The nonpartisan Tax Policy Center said about half of that revenue gain would come from higher taxes on high-income households and about half would come from higher taxes on businesses, especially corporations. In the TPC’s breakdown, Biden’s proposal to increase the corporate tax rate to 28% accounts for about one-third of the additional revenue over 10 years, while applying Social Security taxes to earnings above $400,000 accounts for about 25%. Increased taxes on capital gains and dividends accounts for another 11%, and repealing the TCJA’s tax cuts for taxpayers with incomes above $400,000 raises a similar amount (11%).
Biden would spend more than $270b of that revenue on tax credits and income exclusions for family caregiving, retirement saving, student loan forgiveness, energy efficiency, renewable energy and expanding the electric vehicle fleet. Distributionally, TPC said Biden’s plan would raise taxes on households with income of more than $837,000 (i.e., the top 1%) by an average of about $299,000, or 17.0% of after-tax income. By contrast, TPC said taxpayers in the middle-income quintile would see an average tax increase of $260.
The conservative-leaning American Enterprise Institute’s analysis of Biden’s tax proposals found that altogether, his policies would raise about $3.8t over 10 years, slightly lower than the TPC analysis. AEI estimated that Biden’s most significant tax increases would fall on the top 1% of earners and “overall … make the US tax code more progressive.”
Like TPC, AEI found that the highest-income filers would produce most of the new revenue, projecting that 72% of new tax revenue in 2021 would come from the top 1% of tax filers, whose after-tax income would fall by 17.8%, with an average tax increase of $118,674. AEI said nearly all the income and payroll tax increases in Biden’s proposals target the top 1%; tax increases for the bottom 99% are largely due to business tax hikes.
The conservative Tax Foundation said the Biden tax plan would reduce GDP by 1.51% over the long term. The group said the plan would shrink the capital stock by 3.23% and reduce the overall wage rate by 0.98%, leading to 585,000 fewer full-time equivalent jobs. The group found that on a dynamic basis, the plan would raise about 15% less revenue than on a conventional basis over the next decade. Dynamic revenue gains would total approximately $3.2 trillion between 2021 and 2030 because the relatively smaller economy would shrink the tax base for payroll, individual income and business income taxes.
On macroeconomic effects, AEI forecasts that Biden’s tax policies would reduce the level of US gross domestic product (GDP) relative to the baseline by 0.06% from 2021 to 2030 by reducing labor supply and capital stock. AEI estimated that higher effective tax rates on high-income households and corporations would cause a short-run reduction in GDP, followed by a medium-run increase due to the reduction in debt.
Other Democratic proposals
The Biden plan has thus far left out some of the more progressive tax revenue proposals that emerged during the primary campaign season, including a wealth tax. But many members of Congress will also have ideas beyond, and to the left, of what he has proposed.
A financial transactions tax has had support in Congress and was picked up by other candidates. Sen. Brian Schatz (D-HI) and Rep. Peter DeFazio (D-OR) sponsored the Wall Street Tax Act of 2019 (S. 647, H.R. 1516) to impose a 0.1% a tax on securities transactions. Sen. Bernie Sanders’ (I-VT) bill (S. 1587), cosponsored by Sen. Kirsten Gillibrand (D-NY) would impose a financial transactions tax of 0.5% for stocks, 0.1% for bonds and 0.005% for derivatives.
Senator Wyden, who would likely become chairman of the tax-writing Finance Committee should Democrats take control of the Senate, has proposed a plan to impose a mark-to-market approach requiring capital gains to be taxed annually at ordinary income levels.
“Anti-deferral [mark-to-market] accounting rules” would only apply to individuals with more than $1m in annual income or $10m in assets. Applicable taxpayers would be required to pay annual taxes on unrealized gains and take a deduction for unrealized losses on liquid assets, such as stock, while for illiquid assets mark-to-market would not apply but a look- back charge would be imposed on gains realized upon the sale of these assets.
Biden hasn’t proposed estate tax changes beyond eliminating stepped-up basis, but Biden-Sanders “unity” principles released in July said they should be “raised back to the historical norm.” Democrats have at times urged a return to the 2009 regime: $3.5m exemption and 45% rate. Interest remains in repealing the $10,000 state and local tax deduction cap.
The economy in 2021
At the beginning of 2021, it is likely that the focus will be on reviving the economy while still tending to the demands of the coronavirus. It is possible more virus-related relief will be needed, or that Democrats, if in control, would try to enact some of the measures that President Trump and Senate Republicans have not agreed to in coronavirus measures. There are several tax items in the House-passed Health and Economic Recovery Omnibus Emergency Solutions Act that are not likely to be agreed to by Republicans this year, and so could be ripe for action if Democrats control Washington in 2021:
- Making the child tax credit fully refundable, increasing the amount to $3,000 per child ($3,600 for a child under age 6), and making 17-year-olds qualifying children
- Making the child and dependent care tax credit fully refundable and increasing the maximum credit rate to 50%
- Increasing the exclusion for dependent care assistance from $5,000 to $10,500
There will also be a focus on the recovery and job creation. Biden has said that if elected, he would provide “further immediate relief” to families, small businesses and communities dealing with the coronavirus pandemic.
In terms of stimulus, Biden has thus far outlined plans to invest a combined $700b in procurement and R&D designed to boost US manufacturers and stimulate the economy, as well as $2t in clean energy and infrastructure investment. In both cases, Biden has emphasized the job-creation benefits of the plans, and the campaign has signaled they would be partially paid for by reversing tax cuts for corporations and impose “common-sense tax reforms that finally make sure the wealthiest Americans pay their fair share.” Probably the best model for a united government coming into power amid a crisis was President Obama working largely with the Democratic Congress on financial rescue and recovery in 2009. The new president had campaign tax proposals, but those largely were jettisoned initially to focus on recovery.
If racial economic equality is an early priority, Biden has proposed opportunity zone changes in a context that focuses on creating jobs for low-income residents and otherwise providing a direct financial impact to households, as well as additional review of and reporting by opportunity zone recipients.
He also proposed making permanent the New Markets Tax Credit.
At some point, however, tax increases will likely be proposed for what is already a massive revenue hole from the coronavirus. The Congressional Budget Office (CBO) on April 24 said the FY2020 budget deficit is projected to be $3.7t. The deficit was $864b just for June. Also inevitable: a discussion over the future of Social Security, with the troubling outlook for the program over at least the past two decades now even worse with an aging population and the payroll and other economic effects of the pandemic, which some say accelerates the insolvency date by about a year.
Biden proposes to impose Social Security payroll taxes on incomes greater than $400,000 per year, in addition to the first $137,000 in annual income, with no additional tax on income in the doughnut hole in between.
Principles behind Democratic tax policy
The “fair share” principle goes back to the Obama administration and has continued in the wake of the TCJA, which Democrats say tilted benefits toward corporations and wealthy individuals. While Democrats are seen as having won the 2018 congressional elections largely on the issue of health care, they were also highly critical of the TCJA. Now-Speaker Pelosi criticized the tax bill for adding to the deficit, saying lawmakers should “make the middle-class tax cuts permanent” but “bring balance” to the tax system and reduce debt “by having a revenue package that does just that, that puts the middle class first.” She also suggested the 21% corporate income tax rate is too low. Democrats are likely to stick to these principles.
While Democrats back making permanent most TCJA provisions for individuals that expire after 2025, it is less clear how they will approach business changes/phase-outs sooner:
- The 30% limitation on the deduction of interest expense is calculated without depreciation and amortization after 2021 (i.e., earnings before interest and taxes vs. earnings before interest, taxes, depreciation and amortization)
- Bonus depreciation phased down 20% yearly after 2022
- Amortization of R&D expense beginning in 2022
- Reduction in the Section 250 deduction for purposes of GILTI and foreign-derived intangible income rules
President Trump’s tax proposals
Given that the TCJA is a signature achievement of the Trump Administration, the President does not propose wholesale changes to the tax system; his vision was enacted and he proposes smaller changes that expand upon that tax relief. The President hasn’t talked much about it, but Republicans in general kind of have a built-in tax policy agenda with all the business provisions that are sunsetting and sunrising starting in 2022, and the expiration of individual provisions under the law after 2025.
President Trump’s campaign materials mention Made in America tax credits much like Biden’s — both campaigns are targeting offshoring given the depletion of US manufacturing over recent decades and the fact that the presidential race is largely being run across the rust belt — but he has mostly talked about “tax credits for companies that bring jobs from China back to America.”
During an August 10 news conference, President Trump repeated comments from the weekend executive action signing that the Administration is looking at income and capital gains tax relief.
“We’re looking at also considering a capital gains tax cut which would create a lot more jobs so we’re looking very seriously at a capital gains tax cut and also at an income tax cut for middle income families,” he said. “We’re looking at expanding the tax cuts that we’ve already done, but specifically for middle income families and you’ll be hearing about that in the upcoming few weeks and I think it will be very exciting.” President Trump said on Fox Business August 13 that he would reduce the capital gains rate to 15% in his second term.