September 21, 2021

Tax Changes in the House Ways and Means Committee Build Back Better Bill


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NOTE: This report was revised on October 1 to incorporate new estimates of one of the proposals, the 3 percent surcharge on income in excess of $5 million. The revision increased the average tax hike for the richest one percent from 4.3 percent of their income to 4.5 percent of their income. More information is provided in the appendix. 

This analysis examines the bill recently approved by the House Ways and Means Committee and the effects of its tax provisions in 2022. It finds that the bill would make our tax system more progressive, raising taxes overall on the richest 5 percent of Americans and foreign investors, while cutting taxes overall for other income groups, although the effects on specific taxpayers depend on their individual circumstances.

The revenue-raising provisions in the bill would raise $2.1 trillion over ten years according to Congress’s official revenue-estimator, the Joint Committee on Taxation (JCT). The bill’s tax increases fall into three categories. The first would raise individual income taxes (including the personal income tax and other individual income taxes) on the rich. The second would increase corporate income taxes. The third would increase taxes on tobacco and nicotine. This report finds that the vast majority of these tax increases would be paid by the richest 1 percent of Americans and foreign investors. The bill’s most significant tax cuts — expansions of the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) — would more than offset the tax increases for the average taxpayer in all income groups except for the richest 5 percent.

The first category of revenue-raising provisions in the bill, which would increase income taxes for individuals, would affect just 1.6 percent of taxpayers. The richest 1 percent would pay 97 percent of these tax increases and the richest five percent would pay virtually all of them. The second category of tax increases in the bill, which affect corporations, could indirectly affect people in all income groups, but the effects would be concentrated among the richest 5 percent of Americans and a large portion would be paid by foreign investors. The third category of tax increases in the bill, related to tobacco and nicotine, would affect people in all income groups. The total effects of these three types of tax increases would be more than offset by the CTC and EITC changes for the average taxpayer in all income groups except the richest 5 percent.

I. Overall Effects of the Ways and Means Bill’s Tax Provisions

This report examines the most significant tax increases in the Ways and Means bill and finds that for most income groups they are more than offset in the aggregate by the bill’s tax cuts. The revenue-raising provisions analyzed here account for 94 percent of the revenue the bill would raise over a decade according to JCT. They include:

  • The bill’s six most significant income tax increases on individuals, which would all target those with very high incomes and which would altogether raise a little more than $900 billion over a decade according to JCT.
  • The bill’s corporate tax increases, which would raise about $1 trillion over a decade according to JCT.
  • A provision to increase federal taxes on tobacco and nicotine, which would raise $97 billion according to JCT.

This report also incorporates estimates of the bill’s two most significant tax cuts, which are provisions to extend the recently enacted expansions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC). These expansions, which were enacted as part of the American Rescue Plan Act, will expire at the end of this year if Congress does not act. According to JCT, these provisions would make up 63% of the bill’s tax cuts in the first five years it would be in effect.[1] These provisions would:

  • Extend the expansion of the CTC, which includes
    • Increasing the credit from a maximum of $2,000 per child to $3,600 for each child younger than six and $3,000 for each child age six or older through 2025,
    • Extending the increase in the age of eligibility by one year to include 17-year-olds, and
    • Making permanent the repeal of limits on the refundable portion of the credit and restoring eligibility for an estimated one million immigrant children.

(Read ITEP’s full analysis of the CTC expansion.)

  • Extend the expansion of the EITC, which includes:
    • Increasing the maximum EITC from roughly $540 to $1,525 for childless workers making up to nearly $22,000 in tax year 2022.
    • Removing the age limits that prevented working adults without children in the home who are younger than 25 or older than 64 from receiving the credit.

(Read ITEP’s full analysis of the EITC expansion.)

This report analyzes the effects of these provisions in tax year 2022, the first year they would be in effect.

When possible, we use ITEP’s tax model to estimate each provision’s revenue impact and distributional impact to see the effects on people in different income groups. This analysis uses this approach for some of the individual income tax increases and for the expansions of the CTC and EITC.

For other provisions, we start with JCT’s estimated revenue impact and then use the ITEP model to estimate the distributional impacts, in effect accepting JCT’s estimate of how much taxes will be increased and using our model to determine which income groups will pay the tax increase.

Table 1a below breaks down the average tax changes for Americans in each income group into the three categories of tax increases examined in this report and a fourth category made up of the provisions in the bill that expand the CTC and EITC.

Low- and middle-income Americans are not affected at all by the individual income tax increases but they can be affected indirectly by the corporate tax increases and can be affected by the tax increases on tobacco and nicotine.

But, as illustrated in Table 1a, the tax increases for low- and middle-income people would be more than offset in the aggregate by provisions in the bill that expand the CTC and EITC. For example, the average net tax change for the bottom 20 percent in 2022 would be a tax cut of $1,170. (This is the sum of all the different tax changes for the bottom 20 percent.) This is the average net effect for all taxpayers in the group. Those not benefitting from the CTC expansion or the EITC expansion (for example, someone who is retired and has no children and no earnings) would not receive a tax cut from these provisions.

Table 1b below breaks down the total tax change (in thousands) for each category. It shows, for example, that the income tax increases for individuals fall almost exclusively on the very rich. The only exception to this is an insignificant portion that falls on a very small number of well-off taxpayers who have moderate incomes under technical rules. (For example, a person with significant business assets might have losses that technically reduce their income even though the tax code rightly prevents them from using these losses for tax purposes because they often exist only on paper.)

The total corporate tax increase for tax year 2022 would come to about $88 billion. (JCT provides revenue estimates in fiscal years, which we convert into calendar year figures for our purposes.) As explained further on in this report, recent research estimates that 40 percent of the shares of American corporations are owned by foreign investors, who therefore pay 40 percent of the corporate tax increase (about $35 billion) in the first year it is in effect. Table 1b includes this portion of the total tax increase paid by foreign investors.

Behavioral Responses of Taxpayers Can Partly Restrict the Total Revenue Raised

The tables provided in section I of this report are designed to show the distributional effects of tax changes, but they do not necessarily illustrate the total amount of new revenue the government would collect. The revenue impact of tax increases can be restricted by behavioral responses, that is, the ways in which taxpayers change their behavior to partly avoid the newly enacted tax increase. How significant these behavioral effects are is very much debated but for simplicity we roughly replicate the assumptions and methods used by JCT.

As explained in section II, JCT believes that behavioral responses to changes related to capital gains are particularly strong. We find that, using JCT’s assumptions, behavioral effects related to capital gains would reduce the revenue raised from the individual income tax increases by about $51 billion in 2022. This is illustrated in the addendum to Table 1b below.


Table 1c below illustrates the combined effect of all these provisions (the three types of tax increases plus the expansions of the CTC and EITC) for each income group. It includes the average net tax change as a share of income for each group. For example, the average taxpayer among the poorest 20 percent would receive a net tax cut equal to 10 percent of their income. The average taxpayer among the richest 1 percent would receive a net tax increase equal to 4.5 percent of their income.

Table 1d below includes the effects of the two tax cut provisions only, meaning it includes the effects of the CTC and EITC expansions and none of the tax increases, illustrating what we might call the gross tax cuts provided by the bill. The poorest 20 percent of taxpayers would receive 32 percent of the gross tax cuts while the bottom 60 percent of taxpayers would receive 71 percent of the gross tax cuts.


Table 1e below includes the effects of the bill’s tax increases only, excluding the effects of the CTC and EITC expansions, illustrating what might be called the gross tax increases in the bill. It shows that 80 percent of the gross tax increase in 2022 would be paid by the richest 1 percent.

II. Most Significant Income Tax Increases on Individuals

The provisions of the bill that increase income taxes on individuals only affect those with taxable income or adjusted gross income exceeding $400,000 (or much more, in some cases) in keeping with President Biden’s pledge not to increase taxes on people with incomes below that level. The six most significant provisions (in terms of revenue raised over ten years) would:

1. Raise the top personal income tax rate for “ordinary” income from 37 percent to 39.6 percent. The tax law enacted by Congress and President Trump at the end of 2017 cut the top personal income tax rate from 39.6 percent to 37 percent. This provision in the Ways and Means bill would reverse that cut and adjust the top bracket so that it starts at taxable income of $450,000 for married couples, $425,000 for single parents, and $400,000 for singles.

2. Partly repeal the special, lower personal income tax rate for certain income from wealth (long-term capital gains and stock dividends). Currently, capital gains (profits from selling assets) and stock dividends are subject to the personal income tax at much lower rates than other types of income, with a top rate of just 20 percent. Most of the benefits of the special rates for capital gains and dividends go to the richest one percent. As a result, some very well-off individuals pay a lower effective tax rate than taxpayers whose incomes are much smaller. The Ways and Means bill would raise this top rate to 25 percent.

3. Repeal an exception in the 3.8 percent net investment income tax. The Affordable Care Act (ACA) added a 3.8 percent bracket to the Medicare payroll tax for high-earners and created a 3.8 percent net investment income tax (NIIT) so that high-income people would generally pay 3.8 percent of their income whether it came from work or wealth. But a loophole allowed certain active profits from pass-through businesses to escape both taxes. The Ways and Means bill would close this loophole but would phase in the effect of this reform for people with adjusted gross income between $400,000 and $500,000 in the case of an unmarried person and between $500,000 and $600,000 in the case of a married couple.

4. Limit the 20 percent deduction for pass-through business income under sec. 199A. Pass-throughs are businesses whose profits are reported on the personal tax returns of the owners and not subject to the corporate income tax. Proponents of the passthrough deduction may describe it as helping small businesses, but most of its benefits actually go to the richest one percent. The Ways and Means bill would not phase the deduction out even for high-income people (as President Biden has proposed) but instead would limit the total amount of the deduction to $500,000 for married couples and $400,000 for unmarried people.

5. Make permanent the limit on pass-through business losses. Under rules enacted in 2017, when business owners report losses, they cannot use these losses to offset more than $250,000 of their non-business income (or $500,000 of non-business income in the case of married couples). This prevents high-income taxpayers from deducting losses that exist on paper only to reduce the income they report to the IRS.[2] One of the rare provisions in the 2017 tax law that looks good in retrospect, the limit on pass-through losses was set to expire with most of the other personal income tax changes after 2025. The CARES Act controversially suspended it for 2020 and retroactively for 2018 and 2019.[3] The American Rescue Plan Act extended it for one year, through 2026.

6. Create a 3 percent surcharge on adjusted gross income in excess of $5 million. While this proposal does not close any special breaks or plug the convoluted loopholes used by high-income people, it does create a new tax that is relatively simple and that applies to most types of income of the very rich at the same rate.

As illustrated in Table 2a, these tax increases combined would affect just 1.6 percent of taxpayers in the U.S. Virtually all of the tax increases would be paid by the richest five percent, and 97 percent of the tax increases would be paid by the richest one percent.

Table 2b below illustrates the revenue impact of each of these provisions in tax year 2022, excluding effects of the policy change on taxpayers’ behavior that reduce the total amount of revenue raised.
Using the ITEP model, we estimate the revenue impact and the distributional impact of the rate hikes on ordinary income and capital gains and dividends and the surcharge. Limited data make it difficult to precisely model the revenue impact of the change in the net investment income tax and the limit on the 20 percent deduction for pass-through income. For these provisions, we take the revenue impact estimated by JCT and use our model to distribute the tax increase to the appropriate income groups.[4]

While it is helpful to think of these effects as tax increases that would be felt by taxpayers, not all the tax increases shown here would be collected as revenue. Changes in taxation of capital gains, in particular, can affect the behavior of taxpayers in ways that counteract the policy and therefore restrict the amount of revenue that can be raised.

A capital gain is the appreciation on an asset. When the owner of the asset sells it, the capital gain becomes “realized” as income (as the profit from the sale of the asset). Taxpayers can respond to a higher rate on capital gains by holding onto their assets for longer periods before selling them or holding onto assets until they die so that they can pass the assets onto their heirs and take advantage of the “stepped-up basis rule” that exempts unrealized gains at death. In this way, taxpayers can partly avoid the tax increase that would otherwise result from the higher rate on capital gains.[5]

President Biden proposed to address this problem by sharply limiting the tax break for unrealized capital gains on assets passed on to heirs. His reform would tax most of these unrealized capital gains when wealthy individuals die. This reform would block many of the behavioral effects that limit the revenue raised from rate hikes on capital gains. The Ways and Means Committee nonetheless chose to not include this reform in its bill.

Table 2c illustrates the revenue impact of the income tax increases in a way that takes into account these behavioral effects for the proposal to raise the top rate on capital gains and dividends and the proposal to create a surcharge (which would apply to capital gains just as it would apply to other types of income).[6] These estimates adopt the assumptions used by JCT, which are themselves controversial.

Congress’s official revenue estimator, JCT, assumes that capital gains income is very elastic in its relationship with the tax rate imposed on it. The higher the tax rate on capital gains, the more people with assets will use various techniques to avoid paying the increased rate. While JCT’s methods can be opaque, it is understood by experts that JCT believes that capital gains have a long-term elasticity of negative 0.68. This means that if the rate on capital gains was raised by 10 percent, the amount of capital gains income reported (the amount of capital gains “realized”) would decline by about 6.8 percent. (Actual calculations are much more complicated.)

The provision to raise the top tax rate on capital gains to 25 percent would apply to gains realized after September 13, the day the bill was introduced. The surcharge would not take effect until the start of next year, which would create even greater behavioral effects initially because taxpayers would have time to change their affairs in ways to avoid the tax increase. In this situation, JCT assumes an even larger behavioral response in the short-term.[7] This can cause the revenue imapct to be dramatically lower in the early years the policy is in effect. In later years, the surcharge is expected to have a consistent, significant revenue impact.

Experts are not in unanimous agreement on the assumptions used by JCT. Some research suggests that high-income individuals do not avoid tax increases on capital gains as easily as JCT assumes.[8]

III. Corporate Tax Increases

The Ways and Means bill includes provisions that raise about $1 trillion in corporate income taxes over ten years. A little more than half of this would come from increasing the corporate income tax rate from 21 percent to 26.5 percent (well below the rate of 35 percent that was in effect before enactment of the 2017 tax law). The rest would come from provisions that restrict and eliminate special breaks and loopholes, particularly those related to offshore profits

For example, under current law, some offshore profits of American corporations are not taxed at all because they fall within an exclusion (equal to a 10 percent return on tangible offshore investments). The Ways and Means bill would cut this break in half, meaning offshore profits would still be excluded except to the extent that they exceed 5 percent of a company’s tangible offshore investments. The Ways and Means bill could therefore preserve some of the incentive for companies to invest offshore rather than in the U.S. to shield some of their offshore profits from U.S. taxes.

Under current law, when offshore profits of American corporations are subject to U.S. taxes, they generally are subject to a rate of 10.5 percent, just half the rate that applies to domestic profits, which means offshore profits are more advantageous than profits generated in the U.S. The Ways and Means bill would ensure that these offshore profits would be taxed at a combined rate (including both U.S. taxes and foreign taxes) of at least 16.5 percent.

These tax increases (the hike in the corporate tax rate and the changes for offshore profits) are all paid directly by corporations, but economists generally believe that individuals bear the tax in the long run, even if there is some debate over exactly who bears how much of it.

Most analysts believe that the bulk of the corporate tax is borne by the owners of corporate stocks and other business assets, which are mostly (but not entirely) owned by well-off individuals. The Joint Committee on Taxation (JCT) assumes that working people eventually bear a quarter of the impact of a corporate tax hike (in the form of a wage reduction), but also assumes that it takes several years for this to happen. Like JCT, ITEP assumes that labor bears none of the cost in the first year that a corporate income tax increase goes into effect, and that the cost falls entirely on the owners of corporate stocks and business assets. We use capital income (income from these assets) as a proxy for ownership of these assets.

This leads us to find that low- and middle-income people indirectly bear a small fraction of the corporate tax increase in the bill. They own a small fraction of U.S. corporate stocks and other business assets, receive a small fraction of the income that these assets generate, and therefore would be little affected by the tax increase.

A large portion of the shares in American corporations are owned by foreign investors, which means they would indirectly pay a large portion of the corporate tax increase. In 2013, JCT explained that it believed that 10.8 percent of shares of American corporations were owned by foreign investors.[9] Others find that the foreign-owned fraction is much higher. Steve Rosenthal and Theo Burke at the Tax Policy Center estimate that in 2019 foreign investors owned 40 percent of the shares in American corporations.[10] We therefore assume that 40 percent of the corporate tax increase is indirectly borne by foreign investors while the other 60 percent is indirectly borne U.S. residents who own corporate stocks and other business assets.

IV. Increase in Federal Taxes on Tobacco and Nicotine.

The bill would make one substantial change to federal excise taxes, increasing the federal tax on cigarettes by just over $1 per pack. The bill would also increase tax rates on other tobacco products and would create a new tax on nicotine used in vapor products. The bill is apparently designed to equalize tax rates between the various types of tobacco and nicotine products. Unlike the personal and corporate income tax provisions discussed above, tax increases on tobacco and nicotine would clearly fall most heavily on low-income smokers.

ITEP’s consumption tax model forecasts the consumption of cigarettes by residents of each state, by income level. Because there is little data available on consumption of nicotine used in vapor products, we assume consumption of vapor products is distributed identically to consumption of traditional cigarettes. We model a behavioral adjustment to the increased cigarette tax (which could take the form either of less consumption or more off-the-books consumption) at a level that is consistent with JCT’s estimate that these tax increases would raise $9.5 billion a year in the near term.

V. Conclusion

This report reaches conclusions that may differ slightly from those reached by JCT and other analysts for several reasons. This report does not include every tax provision in the Ways and Means bill. (It includes 94 percent of the tax increases and 63 percent of the tax cuts, as already explained.) It focuses on the effects for calendar year 2022, whereas some analyses of the revenue impact focus on fiscal years. This report differs from JCT in that we assume a larger share of the corporate tax increases will be borne by foreign investors, based on the latest research concerning amount of stock they own in U.S. corporations. This analysis generally defines individual income as money received from work, investments or government benefits, whereas other analysts use a more expansive definition of income.

Despite these differences between ITEP’s methods and those of other analysts, it is likely that most analysts will come to the same general conclusion. The Ways and Means bill is defined by tax increases that mostly affect the rich and tax cuts that flow mostly to everyone else. There are exceptions. For example, the bill’s tax increase on tobacco and nicotine affects people at all income levels and the corporate tax increases can indirectly affect people at all income levels. But if this bill is enacted, no one who is not extremely well-off will calculate a tax increase on their 1040 for tax year 2022. The tax increases on tobacco and corporations, to the extent that they are felt by low- and middle-income people, would be more than offset for the average taxpayer in all but the top income groups. The Ways and Means bill would make our tax system much more progressive than it is today.


Appendix: Methodology Update for 3 Percent Surcharge on Income Exceeding $5 Million

Our initial estimation of the 3 percent surcharge on adjusted gross income (AGI) in excess of $5 million was limited by the fact that state-by-state data provided by the IRS, which we use to guide our modeling, does not break the richest taxpayers into income groups beyond those whose income is more than $1 million. This makes it is difficult to estimate exactly how much income would be subject to the surcharge in each state. In our revised estimates, we supplement our model data for this proposal with off-model estimates using more detailed national data from the IRS and also more detailed data from the state tax departments, which help us better understand the distribution of income and returns among very-high-income families.

We were able to obtain tabular data for five subnational jurisdictions (California, New Jersey, New York, Vermont, and the District of Columbia) on the number of returns and amount of income flowing to taxpayers with income in excess of $5 million. For our revised estimates, we use those data—in combination with data both from the IRS and from our model—to forecast the number of returns and amount of income that would be affected by the surcharge in those locales in 2022.

In the remaining 46 states, we assume that within each state’s very-high-income population (constituting returns with adjusted gross income in excess of $1 million), approximately 10 percent of returns and approximately 50 percent of adjusted gross income are found in tax units with adjusted gross income in excess of $5 million, which is consistent with what we observe in the national data and the limited data from state tax departments that we have. From there we again use a combination of IRS data and data from our model to forecast the impacts of the surcharge in 2022. When summing our results across states, this approach allows us to accurately reflect the nationwide distribution of very-high-income returns as reported in IRS tables.


[1] The other tax cut provisions make up a small share of the bill’s total tax cuts. The next largest tax cut behind the CTC and EITC expansions is an expansion of a credit for childcare and adult care, which makes up just 4.5% percent of the bill’s total tax cuts between 2022-2026.

[2] Steve Wamhoff, “The CARES Act Provision for High-Income Business Owners Looks Worse and Worse,” Institute on Taxation and Economic Policy, April 24, 2020.

[3] Steve Wamhoff, “Partying Like It’s 2017: How Congress Went Overboard on Helping Businesses with Losses,” Institute on Taxation and Economic Policy, Updated April 24, 2020.

[4] For the reform to the net investment income tax, we start with the resulting tax increase according to JCT’s estimate (converted from JCT’s fiscal year figure to a calendar year figure) and assume it is distributed to people who have pass-through business income, phasing the tax increase in for married couples with AGI between $500,000 and $600,000 and unmarried people with incomes between $400,000 and $500,000, as specified in the proposal. For the proposal to cap the total amount of pass-through income deduction under section 199A, we again start with the resulting tax increase estimated by JCT. We assume that the universe of people who could be affected by this tax increase have pass-through business income exceeding five times the cap that would be imposed by the proposal. (For example, married people are subject to a cap of $500,000, and since the deduction is equal to, at most, 20 percent of pass-through business income, that means no married couple could be affected unless they have more than $2.5 million in pass-through business income.) We then distribute the total tax increase estimated by JCT to these taxpayers proportionally based on the size of their pass-through business income.

[5] Steve Wamhoff, “Biden’s Plan Will Stop Jeff Bezos and Elon Musk from Avoiding Billions in Taxes,” Fortune, June 9, 2021

[6] Following the approach of JCT, we take the behavioral response to capital gains tax rate changes into account when estimating revenue impact but not when estimating distribution. 

[7] JCT has pointed to research concluding that the short-term elasticity can be negative 1. See Joint Committee on Taxation, Estimating Taxpayer Bunching Responses to the Preferential Capital Gains Tax Rate Threshold, September 10, 2019. JCX-42-2019. JCX-42-19 | Joint Committee on Taxation (

[8] Natasha Sarin, Larry Summers, Owen Zidar, Eric Zwick, Rethinking How We Score Capital Gains Tax Reform, NBER Working Paper No. w28362, revised September 9, 2021. The authors argue that JCT’s assumptions rely on studies that are incomplete or out of date. For example, JCT relies on studies showing that wealthy people respond to a rate increase on capital gains by holding onto their assets, but the studies only follow people for a couple of years and fail to see that the wealthy will eventually sell a large portion of those assets within a decade or so, which means they will pay taxes on them even at the higher rate. The authors argue that the studies are out of date because today wealthy people invest more heavily in pass-through businesses and other assets that are less liquid than corporate stocks, meaning the owners have less discretion over exactly when to sell or hold onto them.

[9] Joint Committee on Taxation, “Modeling the Distribution of Taxes on Business Income,” October 16, 2013, JCX-14-13.

[10] Steve Rosenthal and Theo Burke, “Who’s Left to Tax? US Taxation of Corporations and Their Shareholders,” Tax Policy Center, October 27, 2020.