Democrat candidate Joe Biden’s tax plan rates can reach 62% in some states. California, New Jersey, and New York City taxpayers with incomes of $400,000 a year are facing huge tax rates. Combining state and local statutory income taxes, they could be on the hook for 60% or more. Currently, the highest earners in California and New York City pay about 40%. If Biden wins, they will have to prepare for effective state and federal tax rates of around 53%.
The $400,000 dividing line
Under the Democrats’ plan, Americans earning less than $400,000 would get tax cuts on average. Biden spared low and medium-income earners from increased tax rates. He also proposed increasing tax credits for these income brackets.
Jared Walczak of the Tax Foundation said that those earning over 400k will get the squeeze. Californians face combined state and federal rates of 62.6% under the Biden plan. In New Jersey, high earners face 60% while New Yorkers can go up to 58.2%. For New York City’s top income dwellers, the combined city, state, and federal income tax rate would be over 62%.
In reality, few taxpayers pay the full statutory rates. This does not include deductions, credits, offsets, loopholes, and other sources of income. While the top statutory rate is 37%, the effective rate is actually 26.8%. Biden’s camp clarified that effective rates, not statutory, are what’s important.
Under Biden’s plan, the effective tax rate for the top 1% would increase from 26.8% to 39.8%. This is according to research done by the Tax Policy Center. That means top earners in California and New York City would pay state and federal tax rates of around 53%. Today, they pay around 40% that they pay as effective rates.
Also, if the Democrats win the Senate, they can remove the $10,000 cap on state and local tax deductions. The combined state and local tax rates for top earners could be even lower.
Official Tax Rates Are Higher
Despite the adjustments, the official combined rates would remain at around 60%. These rates will be the highest since 1990 and exceed Obama administration rates.
The main source of the increase in Biden’s plan is the top marginal tax rate hike, from 37% to 39.6%. The other driver is the added payroll tax of 12.4% for those making more than $400,000 a year. Employees and employers will split this tax. All in all, Biden’s tax plan would feature the highest federal rate of 49.338%.
Jared Walczak of the Tax Foundation said that rates could increase further. He said that since employers usually pass on taxes to employees. As such, the combined rate would be higher. This would amount to over 65% in California, 62.9% in New Jersey, and 64.7% in New York. But, some states are deliberating whether to raise state taxes on high earners as well. Local legislators want tax increases to fund billions in budget gaps.
Walczak noted that “These rates would be the highest in about 3½ decades. He added that they are “imposed on a broader tax base than was in place previously.”
Biden’s Campaign Promise: Raise Taxes on the Rich
The American Enterprise Institute (AEI) estimated Biden’s tax plans can raise $2.8 trillion. This covers the period between 2021 through 2030. A separate study from the Urban-Brookings Tax Policy Center (TPC) says it’s closer to $2.4 trillion.
Biden wants high earners to fund stimulus activity for recovery efforts. His opponent, incumbent President Donald Trump doesn’t want increases. He warned that any increase can derail economic recovery and scare companies.
Other proposals from the Democrat target corporations. This includes increasing corporate tax rates from 21% to 28%. Biden has also proposed increasing taxes U.S. corporations pay on foreign earnings. He also wants mega-companies to pay a minimum of 15% on corporate income taxes. The basis will come from financial statements.
Voters will have the final word. The passage of these proposals will take more than Biden winning over Trump. It will also need Democrat majorities in both Congress and Senate. At present, the Senate looks to maintain its Republican majority. Even if Dems manage to get the majority, expect the margins to be razor-thin.
Watch this as CNBC’s Squawk Box tells how Joe Biden’s tax plan could lead to a combined rate of 62% for high earners:
Do you agree with Biden’s tax the rich proposals? Let us know what you think about his measures should he win the elections. Share your thoughts and ideas on where taxes should go in the comments section below.