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Home • Research • Federal Taxes • Research • Details and Analysis of President
Biden’s Fiscal Year 2025 Budget Proposal


DETAILS AND ANALYSIS OF PRESIDENT BIDEN’S FISCAL YEAR 2025 BUDGET PROPOSAL

June 21, 2024October 30, 202419 min readBy: Garrett Watson, Erica York, William
McBride, Alex Muresianu, Huaqun Li, Alex Durante
Print

Table of Contents
Long-Run Economic Effects of President Biden’s FY 2025 BudgetRevenue Effects of
President Biden’s FY 2025 BudgetDistributional Effects of President Biden’s FY
2025 BudgetTop Tax Rates Under President Biden’s FY 2025 BudgetOther
ProvisionsConclusionModeling Notes





TOPLINE PRELIMINARY ESTIMATES

11-Year Revenue (Trillions)Long-run GDPLong-Run WagesLong-Run FTE Jobs

+$2.1T

-1.6%

-1.1%

-666K

Source: Tax Foundation General Equilibrium Model, June 2024.

Related: Harris Tax Proposals



President Biden’s State of the Union address presented a vision of higher taxes
for American businesses and high earners combined with carveouts, credits, and
more complex rules for taxpayers at all income levels. Soon after, the president
released his FY 2025 budget outlining how the White House would implement the
president’s taxA tax is a mandatory payment or charge collected by local, state,
and national governments from individuals or businesses to cover the costs of
general government services, goods, and activities. vision, indicating a gross
tax hike of about $5.3 trillion from 2024 to 2034.

On a gross basis, we estimate Biden’s FY 2025 budget would increase taxes by
about $4.4 trillion over that period. After taking various credits into account,
the increase would be about $3.4 trillion. The tax increases would substantially
increase marginal tax rates on investment, saving, and work, reducing economic
output by 1.6 percent in the long run, wages by 1.1 percent, and employment by
666,000 full-time equivalent jobs.

The tax changes Biden proposes fall under three main categories: additional
taxes on high earners, higher taxes on US businesses—including increasing taxes
that Biden enacted with the InflationInflation is when the general price of
goods and services increases across the economy, reducing the purchasing power
of a currency and the value of certain assets. The same paycheck covers less
goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it
leaves taxpayers less well-off due to higher costs and “bracket creep,” while
increasing the government’s spending power. Reduction Act (IRA)—and more tax
credits for a variety of taxpayers and activities. The combination of policies
would move the tax code further away from simplicity, transparency, and
neutrality, while making the US economy less competitive. The increase in the
corporate tax rate and the additional taxes on top earners would result in US
top marginal tax rates on income that are among the highest in the developed
world.


LONG-RUN ECONOMIC EFFECTS OF PRESIDENT BIDEN’S FY 2025 BUDGET

We estimate the tax changes in the president’s budget would reduce long-run GDP
by 1.6 percent, the capital stock by 2.7 percent, wages by 1.1 percent, and
employment by about 666,000 full-time equivalent jobs. The budget would decrease
American incomes (as measured by gross national product, or GNP) by 1.3 percent
in the long run, reflecting offsetting effects of increased taxes and reduced
deficits, as debt reduction reduces interest payments to foreign owners of the
national debt.

Raising the corporate income taxA corporate income tax (CIT) is levied by
federal and state governments on business profits. Many companies are not
subject to the CIT because they are taxed as pass-through businesses, with
income reportable under the individual income tax. rate to 28 percent is the
largest driver of the negative effects, reducing long-run GDP by 0.6 percent,
the capital stock by 1.1 percent, wages by 0.5 percent, and full-time equivalent
jobs by 128,000.

Our economic estimates likely understate the effects of the budget since they
exclude two novel and highly uncertain yet large tax increases on high earners
and multinational corporations, namely a new minimum tax on unrealized capital
gains and an undertaxed profits rule (UTPR) consistent with the OECD/G20 global
minimum tax model rules. Nor do we include the budget’s unspecified research and
development (R&D) incentives that would replace the lower tax rate on
foreign-derived intangible income (FDII).




TABLE 1. LONG-RUN ECONOMIC EFFECTS OF PRESIDENT BIDEN’S FY 2025 BUDGET

Gross Domestic Product (GDP)-1.6% Gross National Product (GNP)-1.3% Capital
Stock-2.7% Wage Rate-1.1% Full-Time Equivalent Jobs-666,000

Source: Tax Foundation General Equilibrium Model, June 2024.

The budget would include the following major changes, beginning in 2025, unless
otherwise noted.


MAJOR BUSINESS PROVISIONS MODELED:

 * Increase the corporate income tax rate from 21 percent to 28 percent
   (effective 2024)
 * Increase the corporate alternative minimum tax introduced in the Inflation
   Reduction Act from 15 percent to 21 percent (effective 2024)
 * Quadruple the stock buyback tax implemented in the Inflation Reduction Act
   from 1 percent to 4 percent (effective 2024)
 * Make permanent the excess business loss limitation for pass-through
   businesses
 * Further limit the deductibility of employee compensation under Section 162(m)
 * Increase the global intangible low-taxed income (GILTI) tax rate from 10.5
   percent to 21 percent, calculate the tax on a jurisdiction-by-jurisdiction
   basis, and revise related rules (some provisions effective 2024)
 * Repeal the reduced tax rate on foreign-derived intangible income (FDII)


MAJOR INDIVIDUAL, CAPITAL GAINS, AND ESTATE TAXAN ESTATE TAX IS IMPOSED ON THE
NET VALUE OF AN INDIVIDUAL’S TAXABLE ESTATE, AFTER ANY EXCLUSIONS OR CREDITS, AT
THE TIME OF DEATH. THE TAX IS PAID BY THE ESTATE ITSELF BEFORE ASSETS ARE
DISTRIBUTED TO HEIRS. PROVISIONS MODELED:

 * Expand the base of the net investment income tax (NIIT) to include nonpassive
   business income and increase the rates for the NIIT and the additional
   Medicare tax to reach 5 percent on income above $400,000 (effective 2024)
 * Increase top individual income taxAn individual income tax (or personal
   income tax) is levied on the wages, salaries, investments, or other forms of
   income an individual or household earns. The U.S. imposes a progressive
   income tax where rates increase with income. The Federal Income Tax was
   established in 1913 with the ratification of the 16th Amendment. Though
   barely 100 years old, individual income taxes are the largest source of tax
   revenue in the U.S. rate to 39.6 percent on income above $400,000 for single
   filers and $450,000 for joint filers (effective 2024)
 * Tax long-term capital gains and qualified dividends at ordinary income tax
   rates for taxable incomeTaxable income is the amount of income subject to
   tax, after deductions and exemptions. For both individuals and corporations,
   taxable income differs from—and is less than—gross income. above $1 million
   and tax unrealized capital gains at death above a $5 million exemption ($10
   million for joint filers)
 * Limit retirement account contributions for high-income taxpayers with large
   individual retirement account (IRA) balances
 * Tighten rules related to the estate tax
 * Tax carried interest as ordinary income for people earning more than $400,000
 * Limit 1031 like-kind exchanges to $500,000 in gains


MAJOR TAX CREDITA TAX CREDIT IS A PROVISION THAT REDUCES A TAXPAYER’S FINAL TAX
BILL, DOLLAR-FOR-DOLLAR. A TAX CREDIT DIFFERS FROM DEDUCTIONS AND EXEMPTIONS,
WHICH REDUCE TAXABLE INCOME, RATHER THAN THE TAXPAYER’S TAX BILL DIRECTLY.
PROVISIONS MODELED:

 * Extend the American Rescue Plan Act (ARPA) child tax credit (CTC) through
   2025 and make the CTC fully refundable on a permanent basis (effective 2024)
 * Permanently extend the ARPA earned income tax credit (EITC) expansion for
   workers without qualifying children (effective 2024)

We also modeled various miscellaneous provisions for corporations, pass-through
businesses, and individuals, including several energy-related tax hikes largely
pertaining to fossil fuel production. While the budget improperly characterizes
fossil fuel provisions as subsidies, many are deductions for costs (or
approximations of costs) incurred.


MAJOR PROVISIONS NOT MODELED:

 * Repeal the base erosion and anti-abuse tax (BEAT) and replace it with an
   undertaxed profits rule (UTPR) consistent with the OECD/G20 global minimum
   tax model rules
 * Replace FDII with unspecified R&D incentives
 * Create a 25 percent “billionaire minimum tax” to tax unrealized capital gains
   of high-net-worth taxpayers
 * Permanently extend the ARPA premium tax credits (PTCs) expansion (we do
   include PTCs in our distributional analysis)
 * Expand federal rules on drug pricing provisions
 * Spending program changes
 * Provide additional Internal Revenue Service (IRS) funding




TABLE 2. DETAILED ECONOMIC EFFECTS OF PRESIDENT BIDEN’S FY 2025 BUDGET

CSV Excel PDF Print


ProvisionChange in GDPChange in GNPChange in Capital StockChange in WagesChange
in Full-time Equivalent Jobs Raise the top tax rate on individual income to
39.6%-0.10%-0.10%-0.10%0%-86,000 Tax unrealized capital gains at death over $5
million and tax capital gains over $1 million at
39.6%-0.1%-0.3%-0.20%-0.10%-39,000 Limit 1031 like-kind exchanges to $500,000 in
gainLess than –0.05%Less than –0.05%Less than –0.05%Less than –0.05%-2,000
Expand the net investment income tax base to active pass-through business
income-0.20%-0.20%-0.30%-0.20%-41,000 Raise the net investment income tax rate
from 3.8% to 5% and raise the additional Medicare tax from 0.9% to
2.1%-0.20%-0.20%-0.30%-0.10%-177,000 Tax carried interest as ordinary incomeLess
than –0.05%Less than –0.05%Less than –0.05%Less than –0.05%-4,000 Impose new
limits on large retirement account balances and increase minimum required
distributions and misc. taxes on savingLess than –0.05%-0.10%Less than
–0.05%Less than –0.05%-7,000 Tighten estate tax rulesLess than –0.05%Less than
–0.05%Less than –0.05%Less than –0.05%-3,000 Raise the corporate tax rate from
21% to 28%-0.60%-0.60%-1.10%-0.50%-128,000 Increase the corporate book minimum
tax rate from 15% to 21%Less than -0.05%Less than -0.05%-0.10%Less than
-0.05%-8,000 Raise the stock buyback excise tax from 1% to
4%-0.10%-0.10%-0.10%-0.10%-15,000 Changes to the international tax
system-0.10%-0.10%-0.10%Les than -0.05%-13,000 Limit executive compensation
deductibility under Section 162(m)-0.10%-0.10%-0.10%0%-106,000 Misc. corporate
tax increasesLess than –0.05%Less than –0.05%-0.10%Less than –0.05%-3,000 Make
permanent the pass-through loss limitation and misc. pass-through tax
increasesLess than –0.05%Less than –0.05%-0.10%Less than –0.05%-9,000 Make the
American Rescue Plan Act EITC expansion permanent and make the CTC fully
refundableLess than –0.05%Less than –0.05%Less than –0.05%Less than
–0.05%-24,000 Impact of spending and budget deficit0%0.5%0%0%0 Total Economic
Effect-1.6%-1.3%-2.7%-1.1%-666,000


Source: Tax Foundation General Equilibrium Model, June 2024. Items may not sum
due to rounding.


REVENUE EFFECTS OF PRESIDENT BIDEN’S FY 2025 BUDGET

The budget covers the 10-year period from 2025 through 2034, but also proposes
tax increases and credits starting in 2024. As such, we present a revenue table
below that includes the revenue change over the traditional 10-year budget
window and the full 11-year period including 2024. We refer to the score over
the full 11-year period throughout.

Across the major provisions modeled by Tax Foundation, we estimate the budget
raises $2.2 trillion of tax revenue from corporations and $1.4 trillion from
individuals from 2024 through 2034. We relied on estimates from the White House
Office of Management and Budget (OMB) for provisions we did not model, including
the billionaire minimum tax, UTPR, various international tax changes for oil and
gas companies, smaller international tax changes, improvements to tax compliance
and administration, and unspecified R&D incentives to replace FDII.

In total, accounting for all provisions, including those estimated by OMB, we
estimate the budget raises nearly $4.4 trillion in gross revenue from tax
changes over the 11-year budget window.

Expanded tax credits and the unspecified incentive to replace FDII reduce the
gross revenue by $876 billion and $118 billion, resulting in a net tax increase
of $3.4 trillion. Outside of tax changes, the budget includes additional
spending increases and cost savings including expanding the drug pricing
provisions passed in the Inflation Reduction Act for a net increase in spending
of $1.2 trillion, summarized in Table 3.

After accounting for all changes in revenue and spending, we estimate the net
effect of the budget would be to reduce the deficit by about $2.1 trillion
through 2034 on a conventional basis. On a dynamic basis, factoring in reduced
tax revenues resulting from the smaller economy, the deficit reduction drops to
$1.5 trillion.

However, the projected decrease in budget deficits is highly uncertain. About
$742 billion of the increased revenue comes from untested sources—the 25 percent
minimum tax on high earners and the UTPR.

The 25 percent minimum tax on unrealized capital gains has several novel
features and would for the first time attempt to collect tax on a broad set of
assets on a mark-to-market basis or on imputed returns, i.e., without a clear
market transaction to firmly establish any capital gain or loss. It would apply
to taxpayers with wealth greater than $100 million, requiring a new annual
wealth reporting system.

It is unclear how many taxpayers would be subject to the reporting requirements
and liable for the tax, or how taxpayers would react to such a regime. Based on
the OMB estimate (converted to calendar years), the minimum tax would raise
about $517 billion, though it is unclear what OMB assumed regarding avoidance
behavior, valuation disputes, and other factors that could dramatically change
this result.

Another highly uncertain minimum tax proposed in the budget is a UTPR and other
provisions intended to align with the OECD/G20 global minimum tax model rules
applicable to corporate profits earned internationally. Several countries are in
the process of implementing global minimum tax rules including a UTPR, though
our analysis and that of the Joint Committee on Taxation (JCT) indicate a great
deal of uncertainty in forecasting how the rules will ultimately evolve across
the globe.

Additionally, the JCT finds much uncertainty in estimating revenue effects of a
potential UTPR in the US, ranging from a loss of $57 billion over a decade to a
gain of $237 billion, depending on how other countries implement their rules.
The OMB estimates the UTPR would raise about $140 billion over the budget
window, which is about a quarter of what was predicted in last year’s budget.
OMB estimates another $85 billion would come from disallowing foreign tax
credits for oil and gas companies and other sundry tax increases.

The budget discusses additional policies that would significantly reduce
revenue, such as extending tax changes from the Tax Cuts and Jobs Act (TCJA) for
people making below $400,000 after 2025 when they otherwise expire. The budget
does not, however, factor in the cost of such an extension. Similarly, the
budget extends the larger CTC through 2025, but further extending the policy
would cost more than $130 billion per year, adding more than $1 trillion to the
deficit by 2033. Continuing both policies past 2025 would wipe out most, if not
all, of the budget’s projected deficit savings.




TABLE 3. ADDITIONAL NET SPENDING IN PRESIDENT BIDEN’S FY 2025 BUDGET

Spending ItemAmount (Billions) Childcare and early learning, health care, drug
pricing, education, and housing-$986 Paid leave and home care-$505 Public
health-$418 Other, including reductions in discretionary spending$681 Total
Spending Excluding Tax Credits-$1,228 Expanded tax credits (includes expansion
costs for 2023)-$876 Total Spending Including Tax Credits-$2,104


Source: Budget of the US Government Fiscal Year 2025; Tax Foundation General
Equilibrium Model. Note: negative signs denote a net increase in the federal
budget deficit, while positive values indicate a net decrease in the federal
budget deficit.




TABLE 4. REVENUE EFFECTS OF PRESIDENT BIDEN’S FY 2025 BUDGET

Provision (Billions of
Dollars)202420252026202720282029203020312032203320342025-20342024-2034
Individual Provisions Raise top tax rate on individual income to
39.6%$48.3$49.3$10.8$11.9$12.3$12.8$13.3$13.7$14.2$15.4$16.2$169.8$201.9 Tax
unrealized capital gains at death over $5 million and impose a 39.6% tax rate on
capital gains over $1
million$0.0-$6.0$3.1$11.3$24.7$27.0$28.5$29.6$28.7$36.3$37.8$221.0$183.2 Expand
the net investment income tax base to active passthrough
income$22.3$22.9$22.7$24.4$24.7$25.2$25.8$26.2$25.9$29.5$30.3$257.5$249.5 Raise
the net investment income tax rate from 3.8% to
5%$11.4$9.3$9.8$10.9$11.8$12.1$12.4$12.5$12.1$14.1$14.5$119.6$116.5 Raise the
additional Medicare tax from 0.9% to
2.1%$20.1$20.3$20.5$22.6$23.6$24.9$26.3$27.7$28.9$30.7$32.6$258.0$245.5 Make
permanent the limit on excess business losses for passthrough
firms$0.0$1.7$2.3$2.6$5.2$13.4$13.7$10.4$9.7$9.6$9.4$78.0$68.6 Limit 1031
like-kind exchanges to $500K in
gain$0.0$1.1$1.9$1.9$2.0$2.1$2.1$2.2$2.2$2.3$2.4$20.3$17.9 Tax carried interest
as ordinary income$0.0$0.6$0.7$0.7$0.7$0.7$0.7$0.7$0.7$0.7$0.7$6.7$6.0 Create
new limitations on high-income taxpayers with large retirement account balances
and increasing minimum required distributions and miscellaneous tax increases on
saving*$0.0$10.3$9.1$7.0$5.9$5.4$5.2$5.1$4.8$5.6$5.7$63.9$58.1 Tighten estate
and gift tax rules$0.0$0.0$5.9$8.4$8.9$9.3$9.9$10.5$11.0$11.8$12.5$88.1$75.6
Miscellaneous tax increases on passthrough
firms**$0.0$4.3$5.3$3.9$2.3$1.0$0.6$0.8$0.9$1.1$1.3$21.5$20.3 Total Individual
Revenue$102.1$113.9$92.1$105.4$122.0$133.8$138.4$139.1$139.2$157.1$163.5$1,304.4$1,406.6
Corporate Provisions Raise corporate tax rate to
28%$87.7$91.5$87.1$91.4$91.7$88.4$90.2$92.1$97.3$100.4$105.7$935.8$1,023.5 Raise
corporate alternative minimum tax from 15% to
21%$27.0$30.8$31.6$17.3$11.2$16.1$11.7$20.9$17.3$14.8$9.3$180.9$207.9 21% GILTI
minimum tax rate and other GILTI
changes$0.0$36.4$22.9$23.6$24.3$24.8$25.9$26.6$28.0$29.0$29.9$271.4$271.4 Repeal
FDII$0.0$12.9$9.2$9.7$10.3$11.2$11.7$12.2$13.4$13.4$14.2$118.2$118.2 Section 265
changes and world interest
limitation$6.3$14.1$14.7$15.2$16.2$17.1$17.9$18.7$19.5$20.2$20.7$174.3$180.6 4%
excise tax on stock
buybacks$0.0$7.8$6.1$5.2$7.2$9.2$7.9$8.1$9.5$9.9$8.1$78.9$78.9 Modification to
162(m) limit on deduction of excessive employee
remuneration$0.0$27.9$23.6$27.6$33.8$32.3$28.9$23.6$21.0$21.9$25.2$265.7$265.7
Miscellaneous corporate tax
increases***$0.0$7.4$6.5$7.0$7.2$7.2$7.6$8.0$8.6$9.3$10.0$78.8$78.8 Total
Corporate
Revenue$121.0$228.9$201.6$197.0$201.9$206.3$201.7$210.1$214.6$219.0$223.1$2,104.2$2,225.1
Other Revenue Changes (Not Scored by Tax Foundation ) Impose a 25% minimum tax
on unrealized gains for taxpayers with net wealth over $100
million$0.0$12.6$51.8$57.1$59.7$60.3$59.8$57.8$52.3$51.0$54.4$516.9$516.9 Levy
an undertaxed profits rule on large multinational
firms$0.0$19.5$21.8$21.7$22.1$22.1$22.2$22.3$22.6$25.1$25.6$225.0$225.0 Replace
FDII with an incentive for
R&D****$0.0-$12.9-$9.2-$9.7-$10.3-$11.2-$11.7-$12.2-$13.4-$13.4-$14.2-$118.2-$118.2
Changes to tax compliance and
administration$0.8$3.7$3.3$2.9$2.1$1.9$2.0$2.0$2.1$2.2$2.3$24.5$25.3 Total Other
Revenue
Changes$0.8$22.8$67.8$72.0$73.5$73.3$72.3$69.9$63.6$64.9$68.1$648.2$649.0 Gross
Revenue
Total$224.0$378.6$370.7$384.1$407.7$424.4$424.1$431.3$430.8$454.4$468.9$4,175.1$4,399.0
Tax Credits Reinstate the expanded ARPA child tax credit through 2025 and make
permanent full CTC
refundability-$110.4-$106.3-$13.0-$13.0-$13.0-$13.0-$13.1-$13.1-$13.0-$13.2-$13.2-$223.7-$334.1
Make permanent the expanded ARPA earned income tax
credit*****-$4.1-$12.6-$15.4-$15.9-$16.1-$16.3-$16.6-$16.8-$17.1-$16.6-$16.6-$160.0-$164.2
Make permanent the expanded ARPA premium tax
credits$0.0$0.0-$20.3-$22.2-$23.7-$25.1-$26.5-$27.4-$29.0-$31.0-$33.0-$238.2-$238.2
Miscellaneous tax
credits******-$22.1-$20.9-$11.8-$6.6-$6.8-$8.4-$9.9-$11.3-$12.6-$13.8-$15.0-$117.1-$139.1
Total Tax
Credits-$136.6-$139.8-$60.5-$57.5-$59.6-$62.9-$66.0-$68.6-$71.7-$74.5-$77.8-$739.0-$875.5
Total Conventional
Revenue$87.4$225.8$301.0$316.8$337.8$350.4$346.4$350.5$345.7$366.5$376.9$3,317.8$3,405.2
Total Dynamic
Revenue$47.1$184.5$264.7$269.6$280.2$282.6$269.9$264.9$249.9$258.9$258.5$2,583.6$2,630.7
Mandatory and discretionary spending changes (net of spending
reductions)-$47.9-$150.3-$156.2-$169.2-$176.9-$165.1-$152.9-$102.4-$69.5-$15.4-$22.3-$1,180.2-$1,228.1
Conventional Deficit Impact (before interest
costs)$39.5$75.5$144.8$147.6$160.9$185.3$193.5$248.1$276.2$351.1$354.6$2,137.7$2,177.1
Dynamic Deficit Impact (before interest
costs)-$0.8$34.2$108.5$100.4$103.3$117.5$117.0$162.5$180.4$243.5$236.2$1,403.4$1,402.6


*Note: "Miscellanious tax increases on saving include changes to tax rules on
digital assets and a new tax on electricity consumption when mining digital
assets.
**Note: "Miscellanious passthrough tax increases include rules changing
depreciation deduction recapture for real estate transactions and limitations on
basis shifting for partnerships.
***Note: "Miscellanious tax increases on corporations include increased taxes on
fossil fuel production, changes to REIT taxes, new rules for corporate
affiliation tests, changes to corporate aviation taxes, and taxing certain
corproate distributions as dividends.
**** Note: The Treasury Greenbook for FY 2025 proposes using the revenue from
repealing FDII to "incentivize R&D in the United States more directly and
effectively," and leaves the question of whether it is a tax or spending
incentive ambiguous.
*****Note: Our estimates of permanent refundability for the Child Tax Credit do
not incorporate a revenue effect for nonfilers.
*****Note: "Miscellanious tax credits include changes to the the adoption tax
credit, tax exclusion for student loan income, tax credits for homebuyersn and
home sellers, the neighborhood homes tax credit, the low income housing tax
credit, the new markets tax credit, tax-preferred treatment to certain Federal
and tribal scholarship and education loan programs, the work opportunity tax
credit, and the employer-sponsored tax credit for childcare.

Source: Budget of the U.S. Government Fiscal Year  2025, Tax Foundation General
Equilibrium Model, March 2024.



DISTRIBUTIONAL EFFECTS OF PRESIDENT BIDEN’S FY 2025 BUDGET

The budget would raise marginal income tax rates faced by higher earners and
corporations while expanding tax credits for lower-income households. Our
modeling of the distributional effects on after-tax incomeAfter-tax income is
the net amount of income available to invest, save, or consume after federal,
state, and withholding taxes have been applied—your disposable income. Companies
and, to a lesser extent, individuals, make economic decisions in light of how
they can best maximize their earnings. does not include the impact of drug
pricing provisions, the 25 percent billionaire minimum tax, the undertaxed
profits rule, miscellaneous tax credits, IRS enforcement, or spending program
changes.

The budget would redistribute income from high earners to low earners. The
bottom 60 percent of earners would see increases in after-tax income in 2025,
while the top 40 percent of earners would see decreases. After-tax income for
the bottom quintile would increase by 16.1 percent, largely from expanded tax
credits. In contrast, the top 1 percent of earners would experience a 8.7
percent decrease in after-tax income.

After the expanded CTC expires, the bottom quintile would see a smaller 5.8
percent increase in after-tax income in 2034 on a conventional basis while the
top three quintiles would see decreases in their after-tax incomes. The top 1
percent would see a 6.3 percent decrease in after-tax income.

On a long-term dynamic basis, the smaller economy reduces after-tax incomes
relative to the conventional analysis. On average, tax filers in the top four
quintiles would experience a drop in after-tax incomes, while the bottom
quintile would still see an increase, albeit reduced to 4.2 percent, driven by
the permanent changes to the CTC, EITC, and PTC.




TABLE 5. DISTRIBUTIONAL EFFECTS OF TAX CHANGES IN PRESIDENT BIDEN’S FY 2025
BUDGET (PERCENT CHANGE IN AFTER-TAX INCOME)

Income GroupConventional, 2025Conventional, 2034Dynamic, Long Run 0% -
20.0%16.10%5.80%4.20% 20.0% - 40.0%2.80%1.20%-0.30% 40.0% -
60.0%0.50%-0.20%-1.70% 60.0% - 80.0%-0.30%-0.40%-1.70% 80.0% -
100%-2.80%-2.20%-3.60% 80.0% - 90.0%-0.50%-0.40%-1.90% 90.0% -
95.0%-0.70%-0.60%-2.00% 95.0% - 99.0%-1.90%-1.60%-3.10% 99.0% -
100%-8.70%-6.30%-7.60% Total-1.00%-1.10%-2.60%


Note: We do not model the distribution of miscellaneous tax credits or unmodeled
provisions listed above unless otherwise noted.

Source: Tax Foundation General Equilibrium Model, June 2024. Items may not sum
due to rounding.


TOP TAX RATES UNDER PRESIDENT BIDEN’S FY 2025 BUDGET

President Biden’s budget proposals would raise top tax rates on corporate
income, capital gains income, and individual income to levels that are out of
step with the rest of the world.

Raising the corporate income tax rates from 21 percent to 28 percent, a policy
Biden has pushed for since the 2020 campaign, would significantly worsen the
competitive position of US businesses and reduce prospects for business
investment and workers. Including the average of state rates, the top combined
marginal rate on corporate income under current law is 25.6 percent, and Biden’s
proposal would increase it to 32.2 percent—the second highest corporate tax rate
in the OECD (behind Colombia at 35 percent).



The corporate income tax is the most harmful tax for economic growth and its
many problems have led countries around the world to reduce corporate tax rates
considerably over the last 40 years to an average of about 23 percent as of
2023. The US had the highest corporate tax rate in the OECD prior to the TCJA,
which lowered the US corporate tax rate to be roughly average among OECD
countries. Recent studies have determined that lowering the corporate tax rate
significantly boosted investment in the United States, a long-term process that
continues to yield economic benefits, including gains in workers’ wages.

On top of a higher statutory corporate tax rate, Biden has proposed increasing
the rate of the new corporate alternative minimum tax on book incomeBook income
is the amount of income corporations publicly report on their financial
statements to shareholders. This measure is useful for assessing the financial
health of a business but often does not reflect economic reality and can result
in a firm appearing profitable while paying little or no income tax. from 15
percent to 21 percent. The tax was enacted in August 2022 as part of the IRA and
scheduled to go into effect starting in 2023, but the IRS postponed its
implementation because of the complexity of enforcing it. Taxpayers are still
awaiting guidance on several significant questions related to the CAMT, and it
remains questionable whether the tax is even feasible. It has certainly failed
thus far as an effective minimum tax.

Biden also proposes quadrupling the IRA’s 1 percent excise taxAn excise tax is a
tax imposed on a specific good or activity. Excise taxes are commonly levied on
cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement
activities, and betting, and typically make up a relatively small and volatile
portion of state and local and, to a lesser extent, federal tax collections. on
stock buybacks. Stock buybacks are one of the ways businesses return value to
their shareholders. Companies can return earnings to shareholders by issuing
dividends (namely cash payments) or with stock buybacks (purchasing shares of
their own company). As much as 95 percent of the money returned to shareholders
from stock buybacks subsequently gets reinvested in other public companies.
Quadrupling the tax rate would likely discourage firms from pursuing stock
buybacks, potentially tilting toward more dividend issuances instead, and could
discourage investment.

On personal income taxes, too, the Biden budget proposals would further push up
marginal tax rates. Under current law, the top combined marginal tax rateThe
marginal tax rate is the amount of additional tax paid for every additional
dollar earned as income. The average tax rate is the total tax paid divided by
total income earned. A 10 percent marginal tax rate means that 10 cents of every
next dollar earned would be taken as tax. on individual income is 42.5 percent,
consisting of the top federal rate (37 percent) and the average of state and
local income tax rates. Biden’s proposal would raise it to 45.1 percent by
increasing the top rate from 37 percent to 39.6 percent. The rate ignores the 5
percent additional Medicare tax, half of which falls on the employer, in order
to make comparisons to the personal income tax regimes in the OECD database.
Including the employee-side portion of this tax would raise the top rate to 47.6
percent.

In the case of capital gains taxes in particular, the changes would push the
United States beyond international norms. The top combined marginal tax rate on
capital gains income under current law is 29.1 percent, consisting of the 20
percent capital gains taxA capital gains tax is levied on the profit made from
selling an asset and is often in addition to corporate income taxes, frequently
resulting in double taxation. These taxes create a bias against saving, leading
to a lower level of national income by encouraging present consumption over
investment. rate, the 3.8 percent net investment income tax (NIIT), and the
average of state and local income tax rates on capital gains. By taxing high
earners’ capitals gains as ordinary income and raising the NIIT to 5 percent,
Biden’s proposals would raise the top tax rate on capital gains to 49.9
percent—the highest in the OECD.

Aiming to address Medicare’s growing budgetary shortfalls, the president would
raise the hospital insurance (HI) payroll taxA payroll tax is a tax paid on the
wages and salaries of employees to finance social insurance programs like Social
Security, Medicare, and unemployment insurance. Payroll taxes are social
insurance taxes that comprise 24.8 percent of combined federal, state, and local
government revenue, the second largest source of that combined tax revenue. for
people earning more than $400,000 from 0.9 percent to 2.1 percent, expand the
base of the NIIT to include active business income, and raise the NIIT to 5
percent for high earners. The changes would raise top tax rates on labor,
investment, and business income while not doing enough to put entitlements on a
path toward solvency.

The combined integrated rate on corporate income reflects the two layers of tax
corporate income faces: first at the entity level through corporate taxes and
again at the shareholder level through capital gains and dividends taxes. Under
current law, the top combined integrated tax rate on corporate income
distributed as capital gains is 47.2 percent. Under Biden’s proposals, it would
rise to a jaw-dropping 66 percent—the highest in the OECD.



Biden’s FY 2025 budget would yield combined top marginal rates on individual
income in excess of 50 percent in five states and DC: New York (54.4 percent),
Oregon (53.5 percent), California (52.9 percent), New Jersey (51.4 percent),
Hawaii (50.4 percent), and DC (50.4 percent).



Additionally, President Biden reintroduced his proposal to raise the effective
tax rates paid by households with net worth over $100 million. The proposal
requires high net worth households to pay a 25 percent minimum tax rate on an
expanded definition of income that includes unrealized capital gains. Under the
minimum tax, households would pay tax on capital gains even if the underlying
asset has not yet been sold, operating as a prepayment for future capital gains
tax liability.

The billionaire minimum tax, as it is commonly known, would increase the
complexity of the tax code by using a non-traditional and difficult-to-measure
definition of income. It would require formulaic rules for valuing different
types of assets, payment periods that vary by asset type, and a separate tax
system to deal with illiquid assets. This tax design goes well beyond
international norms, where capital gains are taxed when realized and at lower
rates than the US in many cases.

Biden would also expand the disallowance of deductions for employee compensation
above $1 million (Section 162m) to cover all employees of C corporations. The
cap currently applies to the CEO, CFO, and the next three highest-paid employees
of a corporation, and due to ARPA is already scheduled to expand to the next
five additional highest-paid employees beginning after 2026.

Expanding the disallowance makes it costlier for corporations to attract and
retain top talent. It would mean both the corporate and individual top tax rates
would apply to wages, resulting in top tax rates of 70 percent or more including
state taxes. If the $1 million threshold is not indexed to inflation, over time
the tax would hit more than just the C-suite.


OTHER PROVISIONS

Seeking to address the very real problem of housing affordability, Biden has
called for several proposals to subsidize home purchases and boost the
low-income housing tax credit, including a tax credit worth $5,000 per year for
two years for middle-class, first-time homebuyers. The president would also
offer a one-year tax credit worth up to $10,000 for middle-class households who
sell a starter home to help improve starter home availability. Finally, the
president proposes to provide up to $25,000 in down payment assistance for
first-generation homebuyers.

Boosting demand through subsidies is likely to cause housing prices to increase
further. What is needed is a greater supply of housing, which would be best
accomplished at the state and local level by reforming zoning rules and at the
federal level by reforming tax depreciationDepreciation is a measurement of the
“useful life” of a business asset, such as machinery or a factory, to determine
the multiyear period over which the cost of that asset can be deducted from
taxable income. Instead of allowing businesses to deduct the cost of investments
immediately (i.e., full expensing), depreciation requires deductions to be taken
over time, reducing their value and discouraging investment. rules for
residential structures.

For developers, the president would expand the low-income housing tax credit
(LIHTC) and create a new neighborhood homes tax credit to build or renovate
affordable houses. This approach would be an inefficient way to build new homes
as the existing LIHTC is expensive for the homes produced, with much of the
credit value going to developers and financing agencies.

President Biden would renew the expanded child tax credit from the 2021 American
Rescue Plan Act, which would raise the CTC value from $2,000 to a maximum value
of $3,600 while removing work and income requirements. This CTC expansion would
have major fiscal costs totaling over $1 trillion over 10 years above the
current-policy CTC. If we include the underlying CTC expansion from the Tax Cuts
and Jobs Act that expires at the end of 2025, the cost approaches $2 trillion
over 10 years.

In addition to the CTC expansion, the president would expand the EITC and make
permanent the expanded Affordable Care Act (ACA) premium tax credits that are
scheduled to expire at the end of 2025.

President Biden also committed to preserving and extending the additional
funding appropriated to the IRS as part of the Inflation Reduction Act. Biden
argues this would help raise revenue from higher earners who evade taxes and
would also improve taxpayer services. Much of this new revenue may take time to
appear as the IRS trains new staff and spends time identifying evasion and
enforcing the tax law. However, the other components of Biden’s tax plan will
push the code in a more complex direction, making the job of the IRS to enforce
the law more difficult.

Finally, the president recommitted to not raising taxes on people earning under
$400,000, arguing that he would fully pay for expiring TCJA individual tax
changes with “additional reforms” that would further raise taxes on high earners
and businesses. The unspecified reforms would need to total at least $1.4
trillion to cover TCJA extension for people earning under $400,000.


CONCLUSION

The president’s tax policy proposals as outlined in the State of the Union
address would make the tax code more complicated, unstable, and anti-growth,
while also expanding the amount of spending in the tax code for a variety of
policy goals not related to revenue collection.

We estimate the proposed budget would reduce deficits by about $1.5 trillion on
a dynamic basis through 2034 compared to the White House estimate of $3.2
trillion. However, neither estimate includes the cost of the intended extension
of the TCJA tax cuts for people earning less than $400,000 or for the proposed
expanded CTC post-2025, which would wipe out most of the touted deficit
reduction.

The budget also assumes an unrealistically high rate of growth in the economy,
especially considering the large tax increases proposed on businesses and high
earners that will slow growth. The budget assumes real GDP will grow at 2.2
percent annually in the last five years of the budget window, while the CBO
assumes real GDP will grow about 1.9 percent annually over this period. By
raising marginal tax rates on investment, saving, and work, we find Biden’s FY
2025 budget would reduce long-run economic output by 1.6 percent, wages by 1.1
percent, and employment by 666,000 full-time equivalent jobs.

In sum, President Biden is proposing extraordinarily large tax hikes on
businesses and the top 1 percent of earners that would put the US in a
distinctly uncompetitive international position and threaten the health of the
US economy. The budget ignores or makes unrealistic assumptions about the fiscal
cost of major proposals as well as economic growth under higher marginal tax
rates on work and investment, concealing what is likely to be a substantial cost
borne by American workers and taxpayers.


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MODELING NOTES

We use the Tax Foundation General Equilibrium Tax Model to estimate the impact
of tax policies, including recent updates allowing detailed modeling of US
multinational enterprises. The model produces conventional and dynamic revenue
and distributional estimates of tax policy. Conventional estimates hold the size
of the economy constant and attempt to estimate potential behavioral effects of
tax policy. Dynamic revenue estimates consider both behavioral and macroeconomic
effects of tax policy on revenue. The model also produces estimates of how
policies impact measures of economic performance such as GDP, GNP, wages,
employment, capital stock, investment, consumption, saving, and the trade
deficit.

Note, however, our conventional and dynamic estimates for the stock buyback tax
do not account for behavioral shifting from buybacks to dividends, which would
also shift the individual income tax baseThe tax base is the total amount of
income, property, assets, consumption, transactions, or other economic activity
subject to taxation by a tax authority. A narrow tax base is non-neutral and
inefficient. A broad tax base reduces tax administration costs and allows more
revenue to be raised at lower rates. from capital gains to dividends.

Regarding the budget’s proposed changes to the GILTI regime, we modeled most of
the major changes including the 75 percent GILTI inclusion rate,
country-by-country application, the reduction in the foreign tax credit (FTC)
haircut to 5 percent, elimination of the qualified business asset investment
(QBAI) exemption, and elimination of the FOGEI exclusion. We did not model the
changes allowing carryforward of GILTI FTCs and losses, repeal of the high-tax
exemptionA tax exemption excludes certain income, revenue, or even taxpayers
from tax altogether. For example, nonprofits that fulfill certain requirements
are granted tax-exempt status by the Internal Revenue Service (IRS), preventing
them from having to pay income tax. for subpart F, or the tax increases on dual
capacity taxpayers.


WHERE DO THE CANDIDATES STAND ON TAXES?

Tax policy has become a significant focus of the US 2024 presidential election.

Compare 2024 Tax Plans

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TOPICS

 * Business Capital Gains and Dividends Taxes
 * Business Tax Compliance and Complexity
 * Business Tax Expenditures, Credits, and Deductions
 * Business Taxes
 * Corporate Income Taxes
 * Environmental, Energy, and Transportation Taxes
 * Estate, Inheritance and Gift Taxes
 * Excise Taxes
 * High-Income Taxpayers, Progressivity, and Inequality
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TAGS

 * Tags:
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LOCATIONS

 * Locations:
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AUTHORS

 * Expert
   
   
   GARRETT WATSON
   
   Senior Policy Analyst, Modeling Manager
 * Expert
   
   
   ERICA YORK
   
   Senior Economist, Research Director
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   WILLIAM MCBRIDE
   
   Vice President of Federal Tax Policy & Stephen J. Entin Fellow in Economics
 * Expert
   
   
   ALEX MURESIANU
   
   Senior Policy Analyst
 * Expert
   
   
   HUAQUN LI
   
   Senior Economist
 * Expert
   
   
   ALEX DURANTE
   
   Economist

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