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Analyzing President Biden’s 2025 Budget Proposal: A Deep Dive
President Biden’s recent State of the Union address painted a picture of tax increases for businesses and high-income earners, coupled with new credits and complexities for all taxpayers. His FY 2025 budget proposal, released shortly after, details how the White House intends to implement this vision, projecting a significant tax hike of approximately $5.3 trillion between 2024 and 2034. This article delves into the specifics of President Biden’s 2025 Budget Proposal, exploring the potential economic consequences and outlining the key provisions.
Key Economic Impacts of Biden’s 2025 Budget Proposal
Our analysis indicates that, on a gross level, the budget is estimated to increase taxes by approximately $4.4 trillion over the 11-year period. However, when considering various credits and deductions, the net tax increase could be as high as $3.4 trillion. Such substantial increases would inevitably impact the economy. We project a notable decrease in long-term economic output, with GDP potentially declining by 1.6 percent. Wages are also expected to decrease by 1.1 percent, and employment could suffer a loss of 666,000 full-time equivalent jobs. This substantial reduction in economic activity is a significant concern.
Tax Changes by Category
The proposed tax changes fall into three primary categories:
- Additional Taxes on High Earners: These measures focus on raising the tax burden on individuals earning substantial incomes.
- Higher Taxes on US Businesses: This involves increasing the tax rates for corporations, potentially impacting their profitability and investment decisions.
- Expanded Tax Credits and Incentives: A crucial component of the proposal involves expanding tax credits and incentives for various individuals and activities.
Potential Negative Consequences on the Economy
These combined policies may push the tax code further from simplicity, transparency, and neutrality. This could diminish US economic competitiveness and lead to long-term consequences such as lower GDP, a smaller capital stock, decreased wages, and a substantial reduction in employment. Our projections underscore the potential implications of the proposal for American incomes, with a potential decline of 1.3 percent in the long run.
Specific Business Tax Provisions
Key business tax provisions under consideration include:
- Increasing the corporate income tax rate from 21% to 28%.
- Raising the corporate alternative minimum tax (AMT) from 15% to 21%.
- A substantial increase in the stock buyback tax from 1% to 4%.
- Adjusting the global intangible low-taxed income (GILTI) tax rate from 10.5% to 21%.
- Further limitations on the deductibility of employee compensation.
Specific Individual Tax Provisions
Significant individual tax provisions include:
- Increasing the top individual income tax rate to 39.6% for high-income earners.
- Taxing long-term capital gains and qualified dividends at ordinary income tax rates for taxable income above $1 million.
- Taxing unrealized capital gains at death with a $5 million exemption.
Revenue Projections and Deficit Reduction
Projected revenue increases from the proposed tax changes are estimated to total approximately $4.4 trillion over 11 years, with certain provisions reducing this figure by $876 billion. On a conventional basis, the budget is expected to reduce the deficit by around $2.1 trillion by 2034. However, dynamic scoring, factoring in the reduced economic activity, brings the deficit reduction down to $1.5 trillion.
Distributional Effects
This budget proposal prioritizes raising the marginal income tax rates faced by higher earners and corporations, while also expanding tax credits for lower-income households. Our estimates indicate that the bottom 60% of earners might experience an increase in after-tax income, contrasting with potential decreases for the top 40%. This creates an interesting balance of considerations.
Top Tax Rates Under the Proposed Budget
President Biden’s proposal would elevate top tax rates on corporate, capital gains, and individual income to levels that are unprecedented compared to other developed countries. The adjusted corporate income tax rate would be among the highest in the OECD, and top combined marginal tax rates on individual income could reach 45.1%, potentially rising to 49.9% when accounting for capital gains.
Conclusion
President Biden’s 2025 budget proposal presents a significant shift in tax policy, potentially impacting economic growth and employment. The proposal may aim to reduce the deficit, but our analysis reveals substantial economic costs. This analysis attempts to provide a clear and unbiased perspective to allow you to form your own conclusions. Share your thoughts in the comments below.
