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Senator Joe Manchin

Financial Planning > Tax Planning > Tax Reform

Battle Erupts Over Claim Manchin Bill Raises Middle-Class Taxes

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What You Need to Know

  • A report from the Joint Committee on Taxation finds that tax hikes on hedge fund managers and corporations could be absorbed by customers and shareholders.
  • Democrats say other provisions will offset any passed-on costs.
  • A vote could happen this week or next.

A partisan messaging battle has erupted over an official U.S. analysis suggesting it won’t be just the wealthy who will pay higher taxes under the Democrats’ latest economic agenda, raising risks for the party in the November elections.

The Joint Committee on Taxation, an official congressional scorekeeper, found that some middle- and low-income households could pay $16.7 billion in additional taxes next year as a result of the draft bill negotiated by Senate Majority Leader Chuck Schumer and Senator Joe Manchin.

That would seem to violate President Joe Biden’s consistent promises to not increase levies on anyone making under $400,000. And it makes for an awkward sales job for Democrats touting the benefits of a package that spans climate and energy investments to health-care provisions.

Veteran budget watchers said not so fast: the JCT’s estimates, made at the request of Republicans on the panel and released by GOP staff Friday, don’t convey a full picture. For one thing, the calculations don’t incorporate stepped-up benefits for many non-wealthy households, they said.

“Once you account for the spending side and the other taxes that are left out — and that includes the household consumer tax credits for various energy things, lower drug prices and health-care subsidies — the middle class is going to be distributionally ahead,” said Marc Goldwein, a senior vice president at the Committee for a Responsible Federal Budget, a Washington-based think tank.

Theoretical Model

The package under negotiation has two key tax-hike proposals: a 15% minimum tax on the profits corporations report on their financial statements — the so-called book tax — and the scaling down of the “carried interest” tax break used by private-equity managers.

While the book tax doesn’t directly affect the middle class or lower-income earners, that’s what the JCT, using economic theory and tax modeling, has determined as imposing a cost on those groups.

Goldwein explained that “corporations may be the ones that fill out the paperwork” for the book tax. But, ultimately, “people pay taxes.”

In theory, companies can pass along the higher tax burden to shareholders — including those who own stocks through retirement accounts or pensions — such as by scaling back dividend payments. They could charge customers higher prices, or take it out of employee compensation.

Democrats Rebut

The JCT model allocates 25% of the increase to labor, and 75% to capital, including shareholders. The panel’s distributional tables showed that those earning less than $200,000 could see their tax burden rise by about 1% next year, including effects passed along from the curbed carried-interest tax break.

William G. Gale, the co-director of the left-leaning Urban-Brookings Tax Policy Center, said in a blog post Tuesday that the precise way to divvy up corporate-tax burdens has been a longstanding debate among economists.

“The labor portion in JCT’s model is relatively small compared to the burden faced by shareholders,” he wrote. “But it’s enough to make the JCT distributional tables reflect tax increases among nearly all income groups in a bill where a corporate tax increase is the primary revenue source.”

Supporters of the draft moved to rebut the JCT analysis of the bill, which Democratic leaders are hoping could win passage this month. The draft has yet to win the endorsement of Senator Kyrsten Sinema, an Arizona Democrat whose vote is critical in the 50-50 upper chamber.

Debate Ensues

“It’s just completely false,” said Senate Finance Committee Chair Ron Wyden, an Oregon Democrat. “We have multibillion-dollar corporations paying less in their tax rate than nurses and firefighters.”

Brian Deese, a White House economic advisor, said Tuesday: “There are some corporations who will have to pay 15% in this context, but there aren’t going to be any individuals who will pay a higher tax rate as a result.” This relates to “common sense and who pays the tax,” he said in an interview with CNBC.

Treasury Secretary Janet Yellen weighed in as well, writing in a letter Tuesday to House Speaker Nancy Pelosi that the legislation won’t raise taxes on families earning less than $400,000 a year, which is “fully consistent with the President’s pledge.”

Republicans were quick to latch on to the JCT analysis in their blasting of the so-called reconciliation bill.

“If these taxes are passed, we’ll see higher inflation, more economic stagnation, lower wages, less employment, and most importantly, the burden will be paid by people making less than $400,000,” Senator Mike Crapo, the top Republican on the Senate Finance Committee, said in a statement.

Democrats are preparing to vote on the legislation either later this week or early next, but have a series of procedural hurdles. Those include getting more data from the Congressional Budget Office about the bill’s total cost, which could provide further fodder for partisan debate.

– With assistance from Naomi Jagoda and Christopher Condon.

Pictured: Sen. Joe Manchin. (Photo: F. Carter Smith/Bloomberg)

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