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Democrats' proposed tax hikes probably won't affect you — in fact, they'll help you buy an electric vehicle and put solar panels on your house

Jul 30, 2022, 22:44 IST
Business Insider
Senate Majority Leader Chuck Schumer and Sen. Joe ManchinDrew Angerer/Getty Images
  • Sen. Manchin's surprise spending bill would put billions toward the climate and prescription drug prices.
  • The bill, aimed at reducing inflation, is paid for by taxes on corporations and wealthy investors.
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It was the deal heard around the world: Sen. Joe Manchin, a centrist Democrat who wields his majority-making vote to heavily influence Democrats' agenda, had negotiated a package with Senate Majority Leader Chuck Schumer.

The Inflation Reduction Act of 2022 is, as the name suggests, aimed at bringing down inflation. It would put billions towards climate spending and slash prescription drug prices. Rather than hiking taxes on individuals, or imposing a broad surtax on the ultra-wealthy — both previously proposed to cover spending — the package is narrowly targeting ultra-wealthy investors and corporations, while also stepping up IRS enforcement. That income will help pay for assistance to Americans who want to buy electric vehicles or make energy efficient upgrades to their homes.

"We will pay for all of this by requiring big corporations to pay their fair share of taxes, with no tax increases at all for families making under $400,000 a year," President Joe Biden said in a statement.

Economists largely say the vast majority of Americans are spared from tax increases under the legislation. Democrats have sought to wall off most families except the very richest ones from getting hit with new taxes.

Kimberly Clausing, a former senior Treasury Department official, said the average American's tax bill is "absolutely" not going to be affected under the legislation.

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"Are you a tax cheat? If not, the IRS money won't affect you," Clausing, a tax professor at the UCLA School of Law, told Insider. "Are you a big corporation that earns over a billion dollars and pays less than 15%? If not, there's no increase in your taxes."

However, Democrats intend to close the carried interest tax break that allows hedge fund managers and venture capitalists to pay a lower tax rate on income made from their investments. That provision would only impact investors making over $400,000.

"For the person at home, it's not going to raise their taxes. It's a loophole closer for very highly paid people who buy and sell companies," Samantha Jacoby, a senior legal tax analyst at the Center on Budget and Policy Priorities, told Insider.

Closing the carried interest loophole seems to be a strong priority for Manchin. The West Virginia senator name-checked it in an interview with West Virginia reporter Hoppy Kercheval.

But Republicans assailed the measure, and think that fellow Democratic centrist Sen. Kyrsten Sinema — who has repeatedly drawn the line on tax hikes — may pour cold water on the measure.

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"It's sort of funny for carried interest to be the tail wagging the dog, because it's a relatively modest revenue component of the overall package," Steve Rosenthal, a senior fellow at the Tax Policy Center, told Insider.

For most taxpayers, the package actually contains credits to incentivize clean energy adoption. Taxpayers would be able to get thousands in rebates for energy efficient home improvements, such as electric heat pumps, stoves, and solar panels.

They also stand to qualify for tax credits that cut the cost of purchasing an electric vehicle. Under the bill, Americans qualify for a $4,500 tax credit to buy used electric vehicles, depending on their annual income. For new EV's, the amount increases to $7,500.

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