Individual income tax provisions of President Biden’s 2025 Budget

PolicyEngine projects the impact of expanding tax credits and raising taxes on high-income filers.

President Biden introduced his 2025 Budget earlier this month, proposing a mix of reforms to both revenues and outlays. This report applies the PolicyEngine US microsimulation model to analyze four of its main individual income tax reforms:

1. Restoring the 2021 Child Tax Credit expansion
2. Restoring the 2021 Earned Income Tax Credit expansion for filers without qualifying children
3. Raising the top marginal tax rate to 39.6%
4. Increasing the Medicare and Net Investment Income taxes

We estimate that, in 2024 and assuming no behavioral responses, these reforms would cost $40.5 billion, lower poverty 12%, and lower income inequality. 59% of Americans would see a higher net income, while 3% would see a lower net income. This report describes these impacts in more detail, and examines effects on individual households.

See how President Biden’s 2025 Budget affects your household with our personalized calculator.

The reforms

Here we summarize the four provisions of Biden’s 2025 Budget that PolicyEngine models, based on the Department of the Treasury’s details.

Restoring the 2021 Child Tax Credit expansion

Biden’s budget restores the expansion to the Child Tax Credit (CTC) enacted in the American Rescue Plan Act (ARPA). It would make the CTC fully refundable beginning in 2024, and for 2024 and 2025 increase the age limit from 16 to 17. Additionally, it increases the maximum credit per child to $3,600 for children under 6, and $3,000 for older children, phasing out at 5% of income in excess of a threshold dependent on filing status: $150,000 (married joint), $112,500 (head of household), and $75,000 (other). These amounts are not inflation-adjusted.

For example, this reform would provide an additional $3,600 to a single parent of two children, with one below six, if their income is below $6,600. The net benefit would phase out until their earnings reach $164,000, as shown here.

To learn more, read our 2023 report on restoring the ARPA CTC.

Restoring the 2021 Earned Income Tax Credit expansion for filers without qualifying children

Biden similarly proposed restoring ARPA’s expansion of the Earned Income Tax Credit (EITC) for filers without qualifying children. His plan would:

• Increase the phase-in and phase-out rates from 7.65% to 15.3%
• Lower the minimum age from 25 to 19 (or 24 for students)
• Remove the maximum age, currently 65
• Raise the maximum credit from $632 to $1,749 (adjusted for inflation from 2021)

This would change the EITC as follows for a single person between 25 and 65:

Producing a net benefit of up to $1,360 at $13,500 earnings, phasing out until earnings reach $25,000.

To learn more, read our 2023 report on restoring the ARPA EITC.

Increasing the top marginal rate to 39.6%

The President proposed raising the top marginal tax rate from 37% to 39.6%, its value prior to the Tax Cuts and Jobs Act of 2017. The new rate would apply to income above $400,000 for single filers, $425,000 for head of household filers, $450,000 for married filers, and $225,000 for married separate filers. The reform would take effect in 2024, and the thresholds would rise with inflation starting in 2025.

For a single person without itemized deductions, taxes would begin rising at $414,600 ($400,000 plus the standard deduction), and reach $19,400 in additional taxes at $1 million earnings.

Increasing the Medicare and Net Investment Income taxes

Finally, the President proposed increasing both the top Medicare tax rate and top Net Investment Income Tax (NIIT) rate by 1.2 percentage points for individuals with income over $ 400,000. Since this is based on wages or net investment income, it kicks in at $400,000, not the higher amount resulting from the standard deduction. For an individual with $1 million in wages, it would increase their taxes by $7,200.

Provisions not modeled

The Budget introduces three additional individual income tax reforms that PolicyEngine does not yet model:

1. Applying the NIIT to pass-through business income of taxpayers with income above $400,000
2. Tax long-term capital gains and qualified dividends as ordinary income for filers with taxable income above $1 million
3. Repeal “step-up basis” that increases the basis of inherited assets to the value at inheritance
4. Impose a minimum tax of 25% on total income (including unrealized capital gains) for taxpayers with wealth exceeding $100 million

Additionally, it reforms some of the programs we model in additional ways, such as a monthly CTC advance, and introduces many reforms outside the individual income tax. As we enhance our model, we will be able to forecast impacts of these types of reforms.

Combined household impacts

To see the combined impacts of all four reforms on net income and work incentives, we examine two household types: a single person and a married couple with two young children.

Single person

The single person would see a larger EITC at low incomes, then a tax increase when their wages exceed $400,000, reaching a $26,600 total impact at $1 million earnings.

Their marginal tax rate would fall up to 20pp in the earnings range where the EITC phases in further, then rise 15.3 percentage points as it phases out. It would then rise by 1.2pp from $400,000 to $414,600 (due to the additional Medicare rate, before the 39.6% rate kicks in), 5.8pp until earnings reach $623,950 (before they reach the current top marginal rate), and stabilize at a 3.8pp rise. The total marginal rate on top earnings would reach 43.2%.

Family of four

A married couple with two children under six will gain up to $7,200 from the expanded CTC, until their earnings reach $220,000 (assuming only one earner). Their taxes will then rise beginning at $400,000 earnings, and by $1 million earnings their taxes would rise by $27,500.

The reform increases their marginal tax rate, due to making the CTC fully refundable (removing the phase-in that reduces marginal tax rates), phasing out the additional CTC benefit for higher earners, and the high-income tax increases. The marginal tax rate increase stabilizes at 3.8pp for earnings above $770,000.

Nationwide results

We run the PolicyEngine tax-benefit microsimulation model, using our Enhanced Current Population Survey and assuming no behavioral responses, to project budgetary and distributional impacts.

These provisions together would cost $41 billion in 2024 and $35 billion in 2025, according to the PolicyEngine model. While all provisions grow in magnitude, the tax increases grow faster, resulting in a smaller net impact. See Appendix A for a breakdown by provision and comparison to Treasury’s projections.

The net income of the bottom nine deciles would rise, on average, while the top decile’s would fall.

As a percentage of net income, the impact falls monotonically with income decile:

Three in five Americans would see an increase in net income, while three percent–almost entirely in the top income decile–would see it fall.

The Supplemental Poverty Measure would fall 12%, disproportionately among children (31%), women (13%), and Blacks and Hispanics (14–15%).

Deep poverty falls at a similar rate, while income inequality falls 1.7% to 2.7%, depending on the measure.

Conclusion

President Biden’s proposed individual income tax reforms in his 2025 Budget, as analyzed by PolicyEngine, would have notable impacts on American households and the economy. The restoration of the expanded Child Tax Credit and Earned Income Tax Credit from the American Rescue Plan Act, along with the proposed increases in the top marginal tax rate, Medicare tax, and Net Investment Income Tax, are projected to result in a net cost of approximately $41 billion in 2024 and $35 billion in 2025.

The analysis suggests that the reforms would have a progressive impact on income distribution, with the bottom nine deciles experiencing an average increase in net income, while the top decile would see a decrease. The proposed changes are also projected to reduce the Supplemental Poverty Measure by 12%, with varying impacts across demographic groups. Income inequality would also be affected, with reductions ranging from 1.7% to 2.7%, depending on the measure used.

This analysis does not account for potential behavioral responses to the proposed tax changes, and differs from Treasury’s budgetary estimates for reasons described below (Treasury does not provide distributional estimates). As policymakers and the public consider these reforms, it will be crucial to carefully examine the potential impacts and trade-offs associated with the proposed changes to the individual income tax system.

Appendix A: Budgetary breakdown

This table compares PolicyEngine’s estimates in 2024 and 2025 to those of the Treasury Department.

Due to timing considerations — we place the budgetary impact of tax credits in the tax year, while Treasury does so only when paid in advance, mirroring the delivery of most payments in the following year — the combined impact across years provides more comparable numbers than either year in isolation. Here, Treasury estimates $94.4 billion from 2024–25, while PolicyEngine estimates $75.2 billion. This does not fully account for timing considerations, since Treasury allocates part of our 2025 estimates to 2026.

Other deviations could result from multiple causes. For example, we do not model the provision to apply the NIIT to pass-through business income of high-income filers, which occurs prior to the NIIT increase; accounting for this would thus increase our estimate of that provision. Further calibration of our microdata to existing costs of programs could also better align these estimates; for example, to the EITC.

Riley Kotlus contributed to this report.