Next Up: The Biden Tax Hike – Pacific Research Institute

Next Up: The Biden Tax Hike

It was just a matter of time. Last week, President Biden announced his intention to hike the taxes of the “rich” to fund his progressive agenda.

But will it? History has shown that revenue projections from tax increases don’t often turn out to be the revenue boon tax raisers hoped. That’s because progressives tend to overestimate their skill at controlling people’s behavior and underestimate people’s ability to make intelligent decisions about their money.

In an interview with Good Morning America, Biden said that anyone making more than $400,000 will see a “small to significant tax increase.”  Later, White House press secretary Jen Psaki corrected the record and said the $400,000 applied to families, so the amount could be even lower for individuals.

Already, the web is chock full of advice from financial advisors on how to lower income, including maxing out on a defined contribution retirement plan and taking advantage of health savings accounts or flexible savings accounts. $400K-ers could also increase the tax efficiency of their portfolio by limiting capital gains, dividend income, or investing in municipal bonds. A more drastic option could be that one spouse stops working because the extra income netted against child-care expenses may mean that it no longer makes sense for a spouse to work.  Tax revenue takes a double hit in this case because two people leave the workforce — the nanny and the parent.  All these changes in behavior across America ultimately means less money for Uncle Sam.

For high-taxed Californians, a hike in federal tax rates for 400K-ers will give them another reason to leave the state.  High earners could face a combined federal tax rate of 62.6 percent according to the Tax Foundation.  Thanks to the high cost-of-living in cities such as San Francisco, Los Angeles, and San Diego, families making $400,000 a year aren’t exactly living large concludes CNBC. Sam Dogen, founder of the personal finance site Financial Samurai, calculated for the business channel the typical expenses of a 400K-er family:

A middle-class lifestyle is defined as: owning a home, having two kids, saving for retirement, saving for college, going on modest vacations several weeks a year, and retiring in one’s early 60s.

…. a family of four living in a high-cost city with $400,000 a year in income could afford a $1.6 million mortgage on a $2 million home…. they would be able to drive a mid-range vehicle — like a Toyota Highlander — and be more likely to shop for clothing at the Gap than Gucci. They would be able to take three vacations a year, but two would have to be staycations and the other would be a road trip… a large chunk of the family’s budget — or over $60,000 a year — would be eaten up by school and child care. While the family could save for retirement, they would only have about $34 left at the end of the year as extra cash flow once their household expenses are paid.

But the tax hike on those making $400,000 or above probably hits business owners the hardest, especially since they’ve already taken it on the chin during the pandemic.

CPA Tom Wheelwright, in an opinion piece for Entrepreneur, created the following hypothetical: Mary owns a business that has $1.5M of gross revenue, $400,000 of wages to employees, and net income for the owner of $800,000.  He assumes Mary’s small business operates as a sole proprietorship and she files her business tax information on Schedule C of her 1040. She also has a little bit of interest and dividend income that is offset by her itemized deductions. What happens to Mary under the Biden tax plan?  Her tax bill goes up $112,150.  For the details on Wheelwright’s analysis, visit here.

Whether it’s taxing small business owners or California’s so called “rich”, one thing is sure – revenues will fall short for big progressive spending sprees. The U.S. will be in debt for decades to come.

Rowena Itchon is senior vice president of the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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