Poorer Americans get big tax cuts under the Democratic plan, while the rich get raises

People with a low income would get a big tax advantage if legislation proposed by House Democrats this week will become law, while the tax burden for top earners would become heavier.

Taxpayers earning more than $1 million would see an 11% tax increase on their federal taxes under the House Ways and Means Committee plan, according to a estimation by the Joint Committee on Taxation. On the other hand, tax liability for those earning less than $40,000 would fall by at least 24% — with much of the break in the form of tax credits.

“The plan is very effectively targeting high-income taxpayers,” Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, told Yahoo Money.

The House Democrats’ plan proposes to reduce the top rate of individual income tax to 39.6% and raise the top rate for long-term capital gains and qualifying dividends to 25%. In addition, the plan includes a 3% surcharge on individuals with adjusted gross income over $5 million.

For low-income taxpayers, the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) significantly reduce the money owed by these families to the IRS. Both credits were extended this year as part of the pandemic relief, and the plan on the table proposes extending the extension until 2025.

As a result, taxpayers earning between $20,000 and $30,000 would see an 88% reduction, while those earning between $30,000 and $40,000 would see a 24% reduction.

‘See no tax hikes for those making less than $400,000’

Those in the middle of the two extremes earning between $100,000 and $1 million would see their taxes change by less than 2% — either decrease or increase, according to the proposal.

“President Biden, on the campaign trail, promised not to raise taxes on those earning less than $400,000,” Rosenthal said. “The estimates from the Joint Taxation Committee show you don’t see tax increases for those making less than $400,000.”

UNITED STATES - MARCH 09: Rep.  Richard Neal, D-Mass., Left, Chairman of the Way and Means Committee, Rep.  John Yarmuth, D-Ky., chairman of the House Budget Committee, and Speaker of the House Nancy Pelosi, D-Calif., will hold a press conference on Tuesday, March 9, 2021, on the coronavirus emergency law, the American Rescue Plan Act. the Capitol Visitor Center.  (Photo by Tom Williams/CQ-Roll Call, Inc via Getty Images )

UNITED STATES – MARCH 09: Rep. Richard Neal, D-Mass., Left, Chairman of the Way and Means Committee, Rep. John Yarmuth, D-Ky., chairman of the House Budget Committee, and Speaker of the House Nancy Pelosi, D-Calif., will hold a press conference on Tuesday, March 9, 2021, on the coronavirus emergency law, the American Rescue Plan Act. the Capitol Visitor Center. (Photo by Tom Williams/CQ-Roll Call, Inc via Getty Images )

But those taxpayers could face higher taxes if the plan is implemented because of the plan’s other provisions, such as the tax increase on tobacco, nicotine and vape products, Rosenthal said.

The tax proposals could change as Democrats finalize the legislation they hope to pass through reconciliation in the coming weeks, which doesn’t require Republican backing.

“This tax bill, if you take a step back, is a serious increase in tax rates: corporate tax rates, capital gains tax rates,” Rosenthal said. “These are all real tax increases. These are not budget gimmicks.”

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Denitsa is a writer for Yahoo Finance and Dinner, a new personal finance website. Follow her on Twitter @denitsa_tsekova

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