Election season is upon us, and with the economic volatility of 2020 still unsettled, many Americans are primarily interested in the tax impact of each candidate’s proposals.
Trump’s implementation of the Tax Cuts and Jobs Act of 2017 was swift, and contained a number of significant tax cuts. Many of these provisions are set to expire in 2025, so Trump’s tax plan, in many cases, involves making these changes permanent, rather than introducing new measures.
Since the economic impact of Trump’s policies has played out in actuality (more on that later), much more attention is being spent analyzing the potential impact of Biden’s proposed policies. During the election, he has championed ideas which are reminiscent of tax policy prior to Trump’s TCJA, favoring progressive plans for climate, health care, and education issues. These were popular issues during the Obama administration, when the existing deficits from the previous recession commanded a strong focus from both political camps. Now, Biden favors increased taxation on businesses and high-earning individuals to fund these plans.
Although the Democratic party has long been a proponent of making corporations pay “their fare share”, even incumbent Democrats in Congress acknowledge that at present, this will take a back seat to measures needed to repair the economic damage we’ve seen in 2020.
This might, if accompanied by a Democratic majority in the senate, be accomplished through economic stimulation via investments in infrastructure and renewable energy. Manufacturing, supply chains, and technological advancements in AI and communications are other likely candidates for stimulation.
On specific issues, the candidates compare as follows.
Income tax rates
Currently, there are seven tax rates at 10, 12, 22, 24, 32, 35, and 37%, as enacted under the TCJA.
Biden favors increasing the top rate back to 39%, with no increases to impact incomes under $400,000.
Trump doesn’t have further changes proposed – the TCJA implemented changes here, making the top tax rate 37%.
Corporate Tax Rates
Currently the corporate tax rate is at 21%, reduced from 35% under the Tax Cuts and Job Act.
Biden has proposed increasing the corporate tax rate to 28%, as well as requiring a minimum tax on corporations with profits of $100 million or more on the books.
Trump hasn’t proposed any more changes to the corporate tax rate.
FICA tax is currently at 12.4% and split between employer and employee.
Biden wants to eliminate the wage base cap on taxpayers earning more than $400,000.
Trump favors cutting or even eliminating payroll tax. As a measure to combat the effects of COVID-19 on the economy, Trump deferred payroll taxes from 9/20-1/21, and has pledged to eliminate the deferred taxes – upon his re-election.
Child Tax Incentives
The TCJA allows a maximum Child Tax Credit of $2,000 through 2025. Family size and income level also contribute to eligibility for the Earned Income Tax Credit up to $6557 in 2020. Dependent care credits can reach $2100.
Biden favors expanding the EITC and dependent care credit, enacting a new refundable $8000 child care tax credit for a qualifying child or up to $16,000 for 2 or more children. He also proposes adding a $5,000 caregiver tax credit for individuals needing care as a result of physical or cognitive needs.
Trump has proposed no further changes.
Business Tax Incentives
These include a range of credits which are available to businesses involved in oil production, electric vehicles, and green energy including solar and wind.
Biden proposes eliminating subsidies for fossil fuels. He is also a proponent of restoring the electric vehicle tax credit, which was phased out from 2019 to 2020. Under Biden’s tax plans, credit incentives for residential and commercial energy efficiency would be restored as well.
Trump has no more proposals for changes to business tax incentives.
Other Deductions and Tax Strategies
Capital Gains Tax/Dividends
Current capital gains rates are 0%, 15%, and 20%, depending on taxable income. Currently 20% applies to those with taxable incomes over $496,600 (joint), $469,050 (heads of household), $441,450 (single) and $248,300 (married filing separately).
Biden wants to increase the top rate on long term capital gains to 39.6% on taxpayers earning more than $1 million per year. The highest tax rate on long-term capital gains would increase from 23.8% to 43.4%. He would also eliminate the step basis which allows capital gains to pass to heirs without being taxed. Closely related, Biden and other Democrats have discussed eliminating the 1031 “like-kind” exchange used in real estate investment.
Trump has no current plans to change this tax, but the Trump administration favors executive or regulatory ability to adjust basis when calculating capital gains.
Qualified Business Income Deduction
Under section 199A, eligible taxpayers may deduct up to 20% of qualified business income (QBI) in addition to 20% of qualified REIT dividends and qualified publicly traded partnership income. This was implemented under the Tax Cuts and Jobs Act, and is one of the deductions scheduled to expire in 2025.
Biden proposes phasing out the qualified business income deduction for incomes above $400,000.
Trump hasn’t announced any further proposed changes to these rules.
Income from a private investment fund is typically taxed at a lower capital gains rate. During a three-year holding period, it must meet certain requirements for long term capital gain or loss.
Biden and Trump both favor eliminating carried interest.
Currently, U.S. income tax on profits from offshore subsidiaries may be deferred by U.S. corporations until they are repatriated.
Biden would end TCJA incentives for multinationals, and tighten inversion laws. He also proposes to establish provisions to require a return of public investments and remove tax incentives for U.S. companies which send jobs overseas, rather than keeping them in America.
Trump has not mentioned any further changes to international taxation.
Itemized Deduction Limitations
The TCJA eliminated the limits on itemized deduction levels through 2025.
Biden would restore the limitation on itemized deductions and apply it to taxable income exceeding $400,000.
Trump has put forth no further proposals for change.
The Affordable Care Act
With the exception of the individual mandate, which Trump repealed, the Affordable Health Care Act remains in effect.
Biden not only supports the existing Affordable Care Act, he proposes strengthening it by eliminating the 400% income cap limiting tax credit eligibility. He would also reduce the limit on overage cost from 9.86% to 8.5% of income. Family tax credits could potentially be expanded to increase coverage and lower premiums.
Trump has always supported a repeal of the Affordable Care Act, but has not yet managed to remove or replace it.
Cost & Benefit of Tax Policies
Biden’s campaign proposals have been totaled by multiple nongovernmental sources, who concluded the tax changes would result in an increase of $2.4 trillion dollars (Tax Policy Center) to $3.8 (American Enterprise Institute) over the next decade. These analyses did indeed find that the brunt of the increased tax burden would be borne by higher income households and businesses (primarily corporations).
However, the Tax Foundation found that, on average all taxpayers would see nearly 2% less in after-tax income, with the wealthiest taxpayers seeing a 7.7% drop. This analysis concluded that Biden’s tax plan would, in the long term, reduce GDP (1.62%), shrink capital stock (3.75%), and reduce overall wage rate resulting in a reduction of 542,000 full-time jobs. The reduced tax base for payroll would then yield 15% less revenue over the next ten years.
Meanwhile, with nearly a full term of President Trump’s policies in action, many analysts are disputing the narrative that his tax cuts have trickled down or “supercharged” the economy as promised. In fact, in 2018, the economy grew at the same rate as it did in 2015, 2.9%.
The Center for American Progress found that since the TCJA, corporate revenues have dropped by more than 40%, and business investment has turned negative. Rather than investing the tax savings back into these businesses, the 2017 tax bill spurred a surge in stock buybacks. In just one fiscal year (2017-2018) the federal deficit increased by $113 billion – and that’s before COVID. Approximately 80% of this is attributed to the lost corporate revenue as a result of the TJCA cuts.
Ultimately, which of the two contenders’ philosophies appeals to might just depend on which numbers you’re looking at. As a business owner or high net-worth individual, taxes are likely to increase sharply under Biden’s leadership, probably not an appealing scenario. For young and middle-class workers who haven’t seen the fabled wage growth guaranteed under Trump, the promise of expanded tax credits paid for by corporate taxes is a siren song.
Currently, the candidates are polling closely, and from what we’ve seen in 2020…all bets are off.