A strong economy means more Americans are earning $400K. What's it mean for their taxes?
Daniel de Visé, USA TODAY
Updated 6 min read
During the 2020 presidential campaign, candidate Joe Biden presented voters with a bold pledge: He wouldn’t raise taxes on anyone earning less than $400,000.
President Biden has carried the same promise, and the same round sum, into his reelection campaign in 2024. If your income falls short of $400,000, you’re immune to tax hikes. If you earn more than that, your taxes may go up, and you just might be audited by the IRS.
But a lot more people make $400,000 now than in 2020.
Between 2019 and 2023, the number of American households earning more than $400,000 swelled by nearly half, from 2.6 million to an estimated 3.8 million out of roughly 131 million households. The figures come from census data compiled by the Economic Innovation Group, a public policy think tank based in Washington, D.C.
Earnings are up for most Americans, both because of a strong economy and in response to rising consumer prices. Average hourly wages rose by more than one-fifth between January 2020 and April 2024, from $28.44 to $34.75, federal data show.
President Joe Biden announced plans to tax corporations and those making over $400,000, in an effort to lower the country's financial deficit during a speech in New Hampshire.
$400,000 doesn't have the same buying power in 2024
And $400,000 doesn’t have the same buying power. If you adjust the figure for inflation, a $400,000 salary in January 2020 would be worth about $486,000 now.
“Back then, $400,000 was a more notable number,” said Jonathan Swanburg, a certified financial planner in Houston.
Perhaps it is too much to ask a candidate to apply a cost-of-living adjustment to a pithy campaign pledge. If Biden hit the trail in 2024 promising not to raise taxes on anyone earning less than $486,000, voters might react with puzzlement.
And therein, some economists say, lies one of several problems with invoking an arbitrary figure when setting fiscal policy.
“I think it’s kind of a ridiculous line to draw in the first place,” said Michael Strain, director of economic policy studies at the American Enterprise Institute, another Washington think tank.
“The threshold is not indexed to inflation, and it’s not indexed to average growth,” Strain said. “So, over time, more and more households are going to get hit by it.”
Biden administration officials say the $400,000 pledge was meant to signal his commitment not to raise taxes on anyone but the rich and his quest to ensure that the very rich don’t cheat on their taxes.
“President Biden’s pledge not to raise taxes on anyone making less than $400,000 is a clear, direct and easy-to-understand commitment to the American people that, as long as he is president, he will not raise taxes on the middle class by one penny," said Jeremy M. Edwards, a White House spokesperson, adding that the president "will instead fight for a tax system that finally asks the wealthiest Americans and largest corporations to pay their fair share”
Philadelphia, Pennsylvania | President Joe Biden speaks during a campaign event at Martin Luther King Recreation Center on April 18, 2024 in Philadelphia. Biden is on a multi-city tour of the battleground state of Pennsylvania where he renewed calls to increase taxes on wealthy Americans and large corporations.
Even now, over 95% of Americans earn less than $400,000
Biden officials note that, even now, well over 95% of American households earn less than $400,000.
The $400,000 pledge sits well with advocates for progressive taxation, the principle of raising the tax rate for higher earners.
“If you’re making $400,000, you’re wealthier than 97% of Americans, and your median net worth is $6.4 million,” said David Kass, executive director of the nonprofit Americans for Tax Fairness. “Obviously, these are folks who are doing well.”
Republicans and Democrats alike are campaigning on protecting Americans from tax hikes. Republicans want to extend tax cuts enacted across the board by President Donald Trump in 2017. Democrats say they would protect all but the very wealthy.
Both parties frustrate some economists, who say the government desperately needs new tax revenue to plug a yawning federal deficit, $1.7 trillion in 2023.
“There’s this kind of myth out there that there’s disagreement between the parties over tax increases,” Strain said. “The reality is that one party, the Republicans, don’t want to raise taxes on anybody, and the other party, the Democrats, don’t want to raise taxes on 98% of the people, and that’s just a terrible situation to be in.”
The Economic Innovation Group charted the growing ranks of Americans who earn $400,000 for The Wall Street Journal, which published the data in a story that asked whether the campaign pledge might ultimately backfire. That report focused on data from 2022. For this report, the think tank updated some of its figures through 2023.
Many $400,000 households live in blue states
According to the group’s research, two-thirds of the households that earned more than $400,000 in 2022 live in states Biden carried in 2020.
These four states and the District of Columbia had the most families earning more than $400,000 in 2022:
District of Columbia (6.1% of households earning at least $400,000)
California (4.4%)
Massachusetts (4.2%)
New Jersey (4.1%)
Connecticut (4%)
The state with the fewest families above the $400,000 line, 0.8%, was Mississippi.
Who earns $400,000 a year, anyway?
A growing number of lucrative professions now pay $200,000 or even $300,000 a year, on average, based on federal data for 2023. A few jobs pay $400,000.
Among the top earners:
Pediatric surgeons ($449,320 in average annual salary)
Cardiologists ($423,250)
Radiologists ($353,960)
Chief executives ($258,900)
Psychiatrists ($256,930)
Airline pilots ($250,050)
The president’s $400,000 pledge, simple as it sounds, gets complicated when it comes to policy decisions.
Does it mean possible tax increases for a couple who earn $400,000 together, or only for an individual who earns that much alone? And is it gross income, or taxable income?
Biden’s most recent budget raises the top income tax rate from 37% to 39.6% for single filers who make more than $400,000 in taxable income. For married couples, however, the bar rises to $450,000.
How does the $400,000 income threshold work with audits?
And what about audits? Biden has pledged to raise billions of dollars in new revenue by going after wealthy tax cheats, again pledging not to target anyone earning less than $400,000.
But does that cutoff for audits apply only to individual earners with $400,000 income, or to entire households? On that point, Biden’s pledge was “a little vague,” said one senior IRS official, who spoke on condition of anonymity because he was not allowed to be quoted for attribution.
Either way, the official said, a household with income of $400,000 or even $500,000 does not face a much higher risk of audit now than in years past.
The most recent audit data, for tax year 2021, show an overall audit rate of 0.2%, or roughly one audit for every 500 returns from individual taxpayers.
For returns that showed income of $500,000 to $1 million, the audit rate rose to 0.3%: one audit for every 333 returns.
Daniel de Visé covers personal finance for USA TODAY
