US Democratic Presidential Nominee Tax Proposals

On August 20, former United States Vice President Joe Biden formally accepted the Democratic nomination for US President. However, questions about Biden’s tax proposals, such as when and how fast he would push for tax hikes, remain to be clarified heading into the fall campaign.

Complicating matters, the US has recently spent trillions of dollars in response to the consequences resulting from the coronavirus pandemic, and the US is likely to spend trillions more. Someone has to bear the cost of all this spending and increased taxes appear to be the answer.

Biden’s proposed tax plan has two major components: higher taxes on both high-income individuals and businesses, coupled with more generous tax credits for specific activities and households. However, given the current economic landscape, with households and businesses still reckoning with the economic fallout of the coronavirus pandemic, Biden’s proposed tax changes may have to be significantly modified if he wins the election.

Using the Tax Foundation General Equilibrium Model, it is projected that Biden’s tax proposals would raise about $3.8 trillion over 10 years. The plan would also reduce long-run economic growth by 1.51 percent and eliminate about 585,000 full-time equivalent jobs.

While Biden’s tax plan would certainly make the US tax code more progressive, Tax Foundation analysis shows Biden’s plan would reduce after-tax incomes for filers of various incomes by reducing the incentive to earn and invest in the United States. On average, taxpayers would see a 1.7 percent reduction in after-tax income by 2030, ranging from a 0.7 percent decline for those in the bottom quintile of the income distribution to a 7.8 percent decline for earners in the top 1 percent.

A prospective Biden administration will have to consider how fast and how far to enact the variety of tax increases that have been proposed so far, as the American economy is still struggling with the coronavirus pandemic and economic hardship. If enacted too fast, tax hikes may undercut any economic recovery next year. Initially, it appears Biden may be open to delaying some of his tax proposals until economic conditions improve. However, additional details about what a Biden administration would want to see before entertaining tax hikes would increase policy certainty moving forward if he were to win the November election.

Biden has not released a single formal tax plan, but he has proposed many tax changes and increases connected to spending proposals related to issues like climate change, infrastructure, health care, education, and research and development. Most of these proposals center around raising income taxes on high earners as well as on businesses. Selected highlights of Biden’s tax increases include:

Individual Tax Changes:

• Increase Personal Income Tax Rates – This proposal will increase the 2017 Tax Cuts and Jobs Act (TCJA) top marginal income tax rate to 39.6 percent from today’s 37 percent, a tax increase of 2.6 percent. This tax rate applies to income, commissions and most business income.
  
• Increase Capital Gains Tax Rates – The proposal is to capital gains at ordinary income tax rates of up to 39.6 percent —an increase from a top rate of 23.8 percent today—for those earning over $1 million.
  
• Limit Deductions for High annual Incomes - over $400,000:
  • The value of itemized deductions would be limited/capped at 28 percent for those in higher marginal tax brackets and also would restore the limitation on itemized deductions for those with taxable income above $400,000.
  • Limit Qualified Business Income Deduction - The current Section 199A deduction would also be phased out for those earning over $400,000. This deduction currently allows a deduction of up to 20 percent of certain business income – may be eliminated in some cases.
    
• Increase Social Security Taxes - Imposing the 12.4 percent Social Security payroll tax on wage and self-employment income earned above $400,000, with no wage limit. Currently the tax is only imposed on income up to $137,700.

Business Tax Changes:

• Increase Corporate Tax Rate - Raises the corporate income tax rate from 21 percent to 28 percent on taxable income for C Corporations, a 33 percent tax increase.
  
• Minimum 15% Tax on Corporate Profits - Imposes a 15 percent minimum book tax on corporations with $100 million or greater in income. The concept is that businesses with large incomes should pay at least a 15% minimum tax.
  
• Increase GILTI Tax Rate - Doubling the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of U.S. firms, from 10.5 percent to 21 percent.

Estates and Gifts

• Eliminate Asset Basis Step-Up at Death – Biden’s plan would eliminate the step-up in basis for inherited assets with capital gains, thus preserving the gain in those assets and passing them along to the decedent’s heirs. Currently inherited assets receive a step-up in basis to the fair market value at date of death. This will serve to increase tax when heirs dispose of inherited assets.
  
• Reduce Estate and Gift Tax Exemption - The current exemption amount – value of estate/gifts – before imposition of an estate tax is currently $23.16 million per married couple and $11.58 million per individual. These will be reduced to $10.98 million per married couple and $5.49 per individual.

What Should You Do?

Whether you are an individual, the owner of a closely held business, or an adviser to such a business and its owners, now is the time to determine how Mr. Biden’s tax plans may impact you and your business. You will want to calculate the economic and tax consequences that may reasonably be expected as a result of a Biden victory and the enactment of the foregoing proposals.

There’s a lot to think about, and there is a lot for you to consider and do before the year-end.