Biden proposes billionaire's tax, aid for homebuyers. Here's what experts think.

Biden vowed to raise taxes on the wealthy and help the middle class.

March 8, 2024, 2:19 PM

President Joe Biden touted U.S. economic performance in his State of the Union Address on Thursday as he celebrated what he called "America's comeback."

Still, he struck a defiant tone when setting forth a vision focused on hiking taxes for wealthy individuals and corporations while improving prospects for the middle class.

"When they do well, the poor have a way up and the wealthy still do very well," Biden said. "We all do well."

Economists who spoke to ABC News lauded proposals to raise taxes on corporations and billionaires as sources of welcome potential revenue to address ballooning U.S. debt, but they cautioned about a slight cooldown of economic growth if some corporations opt to headquarter overseas.

A proposal of tax credits for first-time homebuyers elicited applause from economists about a much-needed jolt for the housing market, but some questioned whether the government support would be enough to make a substantial difference.

"Businesses are making a lot of money, and the wealthy have done very, very well," Mark Zandi, chief economist at Moody's Analytics, told ABC News. "That's the most logical way to go to raise revenue to address the long-term fiscal problem."

The White House did not immediately respond to a request for comment.

Here's what economists said about the policies proposed in Biden's State of the Union address:

Billionaire's tax

Biden put forward a billionaire's tax that would set a minimum 25% tax for the nation's 1,000 billionaires, generating an estimated $500 billion in revenue over the next 10 years.

The measure would help eat away at U.S. debt while taxing funds with relatively little effect on economic output, Bruce Sacerdote, an economics professor at Dartmouth University, told ABC News.

The U.S. debt stands at a staggering $34 trillion and is on pace to grow an additional $20 trillion by 2033, according to a Congressional Budget Office report last year.

The federal debt amounts to one of "the biggest long term problems facing the country," Sacerdote said.

"Proposals that can raise revenue in ways that don't severely crimp economic activity make a lot of sense," Sacerdote added.

Over a roughly 30-year period from 1992 to 2020, the wealthiest 400 families in the U.S. paid an average inflation-adjusted income tax rate of 12%, according to a study in August from Danny Yagan, an economist at the University of California, Berkeley.

Wealthy individuals pay a low tax rate in part due to sophisticated workarounds that allow them to shelter their funds, Steve Allen, an economist at North Carolina State University's Poole College of Management, told ABC News.

"People with huge amounts of wealth have crack accountants to try to put their money where they'll get the highest return," Allen said. "It's hard to write a law for all the ways of shopping investments to avoid taxes."

Corporate tax hike

During his speech on Thursday night, Biden confronted corporations for what he considers a failure to pay enough taxes to support widely shared economic growth.

"I'm not anti-corporation, but I grew up in a home where trickle-down economics didn't put much on my dad's kitchen table," Biden said.

He proposed a tax increase that would raise the corporate tax rate to 28%, bringing it well above the 21% rate set under a 2017 tax cut measure. The tax rate, however, would remain lower than the 35% rate in place before that tax cut enacted by former President Donald Trump.

PHOTO: Treasury Secretary, Janet Yellen speaks during a press conference after attending the G7 Finance Ministers meeting at Winfield House on June 5, 2021 in London.
Treasury Secretary, Janet Yellen speaks during a press conference after attending the G7 Finance Ministers meeting at Winfield House on June 5, 2021 in London.
Justin Tallis/Getty Images

Biden also put forward a measure that would raise the minimum tax for large corporations to 21%, expanding upon the global minimum rate established in recent years at 15%.

As with the billionaire's tax, economists responded positively to the corporate tax hike as a means of generating extra revenue and slashing the federal debt. They warned, however, that the measure risks downward pressure on economic performance if some corporations choose to locate abroad instead of paying the higher tax.

Business investment in the U.S. among typical firms that received the 2017 tax cut rose 20% compared to the expected amount in the absence of the measure, according to a working paper released earlier this month by a group of researchers at universities and the U.S. Treasury.

The tax cut, however, did not generate enough business activity to make up for the lower rate, thereby increasing U.S. debt, the study found.

"People who make investments go where the best deals are and they have choices in a global economy," Allen said.

Sacerdote echoed such worries but noted that the administration's simultaneous focus on the global minimum corporate tax rate would help protect against some of the risk of corporations fleeing abroad.

"I think the efforts to do this in coordination with other countries are really important," Sacerdote said.

A White House official disputed concerns about businesses headquartering overseas, saying the administration's efforts to secure a global corporate tax minimum make it unlikely that companies will find a better tax environment elsewhere. Even more, the official said, little evidence suggests that the tax cut under Trump stimulated domestic business investment.

Tax credit for homebuyers

Biden proposed a $5,000 tax credit for first-time homebuyers to put toward their mortgage, which he said amounts to an estimated $400 per month.

In addition, the White House has put forward a $10,000 tax credit for families who sell their starter homes. In theory, the measure would loosen up the housing market, since many homebuyers have clung to their current low-rate mortgages rather than take on a new home at much higher rates.

a White House official told ABC News the administration believes the tax credits can make a substantial difference for homebuyers when coupled with a proposal that would increase the supply of homes.

The average interest rate for a 30-year fixed mortgage has soared to 6.88%, rebounding after a steady decline at the end of last year, according to a report from Freddie Mac on Thursday.

Looking back further, that figure has skyrocketed from an average 30-year fixed mortgage rate of 3.76% prior to when the Fed began raising interest rates in March 2022, data shows.

Economists cheered the effort to thaw the frozen housing market but warned that the tax incentives may not be enough for homebuyers to overcome the cost of sky-high mortgage rates.

"Here's an eternal truth in economics about taxes: Tax more of it, you get less of it. And tax less of it, you get more of it," Allen said.

But the tax credit for first-time homebuyers only takes a small chunk out of a massive expense, Andrew Levin, an economics professor at Dartmouth College and a former Fed economist, told ABC News.

"I'm worried that this could be too small to make a real difference," Levin said.

"People who can go ahead and buy a new house right now would do it anyway and get the credit," he added. "And the people who can't get one right now, this wouldn't be enough to change the situation so they could go ahead."