tax increase proposals that his administration previously proposed and Congress rejected, which we summarize below.
Topline: $5.5 Trillion More in Revenue Than CBO Projections
Overall the Biden administration would have the federal government collect $65.187 trillion in revenue over the next 10 years (FYs 2024 through 2033), $4.709 trillion more than in the administration’s baseline ($60.478 trillion) and $5.460 trillion more than in the budget baseline released by the nonpartisan Congressional Budget Office (CBO) just a few weeks ago.
In FY 2024 specifically, the Biden budget proposals would in the aggregate lead to $5.036 trillion in revenue collected – $315 billion more than in the administration’s baseline ($4.721 trillion) and $198 billion more than in the CBO baseline.
Revenue as a percentage of the nation’s economic output (gross domestic product or GDP) averages 19.65 percent during the 10-year window, compared to 17.96 percent in the CBO baseline (a 1.69 percentage point or 9.4-percent increase).
And, with the release of Treasury’s annual green book on Thursday, the net effect of the administration’s revenue proposals come out to $4.010 trillion in increased revenue from FYs 2024 through 2032 – $4.742 trillion in increased receipts offset by $732 billion in increased outlays.
Major Revenue Proposals
Major revenue increase proposals in the Biden budget request include:
- $1.326 trillion from increasing the corporate tax rate from 21 percent to 28 percent;
- $549 billion from adopting the undertaxed profits rule (UTPR) negotiated by dozens of countries at the international level;
- $493 billion from tax increases on U.S. corporate income earned abroad;
- $437 billion from a billionaire minimum income tax;
- $344 billion from increasing the net investment income tax (NIIT) rate and Additional Medicare Tax rate for taxpayers making more than $400,000;
- $306 billion from expanding the NIIT base to pass-through income;
- $238 billion from quadrupling the stock buyback tax;
- $235 billion from increasing the top individual income tax rate from 37 percent to 39.6 percent;
- $214 billion from taxing capital gains as ordinary income for those with more than $1 million in income; and
- $116 billion from repealing the foreign-derived intangible income deduction U.S. companies can claim for exports.
These combined proposals alone come out to $4.258 trillion in additional revenue from fiscal years 2024 through 2033.
By our count, there are nearly $3 trillion in tax increases that fall primarily on corporate and business income in the budget proposal, and over $1.2 trillion in tax increases that fall primarily on individual income (we include the Biden administration’s NIIT and Additional Medicare Tax proposals to extend Medicare solvency in the latter category).
The Biden administration and policymakers in Congress should be wary of the effects such significant revenue increases would have on business investment, economic growth, worker productivity, and capital stock in the decade to come – particularly the corporate tax rate increase from 21 percent to 28 percent, the tax increases on U.S. corporate income earned abroad, and the tax increases on pass-through business income. These tax increases, if enacted, may serve two Biden administration goals: increasing the progressivity of the tax code, and raising revenue to both decrease deficits and offset increased spending.
Policymaker discussion should include likely downsides of such significant tax increases though. The Joint Committee on Taxation could offer macroeconomic analysis of the President’s revenue proposals that help policymakers answer a few key questions, including:
- What effects would the President’s tax increase proposals have on GDP, capital stock, and wages?
- What effects would the President’s tax increase proposals have on business investment?
- Since at least a portion of corporate tax increases are borne by workers, what portion of these tax increases would be borne by households making less than $400,000?
Biden for 2017 Tax Cut Extensions?
One of the most interesting elements of President Biden’s revenue proposals for FY 2024 are some early indicators his administration supports extending individual tax cuts for low-income, middle-income, and upper-middle income households enacted by Republicans (and signed into law by former President Trump) in 2017. The Wall Street Journal’s Richard Rubin wrote about this at length on Thursday:
“President Biden largely wants to extend Trump-era tax cuts for households making under $400,000 a year beyond their scheduled expiration after 2025, the White House said in a budget statement Thursday.
Mr. Biden’s budget calls for extending those tax cuts ‘in a fiscally responsible manner’ by using new tax increases on wealthy people and large corporations to offset the budget-deficit increases that extended tax cuts would create. The cuts expanded the standard deduction and lowered tax rates for all income groups and will lapse after 2025 unless Congress acts.
The budget provides the White House’s clearest statement yet on one of the largest fiscal choices facing the country in the coming years, and one that will be a major part of next year’s presidential campaign. But Mr. Biden’s budget doesn’t outline a detailed plan for extending the tax cuts and doesn’t include those costs.”
NTUF would agree with President Biden that tax cuts – including the lowering of individual rates and the doubling of the standard deduction, which in addition to reducing tax burdens also significantly reduced tax filing burdens – should be extended in a “fiscally responsible manner.” First and foremost, Congress could look to extending the repeal of personal exemptions (if paired with the doubled standard deduction) and extending the $10,000 state and local income tax deduction cap to offset the extension of individual cuts. Congress could also look to cutting spending in excess of the net revenue impact of Tax Cuts and Jobs Act extension, to both offset the extended tax cuts and reduce the deficit. NTUF’s “Toward Common Ground” project with U.S. Public Interest Research Group includes $800 billion in deficit reduction proposals, and is one place lawmakers could start in identifying robust offsets that don’t rely on gimmicky budget accounting.
Seeds of Compromise on Child Tax Credit?
President Biden proposes reinstating the $3,000 base Child Tax Credit (CTC) ($3,600 for children under 6) for three years in his FY 2024 budget request – 2023, 2024, and 2025. Similar proposals have been deemed non-starters by Congressional Republicans, but one change to Biden’s CTC plans not reflected in prior proposals could end up serving as a seed for compromise between the two parties over the CTC.
Biden proposes having parents opt in to the monthly, advance CTC benefit that was a feature of the 2021 expansion to CTC in the American Rescue Plan Act (ARPA). The ARPA CTC was an automatic opt-in, giving parents an optional opt-out of the advance benefit.
If policymakers are to eventually pass an advanceable version of the CTC, including an opt-in may reduce improper payments in the program, especially if parents have to regularly confirm that their income and marital status still makes them eligible for the advance payment. Policymakers should explore this idea further if they plan to make the CTC advanceable on a permanent basis.
NTUF shares the Biden administration’s sensitivity to unsustainable debt and deficit levels, but we are troubled that the Biden administration relies almost entirely on increased taxes to reduce deficits relative to CBO’s current baseline.
Tax increases on U.S. corporations may increase progressivity in the tax code, but a portion of the increase will be borne by middle- and even low-income workers and shareholders. And the administration and Congress should give careful consideration to how the level and composition of tax increases proposed in this budget could affect economic growth, business investment, and worker productivity in the years to come.
Finally, we appreciate that the Biden administration may be planting the seeds to a compromise on key expiring elements on the 2017 tax law ahead of 2025 expiration dates. This will be some of the most important work Congress does in the tax policy space in the years ahead, and a final compromise will likely have to be bipartisan.