Tax Prospects Under A Biden Administration

Biden, like every other candidate, made a lot of promises during the campaign, including what he would do about taxes. Now his transition team has laid out plans. They do not quite follow the promises, but they are in the same spirit.  His team wants to raise taxes on businesses and on the wealthy and give marginal additional breaks to lower-income Americans.  

Of course, plans, especially at this early stage in the process, are a long way from law. If, as seems likely, the Republicans keep a majority in the Senate, they will block a lot of the legislation a Biden team would need to put its plans in place. Even if for some reason the Republicans fail to gain a Senate majority, many Democratic senators, as well as representatives, will have objections to some provisions of these plans. But even if American tax law will not necessarily dance to the tune played by the Biden team, several aspects could make it into law in the course of the inevitable Washington compromises. Whatever the outcome, the plans on the table now will frame debate going forward and for that reason alone deserve review. 

The transition tax team has already failed to follow through on one promise from candidate Biden: to repeal Trump’s 2017 tax reform.  No such action appears in the transition’s stated plans. That is understandable. Such an action would contradict the other Biden promise not to raise taxes on any who earn less than $400,000 a year. Although the Trump reform has been characterized as favering only the wealthy, it did in fact cut tax burdens much lower in the income distribution than the Biden cutoff. Nor do the Biden plans, as suggested during the campaign, include efforts to reinstitute the ability for taxpayers  to write off all state and local taxes from their federal tax obligation. On this so-called SALT provision, all Biden now promises only to “discuss the matter with Congress.” No doubt the wide budget gaps plaguing Washington have something to do with the team’s reluctance on this point. 

On corporate taxes, Biden would make three changes. First, he would raise the statutory rate from 21% at present to 28%. Second, he would add a 15 percent minimum tax for corporations that have over $100 million in profits, if, because of deductions, they would otherwise pay less. It would work much like the alternative minimum tax in the individual code. Third, he would double from 10.5% at present to 21% the tax charged on foreign income from licensing and fees on intellectual properties. He plans to write the law so that the government could impose the tax selectively on a country-by-country basis.  

Republicans would fight all three measures but likely show more resistance on the second two. Part of the reason has to do with the impetus behind the corporate tax reduction in the 2017 bill. It was meant less meant as a gift to business than to bring this country’s corporate taxes into line with international norms. Prior to the 2017 reform, U.S. corporate tax rates were so much higher than elsewhere in the world that U.S. multinationals were keeping profits abroad to avoid paying the high tax rates on repatriated funds. Some to avoid relatively high tax rates were actually incorporating abroad. The proposed increase in the statutory rate would tend to undermine this intended effect but is not so great that Republicans could not compromise. In contrast, the minimum tax would face intense opposition. Because capital spending is the main source of deductions, the minimum would be viewed as particularly anti-growth and harmful to the ability of American industry to compete globally. And because licensing and fees on intellectual property are a major factor in overseas sales, the proposal to raise those taxes would also face considerable opposition, not the least because big technology would lead in the lobbying. Additional objections would arise because the selective application of the law could become arbitrary and would resemble centralized industrial planning.

On individual income taxes, Biden would burden high-income taxpayers by hiking the maximum rate – on income over $400,000 a year – from 37% presently to 39.6%. He would also cap itemized deductions at 28% of income for those earning more than $400,000 a year and impose a 12.4% Social Security payroll tax on those in the highest bracket. The plans also call for a repeal of the 2017 break on pass-through income for this class of taxpayers. These changes would increase the tax burden on this income group some 16 percent. All Americans would also face the reimposition of the individual mandate to buy health insurance. Biden’s plans call for increased tax breaks for lower-income Americans. They would increase the earned income tax credit for older taxpayers and raise the Child and Dependent Care Tax Credit from a maximum of $3,000 presently to a fully refundable $8,000 ($16,000 for multiple dependents). Just for 2021, plans call for a rise in the Child Tax Credit from today’s $2,000 maximum to $3,000 with a $600 bonus for children under six. That, too, would be fully refundable.

Republicans would resist the changes, most especially the tax hikes, but are likely to yield in compromises, particularly if they can protect the existing provisions in the corporate tax code. The net economic effect of these proposed changes would not be that great. The tax breaks for dependent care and children might increase spending marginally among those eligible, but not enough to affect overall growth rates appreciably. No doubt the increased burden on the wealthy would create a small boom in the tax preparation industry as these people seek ways to shelter income from taxes. By making tax exemptions that much more attractive these changes would also bring a slight rise in municipal bond prices. To the extent that the tax hikes bite, they are more likely to slow the flow of savings than spending, as most people in these high-income brackets live well within their means. 

A greater impact on savings and investment would emerge from Biden’s plans on capital gains and inheritance taxes. He would raise the present rate of 23.8% on capital gains to 39.6% for households with annual incomes above $1.0 million. The plans would change current arrangements on inheritance. Today, those willed appreciated assets pay taxes only when they realize the gains and then only on those gains since they received assets. The planned changes in the law would insist that heirs pay income taxes on the unrealized gains. They are silent on other aspects of inheritance taxing, such as the $100,000 exclusion per person or accommodations for inflation or special provisions for the transfer of a principal residence or a small family business or farm. Presumably, this means they would stand.

Were such provisions to pass into law or even just look likely, they would cause an immediate sell off in financial markets as asset holders sought to realize gains under the present, lower tax rate. Such monies would likely go back into the market quickly. The inheritance changes would have a more lasting depressive effect on market prices in that each transfer would force sales to enable the heirs to pay the tax on the willed assets. In general, the provisions would discourage savings by significantly reducing what they can earn after taxes. Such a reduced flow would put further downward pressure on asset prices and otherwise reduce the funds available for capital investments.

A strict accounting shows that this package of tax provisions would raise federal revenues some $3.3 trillion over ten years. Accounting  for the slight growth impediment they would impose on the economy, a consensus of economists suggests that the actual revenue gain would amount to something closer to $2.7 trillion. Either way, the annual figure of between $270 and $330 billion would reduce projected federal deficits by about a third, leaving a considerable flow of red ink. Of course, the ultimate budget effect would also depend on Biden plans for spending, which are far from inconsiderable, especially his version of the Green New Deal. How much of that passes into law will also be a matter of substantial resistance in Congress and will form the subject of a separate discussion.

At this stage, conclusions count entirely as speculation. What is for sure is that Mr. Biden will not get all he wants. Though he will almost certainly impose changes, they will be considerably watered down in any final legislation. Now at least readers know the issues on which the revenues debate will turn.