The $400,000 Question: Why the Administration’s Tax Pledge Makes Sense
This week, we have a guest author: Michael Linden is a senior policy fellow at the Washington Center for Equitable Growth. He previously served in senior roles at the White House Office of Management and Budget and on two Senate committees.
At the end of next year, vast swaths of the Trump-era tax cuts will expire. This impending expiration sets up a major legislative debate—and a significant opportunity to begin addressing some of the glaring failures of our current tax system. Primary among those failures is the simple fact that the superrich do not pay their fair share. Tax rates for those at the very top have fallen by almost 30 percentage points over the last several decades, and even more galling, the ultra-wealthy are able to exploit loopholes and special preferences to pay lower tax rates than many middle-class families do.
To remedy these indefensible failures, President Biden has proposed a raft of tax policies that would significantly increase taxes on the rich and large corporations by closing loopholes, ending special tax rates, and increasing rates on the top. He has also pledged not to raise taxes on anyone making under $400,000 a year, effectively cordoning off roughly 98 percent of Americans from any tax increases.
The president’s pledge is politically savvy. For one thing, it centers the debate on the question of raising rich people’s taxes. This is a debate for which the public has a strong and clear preference: Taxing the rich and corporations routinely polls extremely well, and is usually listed among the most popular positions a candidate can take. Furthermore, taxing the top garners strong support among voters from across the political spectrum—44 percent of Republicans and 65 percent of independent voters are in favor. Focusing the debate on the richest households and largest corporations is a clear political winner.
For another, the president’s pledge effectively defuses the most common counterattack—that he wants to hike taxes for everyone—and allows him and his allies to be full-throated in their support for higher taxes on the top. The American public is not as opposed to paying taxes as the corporate-funded constellation of right-wing, anti-tax organizations would have elected officials believe. But they are rightly frustrated with how the tax code lets the rich get away with paying such low rates, and they want their elected officials to fix that problem first. By promising not to raise taxes on anyone making under $400,000, the president can propose substantial tax hikes on the top without fear that the public will be misled into opposing his tax reform agenda out of a concern that they will end up getting the short end of the stick again.
While the president’s tax pledge makes political sense, it has been met with some reasonable criticism on substantive grounds. For a start, some feel that the $400,000 threshold is too high: Households making $399,999.99 are still richer than roughly 98 percent of Americans, and they make more than five times as much as the median American household. They are not billionaires, of course, but their economic circumstances are almost as far from a struggling, working-class family as they are from a billionaire’s. It is hard to come up with a compelling economic or moral reason why they should be exempt from even one additional dollar in taxes.
But probably the most common objection to the president’s pledge is that drawing a hard line at $400,000 will prevent the the tax code from ever being able to generate the amount of revenue we will ultimately need to protect our commitments to America’s seniors and veterans, to reduce poverty, to narrow persistent racial gaps, and to invest in our shared growth and prosperity, all while responsibly managing fiscal risks.
There is a kernel of truth to this criticism. The US tax code has been deliberately weakened by successive rounds of tax cuts such that it currently generates far less revenue than we need. And while those tax cuts have disproportionately benefited the rich and corporations, they were not solely for the rich and corporations. It is true that we will need to generate much more revenue than we currently do, and that leads some to question whether it makes sense to draw such a stark line at only raising taxes on the top 2 percent.
But in the near and medium term, the real constraint on revenue is not the president’s $400,000 pledge, but overall congressional willingness to approve tax increases. It’s almost impossible to imagine that the next few Congresses (under any scenario) will be willing to raise more revenue than we could reasonably get exclusively from households making over $400,000 and corporations. If we enacted policies that, in combination, returned effective tax rates on the top 2 percent of Americans back to what they were in the 1950s and the 60s, a back-of-the-envelope calculation suggests that would raise something in the neighborhood of $7 trillion over the next decade. Realistically, that’s at the outer edge of what Congress is going to be willing to enact. Thus, even if we think our revenue needs exceed $7 trillion, the president’s $400,000 pledge is not the primary constraint.
That said, it would be an enormous mistake to allow that threshold to float upwards, as happened in 2012—the last time we faced a similar expiration of enormous portions of the tax code. In the run-up to that expiration, then–President Obama drew the line at $250,000, but the final deal that was struck ended up extending tax cuts for everyone below $400,000. That can’t happen again. Indeed, extending the Trump tax cuts for people making between $400,000 and $1 million sacrifices nearly $1 trillion in revenue over the next 10 years. That’s revenue we could use to offset a more robust Child Tax Credit, or universal paid family and medical leave, or a dozen other investments that the American people need and deserve.
Sticking with $400,000 is a reasonable posture not only for the coming tax debate next year but for quite a while. In the long run, we would all benefit from a tax code that asks a bit more from the people in the top 10 percent, and not just those in the top 2 percent. Of course, the bulk of all tax increases should be focused on millionaires, billionaires, and large corporations, but if we want to invest properly in the future and reduce our fiscal risks, then we’ll need a stronger tax code that generates more revenue from the extremely affluent, as well as from the truly wealthy, to support those priorities.
Keeping the threshold from increasing will accomplish exactly that—slowly, over time. Today, only about 2 percent of households make more than $400,000. But because of income growth, in a few years, that same threshold will mark the top 5 percent, instead of the top 2 percent. A few more years after that, it’ll be 10 percent. After all, the Obama-era threshold of $250,000 is today closer to the 90th percentile than it is to its original place at the 98th percentile.
The federal tax system has been under sustained attack for decades. It has been deliberately weakened by repeated rounds of tax cuts that continue to disproportionately benefit the wealthy. With the coming expiration of the Trump tax cuts, there is a real opportunity to start back toward a better tax system that meets the demands of the American people and fortifies our country’s future. The key to that stronger tax system is higher and fairer taxes on the rich and corporations. The pledge to avoid tax increases on anyone making under $400,000 ultimately serves that important task by focusing our efforts where they belong, and defanging bad-faith critiques. But policymakers must avoid the temptation—and reject the specious arguments—to increase the threshold further. Instead, they should recognize that people making at least $400,000 a year can and should pay a bit more in taxes toward the common good. And frankly, that will be just as true a decade from now as it is today.
If You Ask Eleanor
In thinking of the whole question of taxes, however, I have always felt that there ought to be a way, when large corporations were doing as well as many of them seem to be doing at present, to keep their taxes up. The tendency, at the present time, is to give them relief as well as to relieve people in the higher-income brackets who are often associated with corporations or big business of some kind.
- Eleanor Roosevelt, My Day (June 27, 1947)
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