Tax Policy Under a Potential Biden Presidency
Tax policy during President Donald J. Trump’s first term in office can primarily be summed up in the 2017 Tax Cuts and Jobs Act (TCJA). In a potential second term, President Trump indicated he would extend the TCJA provisions beyond 2025, decrease the capital gains tax rate from 20 percent to 15 percent, and implement other tax cuts, including lowering payroll taxes and middle-class tax rates.
But what tax policy changes can be expected if former Vice President Joe Biden wins the presidency in November? Here’s what businesses and individuals should know about Biden’s proposed tax plan:
- Corporate rate increase from 21 percent to 28 percent – Along with a higher corporate tax rate, Biden has proposed a minimum corporate tax of 15 percent that would apply to book income for companies with net income greater than $100 million. In addition, a Biden administration would impose a 10 percent penalty surtax for companies that offshore production jobs.
- Repeal of the use of like-kind exchanges – Biden’s policy focuses on improvements for child care, including an expanded $8,000 tax credit for child care and tax credits for businesses to build on-site child care facilities. To pay for these improvements, Biden proposes ending the use of like-kind exchanges and real estate losses to reduce tax liability.
- Opportunity Zones – Biden has proposed to reform the Opportunity Zone tax incentives to require that the U.S. Treasury Department review taxpayers who take advantage of these tax benefits and increased detailed reporting and public disclosure of Opportunity Zone investments and their effect on local communities.
- Doubled tax rate on foreign subsidiary income – Biden has indicated an interest in changing the global intangible low-taxed income (GILTI) regime implemented under the TCJA. Biden’s proposal would make the GILTI rate 21 percent. Note, GILTI is currently taxed at 21 percent; however, C corporation U.S. shareholders can deduct 50 percent of their GILTI, which brings the effective corporate tax rate to 10.5 percent. Biden also would restructure GILTI to apply on a jurisdictional basis.
- Tax rate increases for households earning more than $400,000 – Biden’s tax proposal includes reversing the top tax rate for individuals to the pre-TCJA rate of 39.6 percent. In addition, Biden has mentioned phasing out the Section 199A qualified business income deduction for families with income of more than $400,000.
- Changes to capital gains taxation – Currently, gain from the sale of assets held longer than a year and related dividends is taxed at a rate of 20 percent. Biden proposes to instead tax capital gains as ordinary income at a rate of 39.6 percent for taxpayers with income exceeding $1 million. Biden also would potentially eliminate the stepped-up basis for capital gains at death. It’s expected this policy would resemble the Obama administration proposal to tax capital gains at death with exclusions based on size and type of assets, but under Biden’s plan, these new rules wouldn’t apply to families making less than $400,000.
- Cap on itemized deductions for high earners – Biden proposes to impose a cap of 28 percent on the rate against which taxpayers take itemized deductions. For example, assuming Biden’s plan to increase the individual tax rates for high-income individuals is implemented, the 39.6 percent tax bracket would see a 28-cent tax reduction for every dollar spent on charitable giving, rather than 39.6 cents without the cap. In addition, Biden would reinstate the “Pease Limitation” (suspended through 2026 under the TCJA), which effectively reduces the amount taxpayers can deduct above a certain threshold. Under Biden’s plan, this threshold would once again be $400,000.
- Social Security earnings cap increase – Currently, the Social Security program is funded by a 12.4 percent payroll tax. This tax applies to taxpayers earning up to $137,700 (for 2020, adjusted annually at the rate of wage growth). Biden proposes to increase funding into the Social Security program by subjecting wages above $400,000 to the 12.4 percent Social Security payroll tax. According to this Committee for a Responsible Federal Budget report, this would result in a “donut hole” where income between the current maximum ($137,700) and $400,000 wouldn’t be subject to the Social Security payroll tax. However, as the annual maximum increases each year and the $400,000 threshold remains static, the “donut hole” would eventually close.
- Tax credits and incentives – Biden has proposed multiple tax credits and incentives primarily focused on U.S. manufacturing, clean energy, and promoting homeownership. Biden’s proposals would:
- Restore and expand the electric vehicle tax credit
- Reinstate the solar investment efficiency tax credit
- Enhance tax incentives for carbon recapture, use, and storage
- Enact a manufacturing community tax credit as part of the “Made in America” initiative
- Expand the new markets tax credit program to provide $5 billion in support each year and make the program permanent
- Expand the Earned Income Tax Credit to older workers and the dependent care credit to $8,000
- Create a new refundable, advanceable tax credit of up to $15,000 to assist first-time homebuyers
- Tax credits to renovate distressed properties in distressed communities
- Enact a renter’s tax credit
- Reinstate residential energy efficiency tax credits
Other Democratic Policies
Currently, the U.S. House of Representatives is Democrat-controlled, while the Senate is majority held by Republicans. If this election cycle results in the Senate flipping to a Democrat majority, several other tax policies would likely be proposed, including:
- A financial transaction tax – Democratic Congress members have proposed multiple versions of a tax on securities transactions. For example, Sen. Brian Schatz (D-HI) and Rep. Peter DeFazio (D-OR) sponsored the Wall Street Act of 2019, which would impose a 0.1 percent tax on securities transactions. Sen. Bernie Sanders (I-VT) and Sen. Kirsten Gillibrand (D-NY) co-sponsored the Inclusive Prosperity Act of 2019, which included a financial transaction tax of 0.5 percent for stocks, 0.1 percent for bonds, and 0.005 percent for derivatives.
- Fiscal stimulus bill – In light of the ongoing COVID-19 pandemic and its effect on the U.S. economy, Congress’s focus in 2021 will likely continue to be reviving the economy. Even if Congress passes phase 4 COVID-19 legislation by the end of 2020, a Democratic majority in Congress would likely attempt to pass some of the provisions that weren’t agreed to by a Republican-held Senate. For the phase 4 solutions proposed by the House Democrats, see our summary of the Health and Economic Recovery Omnibus Emergency Solution Act.
If elected, Biden’s proposed stimulus tax policy includes investing $700 billion in procurement and research and development to boost U.S. manufacturers and stimulate the economy, $2 trillion in clean energy and infrastructure investment, and other job creation programs focused primarily on manufacturing and clean energy.
- Changes to the TCJA rules – Democrats have indicated a desire to make changes to the TCJA, including making middle-class individual tax rates permanent, increasing the corporate tax rate, and repealing or changing some of the business tax provisions that Democrats believe disproportionally benefit large corporations.
The tax and economic outlook for 2021 will depend largely on the outcome of the November election, including which party controls the House and Senate and whether President Trump or Biden is voted into the White House. However, as the end of calendar-year 2020 draws near, taxpayers should consider contacting their tax and wealth advisors regarding tax planning strategies in light of potential tax changes in 2021.
Comparing Biden & Trump Tax Plans
For context, below is a high-level comparison of Biden’s and President Trump’s proposed tax policies:
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