Analyzing President Biden’s 2025 Budget

President Biden’s 2025 budget proposes a 25 percent minimum tax on total income, including unrealized capital gains, for the 0.01 percent of households with at least $100 million in assets. It also scales back other tax breaks for wealthy households. This includes taxing capital gains and dividends at the same rates as wage income for households with more than $1 million in income and closing loopholes for pass-through business owners, private equity, and real estate.

For most households, our progressive income tax system works as intended: higher-income households generally pay a larger share of their incomes in taxes than lower-income ones. However, this relationship breaks down for households at the very top of the income distribution, in large part because wealthy households’ primary source of income — income from unrealized capital gains — is not taxed on annual tax returns.

Capital gains are only taxed when the underlying assets on which the gains are based are sold. Often, wealthy people never sell these assets, instead choosing to pass them — and their untaxed appreciated value — down to their heirs, who will never pay income tax on those gains, contributing to and perpetuating a cycle of income and wealth inequality across generations. Here’s how it works:

The Treasury Department estimates that President Biden’s proposed minimum tax on total income would raise $500 billion over ten years — generated from a small subset of the wealthiest households in the country who often enjoy extremely low average tax rates.

President Biden’s proposal would also help reduce racial disparities. Households of color are overrepresented at the lower end of the income and wealth distributions while white households are overrepresented at the top. The budget’s combination of revenue increases and high-value investments will support economic growth, broaden prosperity, and promote equity by investing in people and communities whose futures have been systematically shortchanged by racism, other forms of discrimination, and deep under-investment.

The President’s budget corrects design flaws in the Earned Income Tax Credit (EITC) by permanently expanding the credit for low-paid workers without children and making younger and older workers eligible, reinstating successful American Rescue Plan policies.

The EITC has long provided a powerful wage boost to families with low incomes. But adults who are paid low wages and are not raising children in their homes get a paltry credit, which was enacted in 1993 and has not been expanded since. Moreover, those aged 19 to 24 and 65 and older are entirely ineligible for the EITC.

This temporarily changed with the Rescue Plan’s enactment in 2021, which raised the maximum EITC for workers without children from roughly $540 to roughly $1,500. It also raised the income limit to qualify from about $16,000 to more than $21,000 for unmarried filers and from about $22,000 to more than $27,000 for married couples. (See chart.) More than 40 percent of the people aged 19 to 24 who received increased benefits from the Rescue Plan’s expanded EITC were people of color.

Congress let this expansion expire at the end of 2021. In 2023, the maximum credit for adults between 25 and 64 not raising children was just $600 and they needed to earn less than $17,640 ($24,210 for married couples) to be eligible. With this expiration, more than 5 million adults are taxed into, or deeper into, poverty each year.

The changes in the President’s budget would make the Rescue Plan fixes permanent, allowing more low-income workers to benefit from the EITC.

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President Biden’s budget for fiscal year 2025 rightly calls for restoring the 2021 American Rescue Plan’s expansion of the Child Tax Credit, which dramatically reduced child poverty, contributing to a record-low child poverty rate of 5.2 percent in 2021. The Rescue Plan’s Child Tax Credit expansion also narrowed racial and ethnic disparities in child poverty rates (see chart).

When that expansion and other pandemic relief expired in 2022, child poverty spiked to 12.4 percent, more than doubling the 2021 rate. If the Rescue Plan expansion had been in place in 2022, 3 million additional children would have been kept out of poverty. These impacts make clear that child poverty is a policy choice, and so policymakers should permanently expand the Child Tax Credit.

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Under current law, the Child Tax Credit phases in slowly as earnings rise and provides no help to children whose families have less than $2,500 in earnings. The maximum credit is $2,000 per child under current law, but because of its “upside-down” structure, some 19 million children receive a partial credit or none at all because their families’ earnings are too low.

The 2021 expansion addressed this issue by providing the full credit to families with low incomes regardless of their earnings (sometimes called “full refundability”); that provision had the largest impact on poverty. The 2021 expansion also substantially increased the amount of the credit, provided half of it on a monthly basis, and made 17-year-old children eligible.

Ample research indicates that providing additional income to families with low incomes helps children thrive, improving their health, educational, and long-term economic outcomes.

The Rescue Plan’s Child Tax Credit expansion contributed to a historic reduction in child poverty in 2021, and ultimately this policy should be reinstated. But the Senate can make progress in reducing child poverty right now by passing the House-passed bipartisan tax bill that includes an expansion of the Child Tax Credit for 16 million children in families with low earnings, helping more than 8 in 10 children who currently get a partial credit or none at all because their families’ earnings are too low. The bill will provide crucial income support to families with low incomes and lift 500,000 or more children above the poverty line when the expansion is fully in effect.

The Biden budget proposes to restore and extend the mandatory IRS funding enacted in the Inflation Reduction Act (IRA), which improves tax compliance and increases tax collections primarily from high-income households while also improving customer service for all tax filers.

After a decade of cuts severely undermined the agency’s ability to enforce the nation’s tax laws and serve taxpayers, the IRA created an $80 billion, ten-year mandatory funding stream — funding provided directly in authorizing law as opposed to funding provided through the annual appropriations process. This funding will enable the IRS to undertake the years-long process of hiring and training more compliance and customer service staff and to make needed technology upgrades. But debt ceiling negotiators last year agreed to rescind $20 billion of that funding.

Because every dollar spent on IRS enforcement raises multiple dollars in revenue from increased tax collections, these cuts to IRS funding cost revenue and add to the deficit. Recent research found that for every $1 the IRS spends auditing a very high-income taxpayer yields over $6 in revenue from audit collections (see chart), or $12 when combined with indirect revenue from increased voluntary compliance.

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The Treasury Department estimates that restoring and extending the mandatory funding would raise a net $236 billion over ten years by ensuring that high-income and high-wealth households pay more of the tax that they already owe under current law but are failing to pay.

President Biden’s 2025 budget calls for ending the 2017 Trump tax law’s tax cuts for people with more than $400,000 in income, including the law’s deeply regressive estate tax cuts. It would further strengthen the estate tax by closing loopholes that allow wealthy households to pass substantial assets to heirs tax-free.

Policymakers have substantially weakened the estate tax in recent decades (see chart). Most recently, the 2017 tax law doubled the amount that a wealthy couple can pass to heirs tax-free from $11 million to $22 million, indexed for inflation. The few estates large enough to remain taxable — fewer than 1 in 1,000 estates nationwide — will receive a tax cut of $4.4 million per couple under the 2017 provisions.

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Moreover, the few estates large enough to potentially face the tax can use loopholes to reduce or eliminate their estate tax liability, such as by artificially valuing their assets at less than their true value or by using certain kinds of trusts to pass considerable assets along tax-free.

The estate tax is a highly progressive tax, affecting only the wealthiest households in the country. The 2017 law’s cuts to the estate tax should end on schedule in 2025. The Biden budget’s proposals to limit egregious estate tax loopholes would strengthen the estate tax and raise around $100 billion over ten years, according to the Treasury Department.

Policymakers could strengthen the estate tax beyond what’s in the President’s budget by restoring the estate tax parameters that were in place in 2009 — that is, returning the exemption to $7 million per couple and reinstating a 45 percent top tax rate. Even with that change, less than 2 percent of estates would be taxable, and it would raise about $160 billion over ten years. These substantial revenues could be used to help finance high-value investments in people and communities.

President Biden’s budget calls for Congress to enact provisions that would better align with the global minimum tax agreement the Administration helped negotiate and a number of countries have begun to implement. Under the agreement, countries commit to setting a 15 percent floor on global corporate tax rates — up from an effective zero percent floor today. These proposals would build on that agreement by ensuring that U.S. multinationals’ foreign profits are taxed at a 21 percent rate and that more foreign profits are subject to U.S. tax. They would also penalize foreign multinationals that operate in the U.S. if they earn profits in a country that does not impose adequate taxes (a part of the international agreement).

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As we’ve highlighted, the 2017 Trump tax cuts were skewed to the rich, expensive, and have failed to deliver on their economic promises. As the debate begins on the future of those tax cuts, policymakers can begin to build a better tax system by revisiting the 2017 law’s permanent corporate tax changes, including its international tax changes that continue to allow U.S.-based multinationals to avoid tax through significant foreign profit shifting (see chart).

The Treasury Department estimates that these and other international tax reform proposals would raise more than $600 billion over ten years.

The 2017 Trump tax cut was skewed to the rich, expensive, and failed to deliver on its economic promises. Few provisions exemplified these three strikes more than the law’s centerpiece: a deep cut in the corporate tax rate from 35 percent to 21 percent. President Biden’s 2025 budget proposes partially reversing this corporate tax cut — central to a much-needed course correction on tax.

This windfall for wealthy shareholders costs the Treasury over $100 billion a year. During the 2017 tax debate, Trump Administration officials claimed the rate cut would “very conservatively” lead to a $4,000 boost in household income. Instead, a rigorous study by economists from the Joint Committee on Taxation and the Federal Reserve Board found that most workers didn’t get an earnings boost (see chart).

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The corporate tax rate cut is unpopular — one reason proponents were determined to make it permanent in 2017. But in proposing to partially reverse to corporate rate cut from 21 percent to 28 percent, the Biden budget says the public deserves to revisit this misplaced priority. This reversal would raise $1.3 trillion over ten years. Those revenues could help make critical investments and improve our fiscal outlook.

President Biden’s new budget effectively opens the 2025 tax debate. The 2017 Trump tax cuts were skewed to the rich, expensive, and failed to deliver on their promises. Next year many, though not all, of these tax cuts expire and policymakers will have to decide the future direction of tax policy. The Biden budget correctly rejects this approach and proposes a much-needed course correction.

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The Biden budget embraces three critical principles that should guide the new course:

• Tax cuts for people making over $400,000 should end on schedule. The President “opposes tax cuts for the wealthy — either extending tax cuts for the top two percent of Americans earning over $400,000 or bringing back deductions and other tax breaks for these households.”
• The tax system needs to raise more revenues from wealthy people and profitable corporations to offset any tax cuts extended or expanded for those with incomes below $400,000, to finance high-value investments in people and communities, and to improve our fiscal outlook. The President “supports paying for extending tax cuts for people earning less than $400,000 with additional reforms to ensure that wealthy people and big corporations pay their fair share, so that the problematic sunsets created by President Trump and congres­sional Republicans are addressed in a fiscally responsible manner.”
• Our priorities need to shift from the interests of wealthy shareholders and others with high incomes toward raising the living standards of low- and moderate-income households, reducing child poverty, and making high-value investments in areas like health, housing, and child care. For example, the centerpiece of the 2017 tax cut was a deep and permanent cut in the corporate tax rate, while its expansion of the Child Tax Credit was temporary and left millions of children behind — and the paltry Earned Income Tax Credit for low-paid workers without children got no boost at all. These priorities need to be reversed.