Biden is set to propose higher taxes for the rich. Here’s how they work

WASHINGTON– President Joe Biden is expected to tout the country’s economic health in his State of the Union address on Tuesday, just days after a blockbuster jobs report showed a strong job market coincided with a month-long fall in inflation.

Looking ahead, however, Biden is likely to propose solutions to what he sees as an ongoing economic ailment: income and wealth inequality.

WATCH LIVE: President Biden delivers the State of the Union address

The wealth of the top 1% increased by $6.5 trillion in 2021, according to a Federal Reserve study released last year. This wealthiest group of Americans controls 32% of the country’s wealth, the study found.

The Biden administration’s agenda, set to be announced Tuesday night, includes two policy proposals: a new tax on billionaires and sharply increasing a current tax on corporate share buybacks.

“The idea is to advocate for reducing inequality,” Reuven Avi-Yonah, a University of Michigan law professor who focuses on corporate taxes, told ABC News. “There is no indication that the rise in inequality will stop any time soon and that something should be done about it, Democrats say.”

Here’s what you should know about Biden’s expected tax proposals for wealthy individuals and companies:

billionaire tax

A key part of Biden’s new economic policy agenda is a billionaire tax that would set a minimum tax on the wealthiest Americans, the White House said.

The Biden administration has offered few details on the proposal, but it appears very similar to a policy Biden proposed last March. At the time, he called for a tax rate of at least 20 percent for Americans who bring in at least $100 million a year.

The tax rate would apply to both income and unrealized gains, a measure of the value accumulated by an individual’s unsold investments.

“President Biden is a capitalist and believes everyone should be able to make a millionaire or a billionaire,” the White House said in a statement Tuesday. “He also believes that if America has a tax code that results in America’s wealthiest households paying a lower tax rate than working families, it’s wrong.”

Between 2018 and 2020, the nation’s wealthiest 400 families paid an average tax rate of 8%, the White House economic advisor found.

The richest 25 people added a total of $401 billion in wealth between 2014 and 2018, but they paid an average federal income tax of 3.4% on that wealth, ProPublica found last year. In contrast, the average American earning $70,000 a year pays an average federal income tax of 14%, according to the outlet.

The proposal is likely to face staunch opposition from Republicans, giving it a slim chance of becoming law since Republicans control the House of Representatives, said University of Michigan’s Avi-Yonah.

Responding to previous efforts to tax wealthy Americans, Republicans have said the measures discourage business investment and wealth accumulation and hamper economic growth.

“The truth is that if the Republicans control the House, it’s not going to happen now,” Avi-Yonah said. “So it’s rhetoric.”

Increase in the tax on share buybacks

In addition to the billionaire tax, the Biden administration is expected to propose a large increase in the current tax on corporate stock buybacks.

Companies choose to buy shares of their own stock to return money to shareholders as this usually increases the stock price.

The Biden administration objects to the practice because it makes money available to shareholders while avoiding income taxes levied when a company distributes money to shareholders through dividends, the White House says. Instead, stock buybacks return money to investors as capital gains, taxed at a lower rate.

“Stock buybacks allow companies to funnel tax-deferred payouts to wealthy and overseas investors,” the White House said Tuesday.

The Inflation Reduction Act, signed by Biden in August 2022, imposed a 1% tax on share buybacks. For example, if a company buys $100 million worth of stock, it will have to pay $1 million in taxes.

In his State of the Union address, Biden is expected to propose quadrupling that tax to 4%, the White House said.

As with the billionaire tax, the levy on share buybacks is expected to meet strong Republican opposition and has a good chance of becoming law.

Jesse Fried, a Harvard Law School professor specializing in corporate governance, said he opposes a stock buyback tax because the measures force companies to either hold excess capital or invest it in wasteful initiatives.

Instead, share buybacks allow companies to return money to shareholders, who can then invest or spend the money, which boosts economic activity, he said.

“You’re just going to accumulate more money in companies,” he said.

Avi-Yonah, meanwhile, said supporters of a higher tax on share buybacks argued the measure could pressure companies to allocate money to initiatives with greater social benefits.

Proponents of the policy say companies “should use money for other things like hiring,” Avi-Yonah said. “Stock buybacks are regressive and benefit the rich at the expense of everyone else.”